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‘Ensure customs relief to inputs in FTAs’

Financial Express, India

‘Ensure customs relief to inputs in FTAs’

7 March 2006

New Delhi: The finance ministry has asked the commerce ministry to cover raw materials and intermediates in the free trade agreements (FTAs) being signed.

As and when any finished product is brought under the purview of such agreements that accord customs tariff relief, it must be ensured that the relevant inputs too get commensurate benefit, so that the domestic industry is not adversely affected, the finance ministry has noted in a recent communication.

The duty structure is said to be “inverted” when the import duty on the raw material is lower than or same as on the finished product. Such a duty structure could render the relevant domestic manufacturing process uncompetitive.

The problem is compounded if these inputs can be imported into the partner country at low tax rates. For instance, the India-Thailand FTA had created a problem for the local auto component manufacturing industry. It is feared that local industry might shift base to Thailand to cut costs.

It is noted that with growing number of FTAs, including the South Asian Free Trade Area (SAFTA) and the proposed India-ASEAN FTA, the government should be doubly cautious to avoid creation of inverted duty structures.

In Budget 2006-07, finance minister P Chidambaram had cut the peak customs duty from 15 per cent to 12.5 per cent. In order to avoid inversions, he also slashed the duty on some raw materials and intermediates such as non-alloy steel, non-ferrous metals and ferro alloys from 10 per cent to 7.5 per cent. Also, the customs duty on most mineral products were reduced from 15 per cent to 5 per cent.

The imposition of an across-the-board countervailing duty of 4 per cent on all imports to compensate for the value added tax (Vat) is also expected to correct inversions in a number of cases.

This is because the credit of the countervailing duty will be available in case of raw materials, but not for the duty paid on finished products.

“We will have to make sure that FTAs do not hamper investment in domestic industry. We have advised the commerce ministry to make sure that inversion issues are taken into account while signing FTAs,” a senior finance ministry official said.