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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