Custom-made for results

Finance Minister P. Chidambaram8217;s proposal to cut customs duties is welcome. This is one of the most effective ways to make industry more competitive. By reducing the price of imported goods, duty cuts would also address the problem of excess foreign exchange reserves through a market-based solution where the reserves get used for what firms and consumers want to buy, rather than what the RBI decides to allocate funds to. More importantly, Indian industry has grown competitive, efficient and stronger as a result of the increased openness of the economy. Consumers have benefitted greatly from better quality and lower prices. The range of products available in India have put an end to the smuggling and black marketing of an earlier era.

While most products imported into India have a custom duty rate of 20 per cent, there are an innumerable number of exemptions distorting the duty structure. To talk about ASEAN, or even lower, levels of custom duties, the finance minister must remove exemptions and bring customs duties to a uniform rate. Today, there are products like automobiles with custom rates much higher than 20 per cent, even though the automobile industry is already a big exporter, indicating that it no longer meets the infant industry argument. These duties need to be brought down. Such rationalisation of duty structure will reduce the scope for corruption and further lobbying.

However, while the minister should aim for zero duty, he needs to ensure industry does not face a negative effective rate of protection. One of the constraints in cutting custom duties further is going to be that the countervailing duty CVD only takes into account the central excise or CENVAT. But if Indian producers continue to pay state duties, whether in the current form or as state VAT, while foreigners do not, there is no longer a level playing field between them. This requires the inclusion of state VAT in the CVD. The minister should make sure that the design of the state VAT is compatible with the changes that are made in the custom duty structure. It is important that the country does not blunder into tax reforms without a clear roadmap showing how all elements of the tax regime are in harmony. We need a well-articulated plan of how and when tax reform will be implemented to prevent the tax reform agenda from getting derailed.