While the globally accepted norm is that customs duty rates on final products are always equal to or higher than the rates on components or raw materials used for the manufacture of the final products, in certain cases the converse is true, which results in an “inverted duty structure”. Such an inverted levy is distortionary and results in tax inefficiencies as the manufacturer builds up unused credits.
The natural corollary of an inverted duty structure is that imports of the final products become cheaper, which adversely affects the competitiveness and sustainability of the domestic manufacturing industry.
The issue of inverted duty structure arises mainly because: (a) import duty on finished products is lower than import duty on raw materials; (b) import duty on finished products is lower than duty rates on domestic procurement of raw materials; (c) free trade agreements/regional trade agreements (FTAs/RTAs) with various countries ensure that finished products attract negligible or concessional rates of duty; and (d) this inversion is not solely because of basic custom duty (BCD) but in some cases a result of other additional duties.
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Karthik Sundaram is an associate partner and Tejus Golchha is an associate manager at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.
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