The Hindu Business Line : The inverted anomaly

More than 15 years after the first round of Customs duty scale-backs began as part of India's attempts to integrate into the world economy and modernise manufacturing, one problem haunts the policymaker and industry — the inverted duty structure with levies on finished goods falling more rapidly than those on raw materials and intermediate goods. Although successive Budgets and policy measures have addressed this anomaly that seems to favour consumers at the cost of producers, ironically one potent instrument of integration now seems to have exacerbated that duty inversion — the Free Trade Agreements India has been signing with some countries in the region, such as Sri Lanka and Thailand. Under these FTAs, many consumer durables as also some auto-components and other equipment will attract zero duty; conversely, raw materials such as certain grades of alloy steel, and aluminium alloy will still attract 5-10 per cent duty. This is an economic disincentive whose persistence could hamper the competitiveness of sections of Indian industry.

Last August, Planning Commission member Anwarul Hoda was asked to examine the problem of duty inversion; his committee solicited the views of industry representatives on the impact of zero-duty imports, under the FTAs, on domestic units. It would seem the committee has submitted its report from the reference the Finance Minister made in his Budget speech when talking of export duties on iron ore. Though there is no direct mention of the subject, the issue of duty inversion informs some of the indirect tax provisions with an attempt being made to remove anomalies. This has been done with a mix of additional countervailing duties on most items, removal of excise duty exemptions and application of CENVAT credits for the additional countervailing duties on raw materials and component imports. Not surprisingly, some have hailed the corrections in the duty inversion provisions while others — the electronic and consumer durables industries — are baffled by the persistence of an inverted duty structure as applicable to them. According to a post-Budget survey by the Federation of Indian Chambers of Commerce and Industry, some 20 products will face unfair competition from the FTAs India has signed with Thailand.

Even as the Finance Ministry tries to remove the duty inversion anomaly, a larger issue is the benefits that accrue from the FTAs. A reduction in the Customs duties as part of WTO commitments in a multilateral setting allows greater elbow-room for bargaining over reductions, trade choices and reciprocal tariff reductions. Bilateral handshakes appear cozier but they are not so amenable to bargaining and peer pressures and often have unintended side-effects. Aligning Customs duties with Asean as a regional group makes economic sense; the returns from FTAs are debatable.

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