New Delhi: Indian businesses and the country’s trading partners alike have flagged the need for a simpler customs duty framework. The global supply-chain disruptions and US tariffs have further amplified the need to review the regime. Finance minister Nirmala Sitharaman has called it the next “clean-up” exercise after the income tax and goods and services tax reforms. As part of the customs duty reform, the government aims to streamline regulatory architecture to reduce costs and make the economy more efficient and appealing to investors. Mint explains what to expect:
Why is reforming the customs regime important?
Global supply-chain disruptions and the US tariff shock have hurt India’s exporters, making customs regime reforms a priority for the government. Most exporters are also importers of raw materials, capital goods and intermediate goods. Easing the duty structure will ease costs for them. Moreover, delays at ports for clearance of consignments add to the cost of doing business. Streamlining the customs regime has become critical as India aspires for closer integration with the global supply chain and a higher share of global trade. Finance minister Nirmala Sitharaman restructured customs duty slabs and rates in the February 2025 budget. The latest reform is targeted at enhancing India’s manufacturing competitiveness and transparency in customs administration.
What are the problematic areas?
India needs to simplify customs procedures to improve the ease of doing business. Another major issue is the inversion of duty in some industries. That is, the import of raw materials and components attracts a higher basic customs duty (BCD) than the import of finished products. BCD is the tariff to protect domestic producers from competing with cheaper imports. However, in many industries, local manufacturers in downstream sectors use imported inputs, and a higher duty makes them less competitive. Additionally, India’s negotiations with other countries, including the US, necessitate a reduction in BCD to provide trading partners with greater access to the domestic market.
When will the reform be rolled out?
Customs duty changes are usually announced in the annual Finance Bill as part of the Union Budget. These are made through changes to the Customs Tariff Act under which duties are notified. However, mid-year corrections are also done within the upper limit specified in the Act. In recent years, India has cut or waived customs duty mid-year on certain products like pulses to fight inflation. Trade-related measures, such as a trade agreement or retaliatory levies, may also lead to mid-year rate changes.
What to expect from the latest reform?
Finance minister Nirmala Sitharaman last week indicated that simpler, faceless processes, greater transparency, minimal discretion and physical interference, and reducing duties where rates are above the optimal level will be the goals of the customs reform. So, a reduction in basic customs duties and the number of tariff rates may be on the cards. In the last two Union budgets, the government has already phased out 14 tariff lines, leaving only eight, including zero. This could further come down.
“The customs duty simplification drive is expected to centre on reducing the multiplicity of duty slabs, easing import costs for raw materials and creating a more predictable and technology-enabled compliance framework,” said Prabhat Ranjan, senior director at Nexdigm, a business and professional services company. Sectors such as electronics, mobile manufacturing, medical devices, pharmaceuticals, chemicals, textiles, footwear, and white goods are particularly looking forward to this reform, as they face frequent duty-inversion issues that inflate input costs, said Ranjan. A streamlined tariff structure, supported by clearer product classifications, fewer disputes, and mechanisms like self-assessment with post-clearance correction, can significantly reduce compliance friction, he said.
What has the government done so far to ease the customs regime?
Prior to the Covid-19 pandemic, the World Bank’s ‘ease of doing business’ reports flagged the need for reforms in India’s customs duty regime. The government initiated process reforms, lifting the country’s rank to 68 on the ease of cross-border trade in 2019 from 80 the year before. This received a further boost during the pandemic due to the need for paperless and contactless processing.
India has also rolled out an accreditation system for trusted businesses, merchants and logistics operators, called ‘authorised economic operators,’ offering them priority customs processing, lower inspection rates and acceptance of self-declaration of the origin of goods. India is also expanding bilateral arrangements with other countries to mutually recognise such schemes to help merchants on both sides of the cross-border trade.