Rationalization of

Customs Tariff Rates in

India
(Summary of Expert
Group Report 2002)
Tarun Das
Economic Adviser, MOF, India

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 Overview
1. Motivation of tariff reforms
2. Tariff reforms since 1991
3. Issues for tariff fixation
(a) Exchange rate and nominal tariff rates
(b) Effective rate of protection
(c) Minimum and peak rate of duty
(d) Singe uniform rate versus multiple
rates
(e) Three tier system
(f) Anomalies and exemptions
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 Overview
(g) Cases for higher rates
• WTO bindings for higher tariffs for
agricultural products
• Social reasons (wines, cigarettes etc..)
(h) Special rates due to:
• WTO bound rates
• International agreement on IT
• SAARC Free Trade Agreement (SAPTA)
• National safety, security, public health
and environment

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1. Motivations of Tariff Reforms
• In the pre-reforms period before June 1991, there
were very high customs duties with irrational duty
structure leading to high capital cost and overall
high cost economy
• High tariff walls led to industrial inefficiency, poor
quality of goods and services, lack of
competitiveness and inefficient allocation of
resources.
• Greater variance and multiplicity of tax rates on the
basis of end-uses
• Low buoyancy and elasticity of duty rates
.
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1. Motivations of Tariff Reforms
•.Complicated tax structure, legal laws, rules and
procedures.
•.Low compliance rate, high degree of tax evasion, low
administrative efficiency.
•.Liberalization of trade, industry and investment
called for rationalization of duties
•.Integration of customs tariffs with exchange rate
and interest rate policies.
•.Globalisation and regionalisation of economic
activities – WTO and SAARC.
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 2. Tariff reforms since 1991
Status in June 1991 Status in March 2002
Irrational duty structure and Both direct and indirect taxes have been
very high rates of customs duties reduced and rationalised.
Maximum Rates Maximum Rates
Excise duties 105% Excise duties CENVAT 16% + SED of
Import duties 400% 16%
Income tax 54% Import duties 30%
Corporate taxes: Income tax 30% + surcharge of 5%
Domestic cos. 49% and 54% Corporate tax :
Foreign cos. 65% Domestic cos. 35% + surcharge of 5%
Foreign cos. 40%
Multiple rates for excise and End-use specifications are abolished.
customs depending on end-uses. Specific rates replaced by ad-valorem rates.
Many rates are specific. Single rate for excise, and five rates
for customs duties.
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Customs tariff rates
Year No.of Peak SCD SAD
rates rates
90-91 22 400
91-92 20 150
92-93 16 110
93-94 16 85
94-95 12 65
95-96 9 50
96-97 8 50 2
97-98 7 40 5
98-99 7 40 5 4
99-00 5 40 10 4
00-01 4 35 10 4
7
01-02 4 35 4
Customs collection rates
Items 1990-91 1991-92 2000-01
1.Food products 47 23 31
2.POL 34 30 16
3.Chemicals 92 44 38
4.Man-made fibers 83 36 49
5.Paper 24 8 8
6.Natural fibers 20 12 18
7.Metals 95 52 49
8.Capital goods 60 33 37
9.Others 20 13 12
10.Non-Pol 51 28 23
11.Total 47 29 21

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Average customs tariff rates in
1999
India 29.5%
Sri Lanka 22.5%
Bangladesh 22%
Nepal 18%
China 15.7%
Only two countries viz. Pakistan
and Cameroon had higher rates
than India in 1999

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Average customs tariff rates in
1999
India 29.5%
Vietnam 17.3%
Thailand 15%
Indonesia 6.6%
South Korea 5.9%
Taiwan 5.2%
Malaysia 4.5%
Singapore 0%
Hong Kong 0%
Even after reducing peak rate to
20% by 2004-05, India has to
travel a long way to reach East
Asian level 10
Exchange rate and nominal
protection
sl.no. Exchange rate Average Price in Rs. Of
(Rs/US$) tariff rate import of US$1

1 47.50 35 64.13
2 49.33 30 64.13
3 51.30 25 64.13
4 53.44 20 64.13
5 55.76 15 64.13

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Effective rate of protection (ERP)
Price of a good in foreign
country=US$1
Input/Output ratio = 0.8
Value added in foreign country
=US$0.2
Import duty on final product= 20%
Import duty on input= 15%
Exchange rate = e
Landed cost of final product= 1.2 e
Production cost with imported input
= 0.8*1.15 e = 0.92 e
Value added in domestic country
= 1.20 e - 0.92 e = 0.28 e 12
Effective rate of protection (ERP)

ERP =
(Value added in domestic
country/
value added in foreign country)
-1
= 0.28 e/ 0.2 e -1
=1.4 - 1 = 0.4 = 40%
So, ERP is neither nominal
customs duty on final product
nor the difference between
customs duties on input and13
Effective rate of protection (ERP)

1. When there is a uniform and

single tariff rate, then the ERP
equals the uniform tariff rate
and
it ensures that all goods have
the same effective rate of
protection.
2. With multiple tariff rates, ERP
is quite random, arbitrary and
discretionary.
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 Issues for tariff fixation
1. Minimum customs duty and
shadow price of foreign
exchange
2. Peak rate: FM has reiterated
that the peak rate would be
reduced to 20% by 2004-05.
3. Three tier tariff structure for
raw materials, components and
intermediates, final products
4. Anomalies and exemptions
5. Cases for higher tariffs
• WTO bindings on agricultural15
 Issues for tariff fixation
6. Singe rate versus multiple
rates: FM has announced that by
2004-05, there will be only two
rates 10% on inputs and 20% on
final products
7. WTO bound rates
8. Special rates for IT products
9. Special rates for SAARC
countries
10. Exemptions and special rates
for reasons of national security,
safety, public health and 16
 Thank you
Have a Good Day

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