Budget 2025: Customs duty slabs may be rationalised but FTAs to limit flexibility

Many tariff lines governed by FTAs are likely to remain inelastic

The Budget 2025, to be presented on February 1, may see a marginal drop in the number of customs duty slabs, which stand at more than 40, as part of an ongoing review of the existing rate structure.

The government's review aims to rationalise and simplify the customs framework but sources say flexibility in adjusting rates could be limited for certain tariff lines under free trade agreements (FTAs) due to fixed rates even if trade volumes are low.

While the focus is on rationalisation, many tariff lines governed by FTAs are likely to remain rigid, sources said.

"Tariff lines under FTA are likely to be inelastic," a government official told Moneycontrol on condition of anonymity. The customs rate structure review is underway. “A slight reduction in the number of slabs may happen but the extent of reduction will depend on each product line, and some lines may remain inelastic,” the official said.

Rationalisation is a big priority but for tariff lines under FTAs and Double Taxation Avoidance Agreements (DTAA), flexibility is limited. “Even if the trade volume is low, rates under FTAs are fixed, and there is little room for adjustment. FTAs cover a broad range of tariff lines, with only a few exceptions," the official said.

The review, part of the broader fiscal reforms outlined in the 2024-25 Budget, will scrutinise tariffs on line-by-line basis. "… decisions will be carefully examined. This is a complex process that requires a detailed assessment of each tariff line," the official said.

India has more than 40 different rates including specific duty rates and the government is keen on streamlining them to simplify trade and reduce complications. The proposed rationalisation aims to address issues such as duty inversion and disputes.

The US-India Tax Forum, a key body under the US-India Strategic Partnership Forum (USISPF), has called for a simplified customs structure. The forum has advocated for a model with only three rates — 0 percent, 5 percent, and 10 percent — to attract investments, particularly in electronics manufacturing.