India may rationalise most customs tariffs by budget 2027-28, Nirmala Sitharaman says
The Finance Minister indicated that customs tariffs on most goods could be brought down to single digits by the Union Budget for 2027-28
The statement frames tariff rationalisation as the next stage in a sequence of reforms that has already covered corporate tax, personal income tax, and the Goods and Services Tax over the preceding years
Barring a small set of items (reported as around 13), tariff lines have reportedly already been rationalised under recent budgets
The stated goal is to simplify India's customs duty structure, reduce compliance complexity, and make trade more predictable for businesses engaged in import and export
Customs Duty Framework — Customs Act, 1962 and Customs Tariff Act, 1975
Customs duty in India operates under a two-statute framework: the Customs Act, 1962 provides the administrative and enforcement machinery, while the Customs Tariff Act, 1975 prescribes the actual rates via its schedules.
Key Details
- The Customs Act, 1962 empowers the government to levy and collect customs duties and governs procedures such as valuation, assessment, and clearance of goods
- The Customs Tariff Act, 1975 contains the First Schedule (import duty rates) and Second Schedule (export duty rates), classified using the Harmonized System of Nomenclature (HSN), which India adopted in 1986
- Basic Customs Duty (BCD) is the principal levy charged under the Customs Act at rates set in the Customs Tariff Act's First Schedule; other components can include Social Welfare Surcharge and Agriculture Infrastructure and Development Cess
- Annual Finance Bills (part of the Union Budget) are the usual legislative route for revising customs duty rates and exemptions, since customs is a Union subject (List I, Union List, Constitution)
The announced tariff rationalisation for Budget 2027-28 would be implemented through amendments to the Customs Tariff Act's schedules via the Finance Bill process, the standard mechanism for annual customs changes.
WTO Framework — Bound vs Applied Tariff Rates
UPSC tests the distinction between the ceiling ("bound") tariff rate a country commits to under WTO rules and the actual ("applied") rate it charges — India has historically maintained wide gaps between the two, giving it policy flexibility.
Key Details
- India's simple average bound tariff rate (the WTO ceiling commitment) is significantly higher than its simple average applied MFN tariff rate, reflecting substantial "policy space" retained under WTO commitments
- The Most Favoured Nation (MFN) principle under the WTO's General Agreement on Tariffs and Trade (GATT) requires a country to extend the same tariff treatment to all WTO members, except under specific carve-outs (e.g., free trade agreements, preferential schemes for least-developed countries)
- India's trade-weighted average applied tariff has been on a declining trend as part of ongoing rationalisation, though it remains higher than the average for many advanced and several emerging economies
- Reducing the bound-applied gap and simplifying tariff slabs (moving toward single-digit rates) is often cited as a step toward greater trade predictability and eventual free trade agreement (FTA) negotiations, since large tariff overhangs complicate reciprocal market-access offers
The government's move toward single-digit tariffs on most items would narrow the gap between India's applied rates and its liberalised trade posture, relevant to ongoing and prospective FTA negotiations.
Sequencing of Tax Reforms — Corporate Tax, Income Tax, GST, and Now Customs
The announcement frames customs rationalisation as following a multi-year sequence of direct and indirect tax simplification, a theme relevant to India's overall tax-reform trajectory tested under fiscal policy topics.
Key Details
- Corporate tax rates were cut for domestic companies (base rate reduced to 22% for companies foregoing exemptions, and 15% for new manufacturing companies) via an ordinance in September 2019, later regularised through the Taxation Laws (Amendment) Act, 2019
- The Goods and Services Tax (GST), introduced via the 101st Constitutional Amendment Act, 2016 and rolled out from July 1, 2017, has undergone periodic rate rationalisation exercises by the GST Council to reduce the number of slabs and correct inverted duty structures
- Personal income tax has seen periodic simplification, including a new concessional tax regime (introduced 2020-21, subsequently made the default regime) with revised slabs and reduced exemptions
- Tariff/customs rationalisation is described as the "next" item in this sequence, aiming to lower the average applied customs rate toward single digits for most goods while retaining protective tariffs on a limited list of sensitive items
The Finance Minister's statement explicitly places customs rationalisation within this broader six-year reform sequence covering corporate tax, income tax, and GST, positioning it as the next major indirect-tax simplification exercise.
- Target: single-digit customs duty on most items by Union Budget 2027-28, with a small exempted list (reported around 13 items) retaining higher/protective rates
- India's average customs duty has reportedly declined from about 11.65% to about 10.66% following recent rationalisation rounds [Unverified — exact figures as cited in report]
- India's simple average MFN applied tariff (WTO data, most recent available): around 15.8%; simple average bound tariff: around 48.5%
- Governing statutes: Customs Act, 1962 (administration) and Customs Tariff Act, 1975 (rate schedules)
- Corporate tax cut to 22%/15% (new manufacturing units): September 2019, via ordinance later regularised by the Taxation Laws (Amendment) Act, 2019
- GST launched: July 1, 2017, under the 101st Constitutional Amendment Act, 2016