With economic growth “buffeted by the winds of trade wars, protectionism and volatility in crude prices,” in the words of the finance minister, it was anticipated that the government, through budget 2020, would act on trade. And act it did. In addition to the ebb and flow of trade conflicts, India, in the current year, has also had to deal with the fallout of WTO decisions, slowing economic growth and the challenge of creating jobs. This is where Make in India, a cherished goal of the government, became a dominant theme in customs and trade-related proposals in the budget. The mechanism by which the budget seeks to achieve the goal comprises tightening the administration of free-trade agreements (FTAs), strengthening the safeguard mechanism and providing tariff protection.

Administration of Free Trade Agreements

A key measure in the finance bill relates to strengthening the legal authority of customs officials in questioning the origin of the goods imported under an FTA. An FTA grants the benefit of concessional duty if the origin of the goods traded across borders lies in the party countries to an FTA. A certificate of origin once issued by an authorised agency in the exporting country has legal sanctity. The customs officials in the importing country have limited authority on this count. The Customs Act, 1962, does not contain any specific text on the origin of goods and the relevant rules do not explicitly make the importer responsible for a correct declaration of origin once a certificate is provided by an exporter. The proposed amendments to the customs act seek to correct this imbalance and grant more powers to customs officials to verify origin, suspend or deny preferential treatment to goods for an incorrect declaration of origin. The responsibility of the importer for the truthfulness of the origin declaration has also been enhanced. The intent behind these provisions is to curtail unfair competition against products made in India from imported goods availing of the undeserved benefit of FTAs.

Strengthening the safeguard mechanism

Safeguards are a WTO-provided mechanism for containing a surge in imports if the same causes or threatens serious injury to the domestic industry. The Indian customs regime provides for safeguard action by way of imposition of a safeguard duty through Section 8B of the Customs Tariff Act, 1975. Safeguard action can be taken only after an investigation and a quasi-judicial process is completed on the subject. Hitherto, the only safeguard instrument under Indian law was a safeguard duty. Now, the government intends to expand its armoury by providing for tariff rate quotas and other measures. Tariff rate quotas are specified quantities for imports above which a higher rate of duty is charged on imported goods. The attention given to this aspect of the law indicates that the government is likely to take more safeguard action on imports in the event of an increase in imports threatening to cause injury to domestic manufacturing. This, in effect, could provide a shield and a protected market for certain sectors undertaking Make-in-India initiatives.

Increase in customs duties

Changes in the proposed duty rates, too, have the stamp of Make in India. Effective duties have been increased on certain consumer durables, furniture, medical devices and electronic goods. In some cases, duties on parts used for manufacture have been increased with the intent of promoting in-depth manufacturing rather than assembly. This is evident in the duty rate increases on printed circuit board assembly (PCBA) for mobile phones, finger-print scanners and the like. A similar trend can be seen in the duty rates on electric vehicles, wherein duty on completely built units (CBUs) of commercial electric vehicles has gone up from 25 per cent to 40 per cent and there are increases in duty on SKD and CKD forms of electric vehicles. The message is very clear that while the government is onboard with the idea of e-mobility, it favours riding on e-vehicles made in India.

With the overall fillip provided to domestic manufacturing, the coming year will reveal the effectiveness of the budget in India’s march towards becoming a $5 trillion economy.

Manasvi Srivastava is Partner - Indirect Tax at KPMG in India.