India-UK FTA: Tariff cuts likely to weigh on Customs duty collections

The India-UK free-trade agreement (FTA), under which New Delhi has agreed to reduce the weighted average tariff from 15 per cent to 3 per cent over a period of 10 years, may adversely affect Customs duty collections. However, economists believe the overall revenue impact could still be positive, driven by higher exports and increased economic activity.

 

According to Global Trade Research Initiative (GTRI) calculations, India’s revenue forgone in the first year of the agreement is estimated at ₹4,060 crore. “By the 10th year, as tariff elimination phases in more broadly, the annual loss is projected to rise to ₹6,345 crore, or around £574 million, based on FY25 trade volumes. These figures are expected to increase as bilateral trade grows,” said Ajay Srivastava, founder of GTRI. 

 

According to finance ministry data, India had forgone ₹94,172 crore in Customs duties in FY25 due to preferential tariff reductions under FTAs signed with Japan, South Korea, and the Association of Southeast Asian Nations (Asean). 

 

For FY26, the Centre has budgeted Customs revenues to grow only 2.1 per cent to ₹2.4 trillion. Under the UK FTA, tariffs will be removed or reduced on 90 per cent of goods, and 64 per cent of products will become duty-free once the agreement comes into effect. India is also expected to sign trade deals with the US and the EU this year, which could further pressure Customs duty collections. 

 

According to Budget documents, the highest revenue forgone due to FTAs in FY25 was from Asean (₹37,875 crore), followed by Japan (₹12,038 crore) and South Korea (₹10,335 crore).

 

India’s high tariffs require substantial Customs duty reductions during FTA negotiations to provide market access for partner countries. 

 

The revenue forgone due to such tariff concessions has been an issue with revenue department officials, who have argued against such trade deals. It is, however, widely acknowledged that Customs duties should not serve as a revenue-generating tool.

 

N R Bhanumurthy, economist and director of Madras School of Economics, agreed that the Customs duty collections may be impacted and said net gains from tariff reduction could be positive in the medium term. “Customs duties should not be used as a revenue-generating measure. That way one can increase Customs duties to generate more revenues,” he added.  

 

He said Customs duty reduction leads to more value addition, employment creation, and tax returns. “Higher Customs duty also means domestic consumers end up paying more for not so efficient final products. When you export more, you are also generating more indirect taxes. It is only shifting from Customs duties to other taxes. Customs duties should be used only to protect vulnerable groups like the farming community or to prevent dumping by another country,” he added.