Kamal Nath wants FM to correct inverted duty under Thai FTA
Financial Express, 28 December 2005
Kamal Nath wants FM to correct inverted duty under Thai FTA
KG Narendranath
New Delhi, Dec 27 - The department of industrial policy and promotion (DIPP) has asked the finance ministry to correct the inverted duty structure on a few product lines under the India-Thailand free trade agreement (FTA).
The duty structure is said to be ‘inverted’ when the import duty on the raw material is lower than or the same as on the finished product. Such a duty structure could render the relevant manufacturing process uncompetitive in the country concerned.
The problem is compounded if these inputs can be imported into the partner country-in this case, Thailand- under lower tax rates. The fallout could be Indian companies’ shifting production to Thailand to cut costs.
“We are concerned about the possibility of automobile component manufacturers shifting base to Thailand for exports to third country markets,” a senior DIPP official told FE. India’s auto component industry is globally competitive, he said, adding that the comparative advantage that Indian industry enjoys should not be marred by the special tariff dispensation under the FTA.
Taxes apart, Thailand is an attractive manufacturing destination, as labour and infrastructure costs are lower in comparison. In fact, the Thai auto component industry is also robust, with a turnover of $2.5 billion at present.
Giving another example of inverted duty, the official said glass parts and chemicals used in the production of colour picture tubes (CPT) can be imported into Thailand sans duty, whereas they attract peak duty (15%) in India. India being a major CPT supplier to the global television manufacturing industry, the duty differential has already hit local industry.
Not only that, under early harvest scheme under the Indo-Thai FTA, the import duty on CPT would be reduced from 6.25% at present to nil, with effect from September 2006, widening the duty differential between inputs and the finished product further.
It is reckoned that the expected reduction in peak customs duty to 10% would partly address the problem of inverted duty structure. The DIPP, however, would want to leave nothing to chance, and remedial fiscal measures to be taken immediately.
The department is of the view that with growing number of FTAs, including the South-Asian Free Trade Area (Safta) and the India-Asean FTA on the anvil, the government should be doubly cautious to avoid creation of inverted duty structures.
The department also wants tightening of the rules of origin norms in the India-Sri Lanka FTA. It has also endorsed the cement industry’s demand for reduction of the excise duty from Rs 400/tonne. The cement industry had said that the effective tax incidence on industry is around 40% of the ex-factory cost. Inclusive of state-Vat and octroi, the tax on cement works out to be Rs 1,100/tonne, according to the industry.
