CBIC chief says it's hard to correct inverted customs duty due to FTA exemptions

Central Board of Indirect Taxes and Customs (CBIC) Chairman Sanjay Kumar Agarwal

Though the Union Budget proposed to review the customs levies over the next six months for inverted duty correction, Central Board of Indirect Taxes and Customs (CBIC) Chairman Sanjay Kumar Agarwal said it will be a difficult task in many cases because of nil rate on some items under free trade agreements (FTAs).

“We have received certain proposals, corrections for inverted duty in customs. But if the inversion is happening because the rate of duty is nil under free trade agreements (FTAs), then it is difficult to correct it,” Agarwal told Moneycontrol in an interview.

India has FTAs with countries like the United Arab Emirates (UAE) and Australia. These pacts aim to promote trade by reducing or eliminating customs duty on a range of goods.

In the customs duty ambit, inverted duty structure is seen in items like leather, textiles and engineering goods. The duty structure is inverted when the import levy on a finished product is lower than that on raw materials and intermediate goods, which discourages domestic manufacturing. This is particularly true of manufacturers that are heavily dependent on imported raw materials.

“However, the inverted rate of customs duty on items which are not manufactured in India, can easily be corrected,” Agarwal said.

The Union Budget announced a fully exempt customs duty on 25 critical minerals such as lithium, cobalt, rare earths, which are crucial for nuclear energy, renewable energy, space, defence and telecommunications among other sectors. India is heavily dependent on imports for most of the critical minerals, with few exceptions like copper, gallium, graphite, cadmium, phosphorus, potash and titanium.

Import duty on ferro-nickel, a key raw material in the production of stainless steel, was also removed.

The basic customs duty on mobile phones and mobile chargers was reduced in the Budget to 15 percent from 20 percent. To increase value addition in the domestic electronics industry,  the BCD was removed on oxygen-free copper for manufacture of resistors and certain parts to manufacture connectors.

The handset and electronics makers had sought to rationalise the import duty structure and reduce the duties on components of mobile phone parts or sub-assemblies over time to attract global value chains to India and enable them to create manufacturing at scale. They said the move would help the company compete with China and Vietnam, which currently have much lower and simplified input duty structures.