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Speed up customs reform
June, 27th 2009

The budget needs to bring custom duty reform back on the agenda. What's required is a plan to halve the peak rate of custom duty to 5% from the current rate of 10% in the next 2-3 years.

In any case, a low to moderate Goods and Services Tax will necessitate that. Lower duties would rev up competitive pressures on domestic industry and so be efficiency-enhancing. The move would also bring down costs.

It's also eminently desirable to eliminate the general bias against the export sector, in policy terms. Note that overall, our merchandise exports remain lacklustre just over 1% of world trade. Yet the immediate slashing of tariffs maybe unwarranted given the unprecedented global slowdown and the possibility of an artificial surge in cheap imports. It may not have the expected beneficial effects, in the current context.

However, tariff reforms ought not to be put on the backburner either. Note that the weighted-average peak customs duty rate on non-agricultural products was slashed from 12.5% to 10% in budget 2007-08; the rate was retained at 10% in 2008-09.

In tandem, there's a sound case to continue with the exemption of 4% special countervailing duty (CVD) on imported goods. It could be argued domestic goods attract value-added tax, and so special CVD should be levied on imports. But the fact is that our relatively high tariff rates hardly leave scope for additional levy. The other suggestion is to reduce peak custom duty keeping raw materials in mind, and not finished goods.

The gameplan for lower duties on raw materials, so as to boost value-addition, may have had some merit in the old days of cascading duties on manufactures. But in a regime of value-added taxes both on production and consumption of goods implying provision for setoffs of taxes paid earlier in the value chain the duty differential between raw materials and finished products is not warranted.

It makes no sense to seemingly boost value-addition behind high tariff walls. It would be tantamount to an economic mirage, against the backdrop of our steady integration with the global economy. We are poised for free-trade with the Association of South-East Asian Nations, and a distorted tariff regime here can mean needless trade diversion to Asean.

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