The finance minister has taken a significant step towards the integration of the economy with that of other countries by reducing the aggregate Customs duty on most items from 50.8 per cent to 39.2 per cent.
The bold step comes at a time when the international prices of metals are at a peak. The domestic producers now have access to cheaper inputs but they have to fiercely compete with cheaper imports.
The trade was ready to face a 5 per cent cut in basic Customs duties that would have translated to a reduction in aggregate duties of about 6.032 per cent.
The actual reduction is 11.6 per cent because special additional duty has also been abolished.
With expectations that the dollar will continue to depreciate, there are worried businesses that count on the Reserve Bank of India to play a key role in moderating the appreciation of the rupee against the dollar.
The government now has to revise the All-Industry Rates (AIR)of duty drawback and DEPB (Duty Entitlement Passbook) rates downwards by about 20 per cent.
This will adversely impact many exporters who rely mainly on indigenous inputs for export production and treat DEPB or drawback AIR as given subsidies. Their best hope is that indigenous inputs will become cheaper due to pressure from imports.
Exporters using advance licenses or Export Promotion Capital Goods (EPCG) licenses will save on transaction costs as they will have to furnish bond or bank guarantee to customs for a lesser value, as the duty saved will be lesser.
The export obligation under the EPCG scheme will also be lower on the basis of lesser duty saved. The duty reductions will make Export Oriented Units (EOU) and Special Economic Zones (SEZ) less attractive in terms of duty saved.
The attempt to impart dynamism to the entire economy is a better strategy than focus on exclusive zones.
The reduction of duty on project imports to 10 per cent for those who invest more than Rs 5 crore (Rs 50 million) on plant and machinery will significantly lower project costs.
The procedure for availing of project import benefits, such as registration of contracts, are quite outdated and complex and need to be simplified.
Also, there is a strong enough case to allow project import benefits for service providers. The local capital goods producers also need a boost.
It might be a good idea to treat supplies by local producers to projects that qualify for 10 per cent or lesser duty as deemed exports, so that the local capital goods manufacturers also can compete on even footing with foreign manufacturers.
The abolition of duty on six consumer durables, like washing machines, refrigerators etc, under Transfer of Residence rules is a sensible step, just as the reduction of duty to 15 per cent on 17 other items under Baggage Rules is.
Travelers can now bring in laptop computers duty free under Baggage Rules. It will be quite a sensible idea to allow the import of laptops at zero duty under the normal route and even allow second hand laptops. This will help more people become computer literate and enhance all round productivity.
The other trade facilitation measures, such as self-assessment and round-the-clock electronic filing of bill of entry at 23 customs stations are welcome steps but exporters and importers will look forward to filing bills of entry or shipping bills on-line from their own offices the way they file their import license applications.
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