Budget 2022: Recalibrating Import Duties and Capital Goods Exemptions

The capital goods sector is one of the core sectors of the Indian economy with immense potential waiting to be fully tapped. Realising this, the government announced the National Capital Goods Policy in 2016 with the aim of doubling the production of capital goods in India by 2025. Such increase in capital goods manufacturing would not only lead to higher levels of economic activity but also contribute towards higher employment and value addition along with boosting the capacity of the domestic industry.

While the government continues to expand the scope and participation of this sector in the larger economy, with changing times, there has been a need to relook at some policies and exemptions that have been given to this sector for long periods of time and may not be as effective anymore as they were envisioned to be earlier. Towards this end, in this budget, the government has sought to recalibrate the  customs duties in line with its Aatmanirbhar Bharat vision for higher value added manufacturing and reducing imports in a targeted manner. She spoke at length about how several duty exemptions which in some cases have been extending to over three decades now, have been given to various capital goods sectors like power, fertilizer, textiles, leather, footwear, and food processing but contrary to their stated goal of enhancing domestic capacity and value addition, such exemptions have hindered the growth of the country's capital goods sector.

A similar situation exists for project import duty concessions as well since over the years, they have also deprived the Indian producers of a level playing field in areas like coal mining, power generation, transmission and distribution, railway and metro projects. The learning from such concessions suggest that tariffs  should be reasonable for them to be conducive to the growth of domestic industry and ‘Make in India’ without majorly affecting the cost of essential imports. Thus, it becomes imperative to relook at such policies and concessions and as a result, this budget proposed to gradually phase out capital goods and project import exemptions and instead, apply a reasonable tariff of 7.5 per cent from the upcoming financial year. However, the Minister also pointed out that certain specific exemptions for advanced machinery and equipment that are not currently manufactured within the country would continue.

Presenting the Union Budget the Finance Minister said that on the indirect tax front, the government will be raising import duties broadly for finished goods for which domestic manufacturing capacity exists. These include more than 350 exemption entries which are proposed to be gradually phased out such as on certain agricultural produce, chemicals, fabrics, medical devices and drugs and medicines. Further, to simplify matters, several concessional rates are also being incorporated in the Customs Tariff Schedule itself instead of prescribing them through various notifications of the government.

She further added that some new exemptions are being introduced on industrial inputs like specialised castings, ball screw and linear motion guide to encourage domestic manufacturing of higher value added capital goods.