The government will focus on correcting the inverted duty structure in the next Budget. Several sectors, including engineering and electronics, suffer from the anomaly.
"While the reduction of customs duty on some products is certain in next year's Budget in keeping with the government's commitment to bring duties on a par with Southeast Asian countries, rectifying the inverted duty structure will be the main area of focus," a government official told Business Standard.
The inverted duty structure leads to higher duty on intermediates than the tax on finished products.
Several items in the electronic goods sector suffer from the inverted duty structure.
"The government is committed to abolishing duties under the World Trade Organisation's information technology agreement on several electronic goods from January, but inputs for these items have high duties," an official said, adding that several engineering items also had high duties on intermediaries.
Officials pointed out that a further reduction in customs duty would be on a product basis, factoring in inputs that are imported into the country and those that are locally available.
"Whenever customs duties have been reduced, there has been an increase in the import of those products and an appreciation in the value of the rupee, which in turn makes imports easier. And while revenue collections on the customs side is doing well, we will have to consider the impact that the scaling down of customs duty has on the demand elasticity of those imports," the official said.
Officials pointed out that customs duty in South Asia varied depending on each country's comparative advantage. "We have countries like Hong Kong and Singapore, which have no duties, but at the same time, there are countries like the Philippines that have an average duty of around 17.5 per cent," an official said.
Further cuts in excise duties are also not being totally ruled out despite the fact that the ministry has estimated a shortfall of around Rs 7,000 crore (Rs 70 billion) this fiscal.
"Reduction in excise duties favourably impacts domestic production. Scaling back of excise duties in the textiles sector last year, for instance, has had a favourable impact on the sector," the official said, adding that some anomalies in the textiles sector on this account would, however, be addressed.
The Budget will also lay emphasis on improving tax administration including computerisation of both tax returns and refunds.
Taxing matters
Inverted duty effect: It leads to higher duty on intermediates than the tax on finished products
Sectors facing the anomaly: Engineering and electronics are worst hit by the inverted duty structure
More concessions: Customs duty on certain goods set to go. Cuts in excise duties are also not being ruled out despite an estimated shortfall of around Rs 7,000 crore this fiscal year
