Review Pacts, Apply Quality Curbs Instead Of Border Tax, Commerce Ministry Told: BQ Exclusive
A border adjustment was proposed on all imports as part of India’s push towards self-reliance.
The Finance Ministry has asked the Commerce Ministry to review existing free trade agreements to protect domestic industry and impose quality restrictions on imports instead of introducing a border adjustment tax, according to a senior official aware of the correspondence between the two ministries.
The Ministry of Commerce had proposed a “border adjustment tax” to protect domestic industry in a push towards making India self-reliant. This was aimed at providing domestic industry a level-playing field by imposing more taxes on cheaper imports.
The Ministry of Finance has suggested that WTO-compliant non-tariff barriers should be applied to curb imports of certain non-essential and inferior items to protect domestic manufacturers.
The suggestion has been proposed for situations where basic customs duty can’t be raised due to free trade agreements—that are being misused or are leading to a surge in imports. The issue of border adjustment tax was proposed by Commerce Ministry as basic customs duty doesn’t cover imports from countries that have FTAs with India.
Imposing non-tariff barriers or quality restrictions would help in discouraging import of non-essentials, the Finance Ministry is said to have communicated to Commerce Ministry, the official cited earlier said.
Countries like China have high quality restrictions that often discourage imports, said Amitendu Palit, a senior research fellow at Institute of South Asian Studies at National University of Singapore. He said India should also demand good quality standards for imports. “That would reduce many poor-quality imports,” Palit told BloombergQuint.
Emails sent to both the ministries on Friday evening seeking comment didn’t elicit response.
The Finance Ministry is said to have told the Commerce Ministry that introduction of the border adjustment tax will lead to classification issues for items, and fixing the rates will require assessment of alternate technology, raw material, and value of raw materials used to produce imported products. Addressing such issues is difficult, the Finance Ministry said, according to the official cited earlier.
Considering such factors, it has said imposing border adjustment tax to counterbalance the benefit importer gets in terms of taxes isn’t a “feasible option”.
According to Harsha Vardhana Singh, former deputy director general at World Trade Organisation,the BAT discussion suggests a protectionist mindset, with an expectation that there will be no serious retaliatory reaction from other countries, and it could be imposed up to the level required to meet specific objectives. “Most of these expectations from the BAT are either exaggerated or in certain cases overlook significant likely adverse effects on ease of doing business and facilitating exports,” he wrote in a BloombergQuint Opinion.
Alternate Option
The Finance Ministry has urged the Commerce Ministry to “quickly” initiate a “limited” review of existing FTAs to secure domestic industry, according to the official cited earlier. This is being proposed in view of the surge in import of metals under FTAs, he added.
India has focused only on high tariffs—to protect domestic industry—while negotiating FTAs with countries, said Palit from Institute of South Asian Studies. “That has been a weakness of India while signing FTAs,” Palit told BloombergQuint.
‘Expedient’ Option
The Commerce Ministry had also asked Finance Ministry to increase customs duty on non-essential and inferior items as an “expedient method” to provide level playing field for Indian manufacturers, the official said. Citing the example of steel imports, the Finance Ministry has said increasing customs duty to protect Indian steel industry may be an issue as the duty is already high. The advantage that steel imports get are just 3-6%, the Finance Ministry has said.
Increasing tariffs on a wide range of items makes them costly, but these products would continue to be imported as India currently doesn’t have the capacity to produce them, said Palit. A large number of raw materials used for essential products are currently imported which would become expensive, he said, adding that India should improve its capacity for producing locally, and then take steps to discourage imports.