Customs duties regulate India’s merchandise imports exceeding $700 billion, or a fifth of the gross domestic product (GDP). India has been progressively bringing down these import tariffs over the last about four decades.
Barring a short period of tariff escalation in 2018-2024, the duties have been on a declining path, both via the most favoured nation (MFN) roue and the preferential tariffs under a growing number of free trade agreements.
The Budget FY27 is expected to trim Customs duties across a wide spectrum of tariff lines, while also reducing the number of Customs slabs further. This and the widening FTA route will help the country to be a low-tariff country, with commitment to open trade and disprove charges of being a “tariff king.”
In fact, with Customs revenue being less than 4% of the overall Budget receipts, India retains scope for large-scale reduction of duties for tariff lines that are practically not import-intestine.
Since 2019, India has signed new trade pacts (FTAs/CEPAs) with Mauritius, UAE, Australia, European Free Trade Association (EFTA), and the UK. A major FTA with the European Union, the country’s largest trading partner, is set to be concluded today (January 27), while the full terms of the pact will be implemented over the next one year or so.
Several more FTAs are being negotiated, which will expand the preferential trade route further (see chart), and MFN tariff less relevant.
Union Budget for FY27: Major overhaul of customs expected
With the Union Budget for FY27 set to be presented on February 1, expectations are mounting for a major overhaul of India’s customs regime. Industry experts and think tanks point to sweeping reforms aimed at simplifying the complex tariff structures and slashing of compliance burdens with greater focus on digitisation.
India’s import duty policy seeks to balance revenue generation, protection of domestic industries, promotion of manufacturing (especially under initiatives like Make in India), and integration with global trade commitments.
The core component is the Basic Customs Duty (BCD), which varies widely for agriculture and industrial items depending on the Harmonized System (HS) code. The Union Budget for FY26 reduced the number of tariff slabs to eight (including zero) to ease compliance.
Trump’s “tariff king” label on India has limited merit. While India’s simple-average tariff is high, customs collections are only 3.8% of merchandise import value, reflecting a comparable effective rate. Selective import substitution policies have led to a post-2009 pause in tariff liberalisation and a 2018–2023 escalation (now reversed), but deeper cuts remain necessary.
GTRI, a trade think tank, recommended a phased shift toward zero duties on most industrial raw materials and key intermediates, paired with a low uniform rate of around 5% on finished industrial goods over the next few years.
It also recommends reducing the effective number of duty slabs by addressing specific duties, mixed duties, conditional exemptions, and overlapping notifications that create hundreds of practical tariff variations.
According to industry experts, targeted rate cuts in customs duties on inputs are expected in the upcoming Budget. He said that the Budget may address the inverted duty structure vis-à-vis FTAs.
The reduction is expected in customs duty on raw materials and intermediates in sectors where free trade agreement (FTA)-reduced finished goods intersect with higher tariffs on such inputs. This will align input and intermediate duties with finished goods rates to remove inversions and support local value addition.
Meanwhile, They suggested extension of validity and renewal of advance rulings. It stated that the validity of advance rulings should be extended to at least five years from the current three years as it will enhance tax certainty and reduce tax disputes.
Sitharaman has earlier described customs simplification as the “next big reform” after GST and income tax changes, emphasizing transparency, reduced compliance, and faster clearances. Experts have indicated that the government is weighing a reduction in duty slabs to four or five, correction of inverted duties, and scaling back discretionary exemptions.
Additional measures under discussion include a customs amnesty scheme for legacy disputes, deeper digitization, single-window clearances, and reforms to the Special Economic Zone (SEZ) framework, such as duty-forgone domestic supplies and eased sub-contracting norms.
The urgency of these changes is amplified by external pressures from US President Donald Trump’s tariff policies. In 2025, Trump imposed reciprocal tariffs on Indian imports—escalating to 50% in some cases, combined with secondary penalties of 25% linked to India’s purchases of discounted Russian oil following the Ukraine conflict.
By modernizing customs, lowering effective import costs for inputs, and streamlining procedures, the Indian exports would become more competitive, mitigate tariff impacts, and strengthen domestic manufacturing resilience.
What do observers say?
Another tax expert said “India’s customs reforms are increasingly aimed at making domestic manufacturing more competitive at a time when imports are rising, and input costs are going up.”
He also said that Trump-era tariff threats may not be the sole driver for duty cuts, but if US tariffs rise and squeeze exporters’ margins, India may look to ease the pressure by lowering input costs at home.
He stated that reforms are expected for faster and transparent customs clearance processes, supported by digitisation and AI-based risk assessments to reduce delays and compliance burdens should also be the priority in the customs reforms.
Another industry expert expects the budget to outline measures to strengthen the SEZ framework to promote domestic manufacturing and import substitution.
He stated that current duty provisions require SEZ units to pay customs duty on the entire value of finished goods cleared in the domestic tariff area, including on domestic inputs and value addition, making such clearances commercially unattractive.
“Customs duties on value addition undertaken in SEZs may be exempted under Section 25(1) of the Customs Act. Consequently, duties shall be charged only on the value of imported inputs in the manufacture of such goods,” he said.
Source from: https://www.financialexpress.com/business/news-budget-2026-27-expectations-run-high-on-customs-reforms-4119835/
