A cardinal axiom of any policy, especially tax policy, is that it should not be burdened with too many competing objectives. This is especially true of the customs duty, which seeks to strike a balance between meeting the development needs of the country and addressing multiple other objectives; protecting, domestic industry, national treasures, environment, the security of the country; enforcing, the foreign trade policy provisions, intellectual property rights. This is a natural corollary of the customs being at the point of entry and exit.
It is in this background that one should view the recent statement of Union Finance Minister that India will cut tariff rates that are over the ‘optimal level’, overhaul its customs systems by simplifying procedures, so that it is ‘not tiresome’, reduce discretion, improve transparency. The Central Board of Indirect Taxes (CBIC) will be delighted with this.
The CBIC coordinates closely with ministries across the spectrum, all of whom seek protection for their constituent domestic manufacturers, understands the rationale and arrives at rates. Make in India has paradoxically given a cue to ministries to recommend protectionist rates of duty in the belief that domestic industries would then be able to venture into a path of indigenisation. This has on the contrary made them less competitive in the export markets.
The Directorate General of Foreign Trade (DGFT) lays down the provisions relating to import and export, prescribes duty exemption/remission schemes all with their attendant conditions. This is apart from the duties of Safeguard and Anti-Dumping and myriad cesses.
This is the season of Free Trade Agreements (FTAs). Jagdish Bhagwati has famously argued that FTAs are ’Termites in the Trading System’ and are restrictive. Rules of Origin (RoO) are critical — they vary across FTAs and across different products within each FTA adding to complexities and challenges for the Customs administration. Every preferential agreement creates an arbitrage and incentive to dodge the RoO.
Thus, despite India’s commitment to the WTO and the Trade Facilitation Agreement (TFA), the simple average tariff remains around 16% for non-agricultural products and about 36% for agricultural goods, with lower rates for FTA imports, while some procedures remain cumbersome.
The volume of trade going through the customs ports is huge and growing. India’s merchandise exports in 2024-25 was US$825 billion and merchandise imports US$915 billion. The Customs have a critical role to play in ensuring speedy clearance of goods; every delay adds to costs. Technology obviously is a key driver in ensuring facilitation and contributing to the ease of doing business. The Indian Customs EDI system (ICES) operational in 252 major customs locations handles nearly 98% of the international trade.
On an average the EDI system handles more than 14 lakh documents every month; obviously a robust risk-based approach is necessary and is in place. Nearly 90% of consignments are cleared based on the documents filed. The remaining are subject to examination — either of the documentation or of the consignment also based on the risk flags raised. Time Release Studies (TRS) indicate that the average release time is steadily dropping across various ports.
How, then, do we move forward toward cutting tariffs to “optimal levels” and simplifying procedures? At the outset we should not lose sight of the fact that customs revenue while not insignificant is certainly not significant. Out of the total gross tax revenue as per the Budget Estimate for 2025-26 of Rs.42,70,233 crore the share of customs revenue is Rs.2,40,000 crore. While one can debate what is ‘optimal’, a starting point will be to bring all ministries on board. They would need to analyse their recommendations— and whether the benefits projected have indeed happened.
Finance Commission chairman Arvind Panagariya has suggested a uniform 7% tariff across all non-FTA imports and graded movement towards this rate in cases where the rates are high (automobiles). This is welcome and the CBIC will have no objection to this. It will make assessments that much easier. Post import conditions should be reviewed as also all non-tariff barriers. The perception that they are ‘burdensome’ should be rectified.
What the CBIC should focus on is a continuous process of simplification of procedures and enhancing technology. The customs notifications are bound to be technical with multiple references to earlier notifications. Going forward, we could ensure all fresh notifications are self-contained and then work backwards to similarly simplify notifications. A study should be made by CBIC of all chokepoints in the flow of goods—undoubtedly there are multiple players in a port, each with their different set of concerns but customs administration should exercise greater coordination control.
Risk management flags should be reviewed continuously for their relevance. Wherever physical inspection is warranted, CBIC should ensure that field officers carry it out swiftly and only for a risk-based percentage of consignments. Technology has reduced discretion — not eliminated it and dare I say it is not a bad thing. What is essential however is that discretion is exercised judiciously and transparently.
A constant concern raised is that there are delays and pendency in adjudications. I do not believe this is indeed so; the CBIC should bring in the public domain the jurisdiction wise adjudication pendency numbers which are readily available and are monitored by the Board to set at rest this apprehension. Trade and Industry can respond and confirm the correctness of the numbers being reported.
Training officers to be technologically savvy, administratively competent, empathetic to business concerns, and conscious of the need to uphold high standards of integrity should be an ongoing process. There are concerns that some clearances tend to get delayed and there is rent seeking; close vigilance oversight is essential. Trade also has a responsibility of ensuring adherence to the law and should interact closely with the administration in each port. The Customs must not only be efficient and responsive but also seen to be so. The vision and mission statement of the organisation demands that they be so.
The author, Najib Shah is former Chairman, Central Board of Indirect Taxes & Customs. The views are personal.
