Tariff Rationalization

The Union Budget 2025-2026 has rationalized the Indian Tariff with respect to industrial goods and such a move has come against the backdrop of a “tariff war” that the United States of America has initiated against Canada, Mexico and China. 

What is Tariff rationalization?

• Tariff rationalization is the process by which the tariff structure of a country is amended to address the anomalies in the tariff.
• Such Tariff anomalies may have arisen owing to frequent policy changes or may be the result of a protectionist policy more focused on protecting the domestic industry.
• The goal of tariff rationalization is to improve the cost-effectiveness of raw material imports, thereby boosting domestic manufacturing, reducing production costs, and fostering exports.
• Customs Tariff, if structured well, can boost domestic manufacturing of finished goods by making available cost effective raw materials, thereby, providing a fillip to exports of such finished goods as well.

Key Features of the Tariff Rationalization in the 2025-2026 Budget:

• Simplified Tariff Structure:
  • The number of tariff slabs has been reduced from 15 to 8, simplifying classification disputes and promoting economic competitiveness.
  • The peak tariff rate for industrial goods has been capped at 70%, a significant reduction from the earlier 100%, 125%, and 150%
  • AIDC1 (Additional Import Duty) has been introduced for some goods, set at rates either equal to or lower than the import duty to further streamline the tariff system.
  • Surcharges have been eliminated for goods where AIDC is already applicable, ensuring further simplification.
• Addressing Inverted Duty Structure: The budget has focused on resolving the inverted duty structure, where duties on raw materials are higher than on finished goods, hindering domestic manufacturing.
  • Customs duties on components for products like LCD/LED TVs and Lithium-ion batteries have been reduced or exempted to enhance the competitiveness of domestic industries.
  • Raw materials such as copper, lead, and tin scrap used in manufacturing have also seen duty reductions to promote affordable production.
• Revising Import Duties on Motorcycles: The budget has addressed longstanding concerns from the United States regarding India's import duties on motorcycles. Import duties for high engine capacity motorcycles have been reduced significantly.
  • For example, duties on motorcycles with engine capacities up to 1600cc have been reduced from 50% to 40%, and duties on semi-knocked-down and completely-knocked-down units have also been lowered.

Impact on India’s Economy:

• Boosting Domestic Manufacturing: The rationalization and reduction of peak tariffs are expected to reduce costs for raw materials, ultimately benefiting domestic manufacturers. This, in turn, could lead to lower production costs and improved global competitiveness.
• Fostering Export Growth: By lowering tariffs on industrial inputs, India can reduce the cost of producing finished goods, potentially increasing exports of competitively priced manufactured goods.
  • A simpler tariff structure will also enhance trade relations with countries concerned about high tariffs, including the United States, thus fostering a healthier trade environment.
• Strengthening Bilateral Trade Relations: By addressing the concerns over high tariffs, particularly in the automobile sector, India aims to smoothen its trade relations with the U.S. and other nations. This could contribute to easing trade tensions and boosting foreign direct investment (FDI).