Economic Survey: Tariff skew undercuts electronics manufacturing ambitions

Survey backs industry demand to fix inverted duty structure

The Economic Survey released on Thursday has endorsed the electronics industry’s demand for correction of the inverted duty structure to the finance ministry, calling it a major impediment to domestic cost competitiveness and to India’s ambition of becoming a global production base.

 

It has also backed the industry’s call for tariff rationalisation on specialised capital goods required for manufacturing mobile phones and parts, as well as key components such as flexible printed circuit board assemblies, microphones, receivers, and speakers.

 

The Survey highlights that recent geopolitical realignments and global supply-chain restructuring create opportunities for labour-abundant economies to position themselves as competitive assembly and manufacturing bases in global value chains.

 

“In this context, higher import tariffs on intermediates and capital goods relative to final products can lead to inverted duty structures, which raise input costs for domestic manufacturers and discourage assembly and component manufacturing,” the Survey said.

 

It therefore suggested that “a renewed and sustained focus on input tariff neutrality may help realise the potential in this window”, adding that going forward, “continued calibration of tariffs on intermediates and capital goods in high-growth areas can enhance cost competitiveness, deepen assembly and component ecosystems, and support India’s emergence as a global production base”.

 

The electronics industry, through the India Cellular & Electronics Association (ICEA), has petitioned the finance ministry, the Prime Minister’s Office, and the Ministry of Electronics and Information Technology ahead of the Union Budget 2026-27 on three key policy issues to enhance cost competitiveness, expand jobs, increase exports, and strengthen domestic manufacturing. These include correction of inverted duty structures, reform of tax laws related to permanent establishment, and tariff rationalisation for specialised inputs not manufactured in India.

 

In its submissions, ICEA has sought extension of a zero per cent basic Customs duty on inputs, components, sub-parts, and sub-assemblies used in manufacturing capital equipment for smartphones, where finished equipment already attracts nil duty while inputs face duties ranging from 5 per cent to 25 per cent.

 

According to the industry, such inversions discourage localisation, undermine the production-linked incentive and Electronics Component Manufacturing Scheme objectives, increase reliance on imported machinery — particularly from China — and create avoidable supply-chain vulnerabilities. Correcting these distortions would enhance competitiveness, promote jobs, and strengthen domestic manufacturing, the association said.

 

On taxation, ICEA has sought reforms to eliminate unintended permanent establishment risks, including tax-neutral treatment for just-in-time component storage by global vendors in Indian warehouses. Current permanent establishment interpretations place India at a disadvantage compared with competing manufacturing destinations such as China and Vietnam. They also lead to the export of taxes and hurt competitiveness.