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Indian Industry has for long been handicapped by the anomaly of imported raw material being taxed more than the finished product. Tax experts call it the inverted duty structure. This inverted duty structure comes up in a situation where import duties on input goods are higher than on finished goods.
The situation has been further exacerbated by a spate of Free Trade Agreements (FTA) that have granted duty free imports to many products without strict compliance on local value addition norms.
The release of the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR 2020) was done so that importers conduct due diligence before importing the goods to ensure they meet the prescribed rules of origin’ provisions.
However, it is actually in the interest of the importers to turn a blind eye to the origin of the goods in order to minimize the import tariffs. This has essentially created a situation where imports are being preferred over domestic procurement for certain products.
The government has attempted to address these challenges before by rationalizing duty charged against input and final goods. This is especially important if we are aiming to grow India’s manufacturing sector as aligned to the Make in India policy by our Prime Minister.
In FY24, India’s GDP grew by 8.2% – economists have acclaimed that this has been boosted primarily through contribution of the manufacturing sector.
While the manufacturing sector’s contribution to GDP in previous years has not been much to celebrate about, there is much hope for what comes ahead. Just as the government has simplified doing business in India significantly, there is also a need to remove tax anomalies that are hurting the manufacturing sector’s potential.
In a recently held Symposium at IIT Delhi conducted by the Centre for Digital Economy Policy Research (C-DEP) and the Forum for Integrated National Security (FINS), the issue of inverted duties on downstream industries of critical mineral sectors was discussed.
The deliberations brought up that it has become cheaper to import Ferro Molybdenum (an alloy of Molybdenum which is a critical mineral used for defence manufacturing) from certain countries as it is imported duty free due to FTAs, than to continue its manufacturing within India because custom duties on the intermediary product is higher than the finished product due to FTAs.
Similarly, it has been observed that a tax anomaly is affecting the manufacture of data cable in India, where the input material known as Copper Rod has higher duties on import than the finished product. Basic custom duty (BCD) payable on the import of copper and copper articles are subject to levy of BCD at 5% and BCD on Data Cable (finished product) is nil under ITA & FTA.
This is essentially making it cheaper to import the finished product from other countries than to manufacture it in India.
The government has actively worked towards the correction of such tax anomalies. Only recently, the Finance Minister proposed an increase in the BCD on electric kitchen chimneys (finished product) from 7.5% to 15% and a reduction on heat coils (intermediate goods) from 20% to 15%. This was done with the intention of correcting the tax anomaly, and incentivising the manufacture of electric chimneys in India.
Simultaneously, the government is already working on a comprehensive list of products that are affected by inverted duty structures, and needs correction.
Other countries around the world have implemented higher BCD against import of data cables, such as Malaysia – from 5% to 30%, and Vietnam from 10-17%. This has been done to thwart low quality Chinese imports of data cables from proliferating in their critical digital infrastructure.
Previously the Indian government had decided to keep import duties on data cables at nil due to low/non-availability of the product in India. Investments for manufacture of data cables have since kicked-off significantly, and now the industry is sufficiently equipped to cater to the entire domestic demand.
However, such duty anomalies are making it more expensive to manufacture in India and this is bound to have negative consequences for any future investments by proprietors. This was seen in the case of Ferro Molybdenum, where imports from South Korea had captured almost 55-60 percent of the domestic demand for the product.
In a retaliatory intervention, safeguard duties by DGTR were enacted against South Korea in October 2023, and this has benefitted the industry significantly as it has reduced imports to around 35 percent of its previous value.
This has boosted an industry that is dominated by MSME to increase domestic manufacturing of Ferro Molybdenum by around 25 percent in FY 2023-24. These numbers still don’t capture the entire benefits as the safeguard duties were only put in place in the middle of the financial year.
The Indian industry manufacturing data cables have increased production capacity significantly in the past decade. Nil duty against import of data cables had been put in place because the industry did not have the capacity earlier to meet our own requirements domestically.
By correcting the anomaly on products such as data cables, production will be boosted to not only meet domestic requirements but to make the industry export ready. Without robust domestic manufacturing in products such as data cables and ferro molybdenum, both of which have strategic importance for digital infrastructure and defence manufacturing respectively, there is significant risk exposure and supply chain vulnerabilities.
Make in India priorities need immediate attention not only through incentivising new investments through schemes and subsidies, but also through the correction of tax anomalies to increase competitive advantage for any product to be manufactured within the country.
(The author is Policy Consultant at the Centre for Digital Economy Policy Research (C-DEP); Views are personal)
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