Calibrating customs tariffs to improve the viability of investments in finished products and the intermediate stages of production will encourage backward integration of facilities, one person said.
The duty revisions could be made in the electronics and consumer goods segments, the person said on condition of not being identified. Air-conditioners and washing machines are two sectors where domestic production of components and semi-finished goods are likely to get tariff protection.
The move springs from the success in the mobile phone segment, where higher customs duty on finished products helped to attract investments. The government is implementing a phased increase in customs duty on components of smartwatches and mobile phones to encourage producers to make these parts locally.
The basic customs duty on batteries and other parts of smartwatches will go up to 15% from 10% from 1 March 2025. In the case of mobile phones, the basic customs duty on speaker assemblies, printed circuit boards and batteries will go up to 15% from 1 March from 10% now.
Typically, value addition in the intermediate stage exceeds that in the final assembly and carefully executed tariff protection, especially in areas where high-end technology is not required, could boost local manufacturing of semi-finished goods, the first person said.
“Customs tariffs have proven to be an effective tool in fostering domestic manufacturing when implemented strategically,” said Sanjay A. Chhabria, indirect tax lead at Nexdigm, a business and professional services company. “The government in this budget must focus on a nuanced approach protecting domestic industries, encouraging backward integration and ensuring global competitiveness, keeping in mind the long-term growth and export potential.”
“The government is reviewing the customs duty rate structure to make it simpler and fairer. This will help ease trade, reduce disputes and support manufacturing and exports. Revision in customs duties is aimed at promoting the development of critical industries as it encourages businesses to innovate and improve their products. This helps in job creation, fosters skill development and strengthens the overall economy,” the second person said.
Trade regulations
The government is also working on simplifying regulations impacting trade, including those of the Reserve Bank of India, the customs authorities, the goods and services tax authorities and the Directorate General of Foreign Trade to ease exports, especially of handicrafts, jewellery, electronic items, and ayurvedic products, the second person said on condition of anonymity.
Experts said the FY26 budget may adopt a balanced approach to customs duty revision to foster both domestic production and export competitiveness. The government’s strategy of using customs tariffs to boost domestic production has shown tangible results, said Chhabria.
India has emerged as a global manufacturing hub for mobile phones with global companies setting up facilities, thanks to incentives linked to production and other sops, he said. Also, local production of toys has surged as higher duties, complemented by quality standards enforcement, discouraged imports, he said.
In the case of electronic appliances, local assembly and production have increased due to targeted import duty increases on finished products, Chhabria said, adding that this can be replicated in sectors such as medical devices, capital goods, wind turbines and electric vehicle batteries. A combination of duty adjustments, production-linked incentives and infrastructure support can be thought of and will be critical to achieving these goals, he said.
Expectations are high for a comprehensive review of India’s customs duty structure, according to Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm.
“Simplifying the current system is critical as the multiplicity of rates has created unnecessary complexity and frequent disputes,” said Sehgal, adding that the anomaly of raw materials attracting higher taxes than finished products in certain industries needs to be addressed.
Experts also said imposing higher import duties on intermediate products could encourage backward integration, but it must be approached cautiously. Higher duties should be imposed only when there is a clear pathway for domestic production of intermediate goods, supported by sufficient capacity and skill development, they said.
According to experts, there has to be a clear analysis of the existing resources, feasibility of the product being made in India and the existing capacity. In sectors integrated into global value chains, excessive import duties may hinder competitiveness, they said.
India needs low tariffs and rationalised tariff structures so that local producers can compete for export markets, said Rahul Ahluwalia, co-founder of the Foundation for Economic Development.
“Our manufacturers need to access global value chains and have seamless movement of goods across international borders to compete in global markets. Low tariffs across the board are the best way to achieve this. It will also necessitate reforms in the domestic business climate, which we should welcome. Only by being globally competitive, can India create the jobs that we need,” said Ahluwalia.
