Budget 2021: Curing and vaccinating India’s international trade

Finance Minister, Nirmala Sitharaman, has presented the first post COVID-19 budget. With the economy still recovering from the impact of the contagion, the annual fiscal tool needs to be both a curative medicine and a vaccine. As the contagion has impacted almost all economies globally, though to different degrees, some part of the vaccine and medicine would perforce need to address India’s participation in global trade. Trade and growth in GDP being strongly correlated, recovery of the economy needs to address both. The attempt to balance India’s participation in global trade with the concept of Aatmanirbhar Bharat comes across clearly as one of the intents of the budget.

Getting into the specifics of proposals, a few themes stand out in the changes in Customs duty rates. Duty rates have been increased, thereby providing or increasing the measure of protection available to products covered by Production Linked Incentives (PLIs) granted by the Government of India. It may be recalled that the Central government has announced the coverage of 13 sectors with such schemes in the past year.
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In this budget the government has tried to deploy its fiscal policy to aid some of the PLIs. It has done this by increasing the import duty rates on final products which are covered by the schemes thereby providing a protected market to those investing in manufacturing. In some cases, duties have also been increased on components required to manufacture the final products covered by PLIs. Taken together, these measures demonstrate the government’s intent to deepen the presence of the manufacturing value chain in India. If merely the manufacture of finished products was incentivized, it could have led to an import of components followed by a simple assembly of products. On the other hand, development of a component manufacturing ecosystem would lead to stickiness of manufacturing investment. This intent of the government is evident in the increase in duty rates for automobile parts, compressors for refrigerators and air conditioners, solar inverters, PCBAs for mobile phones, camera modules, connectors, LEDs and Lithium-Ion batteries. While the efficacy of such measures can be debated, it is noteworthy that the government has acted only to the extent to which it can go in tariff-based protection, keeping in mind that in today’s world almost no product can be made end to end only in one country or market. Such intent is evident in reduction of import duties on naphtha, nylon chips, ferrous and non-ferrous metal products.

A new feature in the current budget is in the introduction of the agriculture and infrastructure cess which will be collected as a duty of Customs. This new levy is on a small set of diverse goods spanning agricultural products, alcoholic beverages, coal, fertilizers etc. The Finance Minister has stated that with corresponding reduction in Customs duty rates, the net impact of the new levy would not cause additional fiscal burden on most of these products. It remains to be seen whether the list of products chargeable to this cess will become longer in subsequent budgets.

A few other proposed actions of the government are notable for their potential impact in making India’s Trade and Customs regime more friendly and intelligible. The proposed amendment in the Customs Act, 1962 capping the life of exemption notifications at two years, would mean that importers or their advisors would not need to delve into notifications issued since times immemorial, to confidently know the effective duty payable on a product.

Similarly, the announcement that the Central Board of Indirect Taxes and Customs (CBIC) is crowdsourcing suggestions to review 400 exemptions and will notify changes by October 2021, could lead to a massive simplification of import levies. Another significant governance reform is the proposed amendment in Customs law prescribing a maximum period of two years for completion of investigations by Customs officials. Once effective, this would mean that businesses will not be kept in suspense while Customs investigators take their own sweet time to finalize charges.

A few other changes in Anti-Dumping Duty, Safeguard duty and Countervailing Duty regimes are proposed. Another important technical change is the adoption of the new version of Harmonized System of Nomenclature (HSN) with effect from 1st January 2022. Businesses whose products are undergoing a change of classification due to the new version of HSN should evaluate the impact of such change on duty rates, exemptions available, any regulatory restrictions and benefits of Free Trade agreements.

All in all, the budget has touched multiple facets of international trade and Customs, ranging from Customs duty levies to governance. Given that international trade is governed by actions of the Finance Ministry, Commerce Ministry and sectoral departments enforcing technical barriers, the full picture of impact will emerge only in the course of the year. That is when we will get to know the efficacy of both the cure and vaccine.

(The writer is Partner, Trade & Customs, KPMG in India)

Budget 2021: Curing and vaccinating India’s international trade Budget 2021: Curing and vaccinating India’s international trade Reviewed by TechCO on 2/03/2021 Rating: 5

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