product. This leads to accumulation of input tax credit, which a local manufacturer will never be able to utilise.
“In the case of IT and electronic products (where the BCD is zero), the prevailing CVD of 12% and SAD of 4% is a major disincentive for local manufacturing as the effective duty rate on account of CVD and SAD comes to approximately 16.48% as against the effective excise duty rate of 12.36% on finished products. The above anomaly can be addressed by aligning the duty rates on inputs vis-à-vis finished goods,” said Jain.
Similar examples of perverse duty incidence affecting the use of imported components in local production of finished goods are seen in the case of toilet soaps, PVC, tyres, paper and edible oils, too.
“Correcting the inverted duty structure is very difficult because the same raw material may be used in different industries where imported finished products attract different rates of duty. One way to address it is to give duty relief or exemption for specific end use of raw materials. But this may have the flip side of requiring inspections to ensure that the relief is being claimed for intended end uses,” said Ajai Sahai, director general, Federation of Indian Export Organisations.
According to Krupa Venkatesh, senior director, indirect taxes, at Deloitte Touche Tohmatsu India, the problem of inverted duty is prominent in sectors like edible oil, cement, steel, aluminium, chemicals, tyres, pharmaceuticals, pumps, tractors and paper.
Tyres, for example, attract only a 10% BCD compared with 20% or Rs 20 a kg (whichever is lower) in the case of natural rubber, its principal raw material.
“Besides, tyre imports enjoy preferential duty under India-Asean FTA, Sri Lanka FTA and the Singapore CECA (comprehensive economic cooperation agreement) which leads to imports at concessional rates ranging from 0% to 8.6%, increasing the incidence of inversion,” she said.
In the case of pharmaceuticals, imported active ingredients attract 12% customs duty, while finished products attract only 6%, leading to accumulation of tax credit, said Venkatesh.