tariff fixation

8/14/2019 Tariff Fixation

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Rationalization ofCustoms Tariff Rates in

India(Summary of ExpertGroup Report 2002)

Tarun Das

Economic Adviser, MOF, India


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Overview1. 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 multiplerates

(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 healthand 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, poorquality of goods and services, lack of

competitiveness and inefficient allocation of

resources.

Greater variance and multiplicity of tax rates on thebasis 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

very high rates of customs duties

Maximum RatesExcise duties 105%Import duties 400%

Income tax 54%

Corporate taxes:

Domestic cos. 49% and 54%

Foreign cos. 65%

Both direct and indirect taxes have been

reduced and rationalised.

Maximum RatesExcise duties CENVAT 16% + SED of16%

Import duties 30%

Income tax 30% + surcharge of 5%Corporate tax :

Domestic cos. 35% + surcharge of 5%Foreign cos. 40%

Multiple rates for excise andcustoms depending on end-uses.

Many rates are specific.

End-use specifications are abolished.Specific rates replaced by ad-valorem rates.

Single rate for excise, and five rates

for customs duties.


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Customs tariff rates

Year No.of Peak SCD SADrates 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

01-02 4 35 4


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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 36 495.Paper 24 8 8

6.Natural fibers 20 12 18

7.Metals 95 52 49

8.Capital goods 60 33 379.Others 20 13 12

10.Non-Pol 51 28 23

11.Total 47 29 21


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Average customs tariff rates in1999

India 29.5%Sri Lanka 22.5%

Bangladesh 22%

Nepal 18%China 15.7%

Only two countries viz. Pakistan

and Cameroon had higher ratesthan India in 1999


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Average customs tariff rates in1999

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 totravel a long way to reach East

Asian level


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Exchange rate and nominalprotection

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$1Input/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


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Effective rate of protection (ERP)

ERP =

(Value added in domesticcountry/

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 productnor the difference between

customs duties on input and


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Effective rate of protection (ERP)

1. When there is a uniform andsingle tariff rate, then the ERPequals the uniform tariff rate

andit ensures that all goods havethe same effective rate ofprotection.

2. With multiple tariff rates, ERPis quite random, arbitrary anddiscretionary.


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Issues for tariff fixation

1. Minimum customs duty and

shadow price of foreignexchange

2. Peak rate: FM has reiterated

that the peak rate would bereduced to 20% by 2004-05.

3. Three tier tariff structure forraw materials, components and

intermediates, final products4. Anomalies and exemptions

5. Cases for higher tariffs

WTO bindings on agricultural


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Issues for tariff fixation

6. Singe rate versus multiple

rates: FM has announced that by2004-05, there will be only tworates 10% on inputs and 20% onfinal products

7. WTO bound rates

8. Special rates for IT products

9. Special rates for SAARC

countries

10. Exemptions and special ratesfor reasons of national security,

safety, public health and


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Thank you

Have a Good Day

tariff fixation

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