Budget may try to straighten ‘inverted duty’ structure

Amiti Sen New Delhi | Updated on January 10, 2021

Import levies that are same for both finished and intermediate goods, too, will be reviewed

In line with the government’s focus on ‘Atmanirbhar Bharat’ and import substitution, the forthcoming Budget is likely to lay a greater stress on removing some of the remaining inverted duties that discourage value addition, a government official has said.

This may include not just the simple cases where the import duties on the finished product is more than the intermediates, but also ones where both are the same or where there is more than one end-use for an import, thereby making it difficult to establish if an inverted duty structure exists.

“The Commerce Ministry has taken up the matter of addressing the inverted duty structure further in this Budget with the Finance Ministry. The past Budgets have been sorting out the issue but there are some sectors that are continuing to face a problem, including in cases where the import duty for a raw material may be the same as the end product or where there are different end uses for an import. It would be seen if those can be addressed too,” an official tracking the matter told BusinessLine.

Discouraging value-addition

For instance, in case of an item like cashew, where the import duties on cashew kernels and semi-finished cashew products like shell are the same, there is hardly any incentive for processing, an industry source said.

“On paper, an inverted duty structure exists when the levy on the finished product is lower than that on the raw material, and therefore, it discourages domestic value addition. But in case of items like cashew, where the import duties on the finished items and the intermediates are the same, the effect is similar to that of an inverted duty structure as there is no incentive for any processing or value-addition,” he said.

The end-user test

There are also cases where the same imported raw material is used in many sectors and it may be an inverted duty for one end-product and not for another.

“Let’s take plastic, for example. If the end use of plastic is in the electronics or engineering sector, there may not be an inverted duty structure if the import duty on plastic is less than what is imposed on the electronics or engineering goods. However, if the same imported plastic is used in the plastic industry, then the situation may be different and there could be a case of inverted duties,” the official explained.

The past Budgets had tried to address this problem, but there are some unresolved issues.

“It has to be seen if there could be some kind of end-use exemption where a particular sector can be allowed to import some inputs at lower duties,” the official said.

Published on January 10, 2021

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