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ICRIER for hastening tariff reforms

Agencies - New Delhi

Economic policy think tank ICRIER has aid that India had the third highest customs duty rates after Cambodia and Pakistan amongst 122 nations and

suggested that the government hasten tax reforms by lowering peak customs duties to ensure export competitiveness of domestic industry.

Making a case for lowering of peak customs duty from prevailing 30 per cent to 10 per cent by 2006-07, ICRIER said in a policy brief on customs tariff reform that the governments proposed tariff structure does not achieve much reduction relative to competitive countries. “In this globalised era, export oriented FDI depends on a country’s tariff levels relative to those of competing countries particularly those in East and South East Asia”, the CEO and director Mr Arvind Virmani said in the paper.

As compared to India’s peak customs duty of 30 per cent, Pakistan boosts of a peak rate of 46.5 per cent while Cambodia has 35 per cent. Emerging economies like Russia have rates of 13.9 per cent while Czech Republic is at 6.8 per cent, it added. “It is therefore imperative to go beyond the existing commitments and bring peak rates to East Asian levels during the current decade. This will give sufficient time for industry and agriculture to adjust to these changes and for government to ensure that domestic control and bureaucratic constraints are eliminated”, it said.

The paper also pointed to anomalies in the tariff structure adopted during the past decade where tariffs on agricultural raw materials were relatively higher. It criticised the government for adopting a two-tier customs duty structure as against a uniform one arguing that the same would lead to distortions.

The policy brief pointed to the fact that with a two-tier structure, effective protection for final goods can vary to a large extent with the rates being inversely linked to value addition of final goods thus giving least incentive to producers. “It will make life easiest for least efficient, most capital intensive and energy intensive producers by giving them greatest protection”.

ICRIER also pointed out that two-tier structure did not achieve reduction of tariffs relative to competitors, particularly when export oriented FDI was linked to relative tariffs. It further said high levels of tariffs lead to import diversion and smuggling through neighbouring countries.

ICRIER suggested a two phase reform process by lowering basic customs duty to a near uniform level of 10 per cent by 2006 and a uniform level of five per cent by 2010. The paper also sought elimination of virtually all end-use exemptions to establish a standard 10 per cent rate with peak duty being lowered to 15 per cent in 2005-06.

It warned against a myopic view of looking only at tariff rates when thinking of protection, stating that exchange rates also influence protection while high customs duties will reduce competitiveness. Pitching for a uniform basic duty rate, it said a single rate would have many advantages in the form of efficiency, administrative convenience and equity.

The proposed tariff reduction and rationalisation will result in a quantum jump in export competitiveness and make the FDI globally competitive in the manufacturing sector.

The export of labour intensive manufactures will increase and result in substantial rise in employment opportunities for the less educated. If accompanied by an elimination of SSI reservation and reforms to increase labour flexibility, it could make India a genuine competitor for China during the next decade, it said.