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Budget likely to remove indirect tax anomalies for boost to Make in India
January, 22nd 2015

Finance Minister Arun Jaitley’s full-fledged Budget is likely to propose a fresh round of indirect tax reforms by removing existing anomalies such as the inverted duty structure. This is being done to boost Prime Minister Narendra Modi’s ‘Make in India’ programme.

Power generation machines, telecom equipment, and petroleum products are among the categories affected by the inverted duty structure.

However, a Finance Ministry official admitted that given the tax revenue situation, it would be challenging to remove the inverted duty structure for more sectors. In the last Budget, despite limited fiscal space, Jaitley addressed the problem of inverted duty structure in certain sectors. Expectations are that he will continue to do the same this time also.

Inverted duty structure refers to higher import duty on raw materials or intermediate goods and lower duty on finished products. This discourages domestic value addition. This inversion is not solely because of basic customs duty, but in some cases a result of other additional duties.

“Areas such as power generation machines are still facing issues of inverted duty structure, making them uncompetitive. Consultations have started to remove this to boost manufacturing,” a senior Government official told BusinessLine.

For example, a component mainly imported and widely used in power generation machines has basic import duty of 30 per cent, while for finished machines it is 5 per cent.

“Now if duty is lowered to even 10 per cent, this will translate into savings of 3-5 per cent. This will help domestic companies, as they work on thin margins of up to 5 per cent,” he said.

Similarly, finished telecom equipment and petroleum products attract lower duty than components and feed stocks, respectively.

These are among the 25 sectors identified in the ‘Make in India’ mission which was launched last year to boost domestic manufacturing.

Inverted duty structure results from many factors including free trade agreements with various countries. Though such arrangements provide an opportunity for Indian manufacturers to export more, higher import duty on raw materials is disadvantageous to domestic manufacturers.

In its 2013 survey, the industry body FICCI had identified 13 sectors facing the brunt of an inverted duty structure. These included aluminium, capital goods, cement, chemicals, electronics, paper, steel, textiles and tyres.

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