Government to consider correcting inverted duty structure in key sectors

New Delhi: The Centre will likely address the inverted duty structure affecting domestic manufacturing in key sectors such as textiles, leather, and engineering goods in the upcoming budget, two people aware of the matter told . Last month, the commerce ministry had urged the finance ministry to rectify the situation where raw materials face higher taxation than finished products.

This inverted duty structure, impacting over a dozen items, is set to be a focal point in the Union Budget for FY25. Such a tax structure undermines the competitiveness of Indian manufacturers, notably in textiles and apparel, rendering domestically produced goods more costly than imported finished products.

The interim budget for 2024 25 is likely to be presented on 1 February. The finance ministry will likely consult federal think tank Niti Aayog, which is examining tax issues including the inverted duty structure in the engineering, leather, and textiles sectors, one of the people cited above said on the condition of anonymity.

Meanwhile, the issue of inverted duty in textiles may also be discussed in upcoming GST Council meeting, the person added. Addressing the inverted duty structures in these crucial sectors is vital for maintaining competitiveness, particularly against international rivals, aligning with the government's push for domestic manufacturing.

The second person said that this problem in certain sectors could be resolved by adjusting input and output GST rates. Another solution involves allowing specific industries to claim cash refunds from accumulated input tax credit. Spokespersons of commerce and finance ministries didn't respond to emailed queries till press time.

India has been raising import duties since 2014 15 to amend the inverted duty structure for non free trade agreement countries. As per the World Trade Organization (WTO), the average tariff increased from 13.5% in 2014 to 15% in 2020, reaching 18.3% in 2021. Previous budgets have attempted to rectify this by eliminating duty exemptions and reducing duties on various raw materials.

Interestingly, India’s goods trade deficit saw a near 35% drop in November from October's record high, primarily due to a significant decrease in imports. Commerce ministry data revealed a decline in merchandise trade deficit from $31.46 billion in October to $20.58 million in November, with imports falling to $54.48 billion from October's $65.03 billion.

Exports in November rose slightly to $33.90 billion from October's $33.57 billion. As things stand, the government faces the twin challenges of revenue implications on one hand and keeping industries competitive on the other, said Biswajit Dhar, professor at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University.

The hesitation to lower the duty is detrimental to the industry, Dhar said. “For instance in textiles, the global market is extremely competitive. Addressing the inverted duty structure will give impetus to our domestic industry," he added. Livemint tops charts as the fastest growing news website in the world to know more.

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