Rationalization of Customs Tariff Rates in India: (Summary of Expert Group Report 2002)

Rationalization of Customs
Tariff Rates in India

(Summary of Expert Group
Report 2002)
Tarun Das
Economic Adviser, MOF, India
1
Overview
1. Motivation of tariff reforms
2. Tariff reforms since 1991
3. Issues for tariff fixation
(a) Exchange rate and nominal tariff rates
(b) Effective rate of protection
(c) Minimum and peak rate of duty
(d) Singe uniform rate versus multiple rates
(e) Three tier system
(f) Anomalies and exemptions
2
Overview
(g) Cases for higher rates
• WTO bindings for higher tariffs for
agricultural products
• Social reasons (wines, cigarettes etc..)
(h) Special rates due to:
• WTO bound rates
• International agreement on IT
• SAARC Free Trade Agreement (SAPTA)
• National safety, security, public health and
environment
3
1. Motivations of Tariff Reforms
• In the pre-reforms period before June 1991, there
were very high customs duties with irrational duty
structure leading to high capital cost and overall
high cost economy
• High tariff walls led to industrial inefficiency, poor
quality of goods and services, lack of
competitiveness and inefficient allocation of
resources.
• Greater variance and multiplicity of tax rates on the
basis of end-uses
• Low buoyancy and elasticity of duty rates
.
4
1. Motivations of Tariff Reforms
•.Complicated tax structure, legal laws, rules and
procedures.
•.Low compliance rate, high degree of tax evasion, low
administrative efficiency.
•.Liberalization of trade, industry and investment
called for rationalization of duties
•.Integration of customs tariffs with exchange rate
and interest rate policies.
•.Globalisation and regionalisation of economic
activities – WTO and SAARC.
5
2. Tariff reforms since 1991
Status in June 1991 Status in March 2002
Irrational duty structure and Both direct and indirect taxes have been
very high rates of customs duties reduced and rationalised.
Maximum Rates Maximum Rates
Excise duties 105% Excise duties CENVAT 16% + SED of
Import duties 400% 16%
Income tax 54% Import duties 30%
Corporate taxes: Income tax 30% + surcharge of 5%
Domestic cos. 49% and 54% Corporate tax :
Foreign cos. 65% Domestic cos. 35% + surcharge of 5%
Foreign cos. 40%
Multiple rates for excise and End-use specifications are abolished.
customs depending on end-uses. Specific rates replaced by ad-valorem rates.
Many rates are specific. Single rate for excise, and five rates
for customs duties.
6
Customs tariff rates
Year No.of Peak SCD SAD
rates rates
90-91 22 400
91-92 20 150
92-93 16 110
93-94 16 85
94-95 12 65
95-96 9 50
96-97 8 50 2
97-98 7 40 5
98-99 7 40 5 4
99-00 5 40 10 4
00-01 4 35 10 4
7
01-02 4 35 4
Customs collection rates
Items 1990-91 1991-92 2000-01
1.Food products 47 23 31
2.POL 34 30 16
3.Chemicals 92 44 38
4.Man-made fibers 83 36 49
5.Paper 24 8 8
6.Natural fibers 20 12 18
7.Metals 95 52 49
8.Capital goods 60 33 37
9.Others 20 13 12
10.Non-Pol 51 28 23
11.Total 47 29 21
8
Average customs tariff rates in 1999
India 29.5%
Sri Lanka 22.5%
Bangladesh 22%
Nepal 18%
China 15.7%
Only two countries viz. Pakistan and
Cameroon had higher rates than
India in 1999
9
Average customs tariff rates in 1999
India 29.5%
Vietnam 17.3%
Thailand 15%
Indonesia 6.6%
South Korea 5.9%
Taiwan 5.2%
Malaysia 4.5%
Singapore 0%
Hong Kong 0%
Even after reducing peak rate to
20% by 2004-05, India has to travel
a long way to reach East Asian level
10
Exchange rate and nominal protection
sl.no. Exchange rate Average Price in Rs. Of
(Rs/US$) tariff rate import of US$1
1 47.50 35 64.13
2 49.33 30 64.13
3 51.30 25 64.13
4 53.44 20 64.13
5 55.76 15 64.13
11
Effective rate of protection (ERP)
Price of a good in foreign country=US$1
Input/Output ratio = 0.8
Value added in foreign country =US$0.2
Import duty on final product= 20%
Import duty on input= 15%
Exchange rate = e
Landed cost of final product= 1.2 e
Production cost with imported input
= 0.8*1.15 e = 0.92 e
Value added in domestic country
= 1.20 e - 0.92 e = 0.28 e
12
ERP =
(Value added in domestic country/
value added in foreign country) -1
= 0.28 e/ 0.2 e -1
=1.4 - 1 = 0.4 = 40%
So, ERP is neither nominal customs
duty on final product nor the
difference between customs duties
on input and output
13
1. When there is a uniform and single

tariff rate, then the ERP equals the
uniform tariff rate and
it ensures that all goods have the
same effective rate of protection.
2. With multiple tariff rates, ERP is
quite random, arbitrary and
discretionary.
14
Issues for tariff fixation
1. Minimum customs duty and
shadow price of foreign exchange
2. Peak rate: FM has reiterated that
the peak rate would be reduced to
20% by 2004-05.
3. Three tier tariff structure for raw
materials, components and
intermediates, final products
4. Anomalies and exemptions
5. Cases for higher tariffs
• WTO bindings on agricultural goods
• Social reasons- wines, cigarettes 15
Issues for tariff fixation
6. Singe rate versus multiple rates:
FM has announced that by 2004-05,
there will be only two rates 10% on
inputs and 20% on final products
7. WTO bound rates
8. Special rates for IT products
9. Special rates for SAARC countries
10. Exemptions and special rates for
reasons of national security, safety,
public health and environment
16
Thank you
Have a Good Day
17

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