Union Budget 2023: Dissecting the tariff barrier

One unintended consequence of the advent of the Goods & Services Tax (GST) is its impact on the Union Budget. On the indirect taxes front, only the changes in the customs side figure in the Budget. It is the GST Council, in the full public glare, which makes recommendations on goods and services. Customs does contribute to the revenue kitty; it is not a major contributor. Last year, for instance, for every Rs 100 of revenue collected, the contribution from customs was Rs 5, the total Budget estimates projected for 2022-23 for customs being Rs 2,13,000 crore. Customs now increasingly plays the role of a protector of the economic frontiers of the country by imposing barriers — tariff and non-tariff.

The entire budgetary process takes place in high secrecy. Surprisingly, the news of a possible hike in customs duty across several commodities was splashed in the newspapers. The news linked to an unnamed government official suggests an increase in customs tariffs on electronic items, vitamins, helicopters, plastic goods, jewellery, and high-gloss paper among others. If this is indeed so, it will be part of a pattern noticed over the last few budgets.

Union Budget 2022-23 saw a tariff increase on various electronic items, imitation jewellery, chemicals, and umbrellas among others. 2021-22 witnessed a tax hike on cotton, cotton waste, ethyl alcohol, various chemicals, plastics, leather, gems & jewellery, capital goods, specific auto parts, metals products and various items in the electronics sector. The result has been a steady increase in the average rate of customs duty to about 18 per cent from 14-15 per cent.

The key reason for the increase in customs tariffs is protectionism. And protectionism predominantly now in India, like in every other country, means protecting the domestic industry from the influx of goods from China. Despite its current economic turmoil, China continues to be a major source of products ranging from capital goods and intermediate goods to raw materials, for meeting the demand of several fast-expanding sectors like electronics, telecom, and power. While the total trade in 2022 between China and India touched USD 135 billion, imports from China were at USD 118.5 billion and exports at USD 17.48 billion. The trade deficit crossed the USD 100-billion mark.

Unfortunately, the line ministries which recommend the increase in tariffs do not carry out any exercise to ascertain if the domestic industry has indeed benefited because of the protection afforded. There is no worthwhile study done to see if investment or manufacturing has increased. As a rule, such an exercise should be carried out and put in the public domain. Make-in-India should not result in hurting free trade and the domestic industry from competition. In the absence of competition, quality also suffers.

It can be argued that every country engages in some degree of protectionism. The US, has in the guise of ‘Making America Great Again’, and fearful of Chinese imports, increased tariffs. A whole range of subsidies has also been offered to attract investment into the US and reduce import dependence.

India needs to protect its industry, especially its nascent industry. However, it should never be forgotten that protections come with a cost. All such protectionist measures should be short-term with a clear end date. This will give an unambiguous signal to the domestic industry that they need to put in place measures to increase production, improve quality and gird to face the competition which free trade will usher in. Yes, by increasing tariffs and making imports expensive, the attempt is also to address the mounting current account deficit (CAD) problem. This has not really happened; CAD is about 4.4 per cent of the GDP. However, every increase also provides the necessary arbitrage for unscrupulous elements to try to evade the tariff barrier. The incessant gold smuggling is a case in point.

The protectionist streak also runs counter to the free trade agreement (FTA) signing spree we are currently engaged in. FTAs result in a reduction in tariffs for imports from partner countries. The range of goods getting preferential access is increasing. However, many of the same goods, if coming from other countries, will suffer a higher tariff. The contradiction here needs to be addressed.

There are several schemes already in place to attract investment and increase manufacture and exports. The Production-Linked Incentive (PLI), the SEZ scheme (which is to be replaced with a new act as per the announcement made in the last Budget and whose contours are still unknown), the EOU scheme, and manufacture in bond are all schemes with similar goals. A hike in customs tariffs may or may not result in a decrease in imports or ease the CAD burden, but it will result in other consequences that we should be aware of.

(The writer is retired chairman, Central Board of Indirect Taxes & Customs)