Tweaks in inverted duty structure in Union Budget

As a part of 'Make in India' initiative changes in store for pharma and auto sector

Budget 2015-16 might announce significant tweaks in the inverted duty structure by reducing the customs duty on raw material for the pharmaceutical, electronic and automobile sectors, sources say.

An inverted duty structure is one in which the import duty on a finished product is lower than that on the raw material or intermediate product, which discourages domestic value addition.


“The inversion in key manufacturing sectors is a cause of concern. We are trying to remove this anomaly for domestic manufacturers; a revision for some sectors is likely in this Budget,” said a senior government official.

Another official said this would be a part of the ‘Make in India’ theme, as such anomalies discouraged value-addition by domestic manufacturers and encouraged imports.
 

In the previous Budget, Finance Minister Arun Jaitley had addressed the issue for the steel and soap-manufacturing sectors by reducing basic customs duty on raw materials (in some cases, the duty was halved).

“One of the very important aspects of the ‘Make in India’ campaign will be correcting the inverted duty structure to incentivise domestic manufacturing. That would mean reducing the customs duty on raw materials or components wherever it is higher than that on the finished product. Also, a special additional duty of sour per cent is resulting in a huge blockage of funds for many sectors in which value addition isn’t very high, such as petrochemicals and auto components. If this is not corrected, it will promote imports and sale of finished products rather than local manufacturing,” said Prateek Jain, partner, KPMG India.

In pre-Budget consultations, industry chambers had made representations on the inverted duty structure in various sectors.  Such a structure is present in various sectors, including commercial vehicles. Here, the excise duty on the vehicles is eight per cent, while the input products used draw a duty of 12 per cent.

While the chemicals used in manufacturing electronic parts draw a duty of 7.5 per cent, the finished products draw no duty.

“This has affected the financial viability of the manufacturers who have set up facilities in Indian states,” the Confederation of Indian Industry said in a pre-Budget memorandum.

Some chemicals used in the manufacture of medicines draw a duty of as high as 12 per cent, while free trade agreements (FTAs) ensure the finished products draw negligible duty.

“The government will have to look at policies specific to the chemical manufacturing sector to generate a sizable impact. Industry feels FTAs are having a negative impact on business. FTAs create an inverted duty structure, making it cheaper to import a finished product rather than manufacturing or assembling it in India,” the Federation of Indian Chambers of Commerce and Industry said in its pre-Budget consultations.

The manufacturing in India has started picking up steam in India in past few months. During the April-December period, the manufacturing sector saw an output growth of 1.2%, compared to a contraction 0.4% the same period last year.