Budget 2019: More Protectionism Via Customs Duty Moves?

The budget’s changes could lead to an upward rise in the prices of automobiles and a further slump in sales.

A freight train stands at the Jawaharlal Nehru Port, in Navi Mumbai, Maharashtra. (Photographer: Dhiraj Singh/Bloomberg)
A freight train stands at the Jawaharlal Nehru Port, in Navi Mumbai, Maharashtra. (Photographer: Dhiraj Singh/Bloomberg)

It has been two days since the second Modi Government unveiled its first Budget. In it, Finance Minister Nirmala Sitharaman presented the government’s ‘Vision for the Decade’, with proposals focusing more on infrastructure development, foreign direct investment and ‘Make in India’.

The budget’s decisions would result in the domestic manufacturing sector benefiting from a reduction in customs duty on procurement of certain raw materials and capital goods. A customs duty exemption has also been given on certain capital goods imported for the manufacturing of specified electronic goods. Emphasis has also been placed on promoting e-mobility by reducing customs duty on parts used to manufacture electric vehicles, including lithium-ion batteries.

To compensate, and keep the deficit balance intact, the Finance Minister increased taxes on dozens of items. These range from auto fuels (by Rs 2 per litre), gold and other precious metals (from 10 percent to 12.5 percent), to air-conditioners and automobile parts. The exemption from customs duty on certain electronic items which are now being manufactured in India has been withdrawn. The hike in customs duty on stainless steel products and other alloy steels follows the concerns raised by Indian associations regarding the misuse of free trade agreements by importers in collusion with exporters of several countries.

While the auto industry has praised the government’s move towards green mobility solutions, it has expressed disappointment towards the lack of support to help it emerge from the current slowdown the sector is facing. The Society of Indian Automobile Manufacturers has, in a post-budget statement, said that the industry expected some form of a stimulus package in the budget in line with what had been done by governments during the previous two similar slowdowns.

The increase in customs duty on automotive parts coupled with the hike in petrol costs could lead to an upward rise in the prices of automobiles and a further slump in sales.

On the other hand, as a national priority, the government has addressed the immediate requirement of defence modernisation and upgradation. The import of defence equipment and their parts which are not being manufactured in India have been exempted from the basic customs duty.

On the legislative front, the government endeavors to curb unfair practices adopted by bogus entities to avail undue concessions and export incentives. Accordingly, the customs legislation has been amended whereby provisions have been incorporated to enhance the general penalty for contravention of a statute from Rs 1 lakh to Rs 4 lakh. Also, offences like fraudulently availing drawback, exemption from duty, or fraudulently obtaining and utilising FTP benefits such as duty-free scrips, where the amount exceeds Rs 50 lakh, have been made cognizable and non-bailable.

This stringent move would certainly put a check on the misuse of export incentives, smuggling and protect the interests of revenue, but it would be expedient to ensure that such powers of arrest are not extended to genuine cases involving interpretational issues.

All these proposals are aligned with the government’s target of growing the country’s economy to $5 trillion in the coming years. As Minister Sitharaman asserted, “This budget is setting out a vision, a target, for every sector of our society.”

Jigar Doshi is Executive Director, Suketu Sheth is Manager and Aditya Nadkarni is Manager, at SKP Business Consulting LLP. Views are personal.

The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its Editorial team.