Budget can be a watershed moment for customs reform

The government may lower customs duties on key raw materials, such as lithium and cobalt, which are vital for India’s green energy transition.

By SR Patnaik, Shivam Garg and Navya Bhandari 

India’s Budget 2025 promises to be a watershed moment for indirect tax reforms, particularly in the customs space. The government is likely to focus on simplifying and rationalising customs duties to ease compliance for businesses while encouraging domestic manufacturing in key sectors such as renewable energy, highly sophisticated knowledge based sectors like artificial intelligence, fintech, pharmaceuticals, etc.

Streamline customs architecture

India’s current customs system, while expansive, contains a myriad of exemptions, concessional rates, and multiple duty structures. This complexity often leads to confusion, disputes, and administrative inefficiencies for businesses. It is expected that the Government should reduce exemptions and concessions, consolidating them into a more transparent and manageable system. Systematic chronological changes in the customs duty levy may also be introduced to provide businesses with a clear roadmap for their long term budgeting and forecasting. Such measures would not only reduce the sudden increase in cost on companies but also contribute to enhancing the ease of doing business.

The rationalisation of customs duties could address sector-specific pain points. For example, the automobile industry is plagued with disputes over the classification of parts and components, especially post the Supreme Court decision in the case of Westinghouse and due to the absence of any clear criterion between sub-assemblies and parts, it is difficult for a taxpayer or a tax professional to predict the potential stance of the judiciary. Similarly, technology sector has faced its own share of complications due to frequent classification disputes due to add on features which could change the classification. Simplifying these categories and aligning them with global best practices would go a long way to simplify the customs position and will also assist in managing the related legal and compliance costs. The Government is also expected to come up with certain specific concessions to new sectors like manufacturing of electric vehicles and semiconductor manufacturing, etc.

Expand PLI

Indian digital economy has grown at an exponential pace in the recent years. The Production-Linked Incentive (PLI) scheme has been a key tool in driving the growth of domestic manufacturing in high-tech sectors like mobile phones, semiconductors, and consumer electronics. It is anticipated that the government will continue to provide preferential treatment for the import of critical components, such as semiconductors, lithium-ion batteries, and display panels, by reducing customs duties.

The Government may also focus on waste recycling and introduce PLI for such sector. This would go in line with the ambition of achieving net-zero emission within a specified timeframe. India’s push toward renewable energy and green technologies is a critical aspect of its long-term economic strategy. The government may lower customs duties on key raw materials, such as lithium and cobalt, which are vital for India’s green energy transition. These changes could significantly accelerate the adoption of clean energy technologies and help India achieve its climate targets.

An amnesty program is needed

In line with its broader goal of simplifying business processes, the Government is expected to introduce new measures in Budget 2025 aimed at improving customs compliance. One of the most pressing reforms is the introduction of an Amnesty Program for Customs. This program would provide a one-time opportunity for businesses to rectify any inadvertent mistakes in their past dealings with customs. The amnesty would not only help reduce the burden of tax disputes but also offer businesses a clean slate to restart operations without fear of retrospective penalties.

Additionally, the government is expected to focus on reducing the lengthy and cumbersome Special Valuation Branch (SVB) investigations, which are currently a significant source of delay in related-party transactions. The introduction of time-bound SVB investigations would bring much-needed certainty and reduce the financial liabilities businesses face while awaiting the final assessment.

Currently, manufacturing in customs warehouses allows for the deferment of customs duties. However, this benefit is limited, as no equivalent benefits under the applicable GST regulations that could apply in such situations. It is expected that Budget 2025 will introduce a mechanism aligning it with other export-oriented units or SEZs. This would ensure that businesses engaged in such activities continue to benefit from incentives without any export linkage, thereby promoting the “Make in India” initiative.

The Government may further expand its use of digital platforms to facilitate faster imports and exports. The adoption of advanced automation tools such as AI and machine learning for risk assessment, documentation, and auditing could play a key role in enhancing the operational efficiency of the customs department. Additionally, expanding paperless documentation would improve transparency and reduce the burden on businesses, aligning India with global standards.

If the government strikes the right balance between domestic industry needs and international trade obligations, Budget 2025 could lay the foundation for a more efficient, self-reliant, and globally competitive India.

(SR Patnaik is (Head of Tax), Shivam Garg (Principal Associate) and Navya Bhandari (Associate) at Cyril Amarchand Mangaldas.)

Views are personal and do not represent the stand of this publication.