Budget 2025: Customs Duty Revamp of Over 100 Items Expected

A major revamp of basic customs duty ( BCD ) on over 100 items is likely in the FY26 Budget, aimed at aligning duty rates with global trade trends and resolving the inverted duty structure, according to a senior government official. Currently, manufacturers often pay higher import duties on raw materials and intermediate goods than on finished products.  The proposed tweaking of customs rates was announced by Union Finance Minister Nirmala Sitharaman in her FY25 Budget speech in July.

Inverted duty correction is expected for sectors including information technology hardware, automobile components, and textiles. In an inverted duty scenario, inputs and raw materials are taxed more than finished goods.

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The proposed changes to customs rates were initially announced by Finance Minister Nirmala Sitharaman in her FY25 Budget speech in July. She had pledged a “comprehensive review” of the duty structure over six months to rationalize and simplify it—facilitating trade, removing duty inversion, and reducing disputes.

During a meeting with the finance ministry last month, the Confederation of Indian Industry ( CII ) advised duty modifications for imported goods based on consultations with different sectors, as well as a review of existing free trade agreements ( FTAs ) and exemption notifications, to address inverted duty issues.

A July report by Niti Aayog emphasized the need for a “significant overhaul” of import tariffs and the use of fiscal incentives to boost India’s role in global electronics value chains. It set a target of $500 billion for the electronics sector by 2030, up from a little over $100 billion currently. Industry experts have likewise urged addressing inverted duty structures in textiles, apparel, leather products, automotive parts, telecommunications, and toys.

CII has recommended a duty range of zero to 2.5% for raw materials, 2.5% to 5% for intermediates, and 7.5% to 10% for finished goods. At present, many raw materials and intermediates attract a higher duty than finished goods, mainly because the government encourages local sourcing. However, manufacturers still rely heavily on imports for essential inputs, incurring steep costs.

This issue affects multiple industries and removing these anomalies will boost local production, reduce imports, and enhance the competitiveness of Indian manufacturers. Under various FTAs, many finished products enjoy either duty exemptions or lower rates, while higher duties apply to their inputs. It is expected that the government considers offering similar concessions for inputs in these cases.

On the direct tax side of matters, experts in the income tax field of practice such Mr. Harsh Bhuta, Partner at Bhuta Shah and Co LLP look forward to the promised comprehensive review of the Income-tax Act in making it concise, lucid, easy to read and understand, thereby making the procedural compliance less complicated and trouble free.

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Some of the suggestions put forward by him are as follows: –

1. Need to fast track appeals pending at first appellate stage, with focus on disposing old appeals in a time bound manner.
2. Dedicated Alternate Dispute Resolution mechanisms like DRC may need to be entrusted with more powers and made more flexible.
3. Adopting a more liberal approach in prosecution by decriminalization of TDS defaults under section 276B.
4. Broadening the tax base to achieve reduced tax rates for existing taxpayers.
5. Introducing a system of issuing position papers, clarifying revenue’s stand on various issues, as practiced by some jurisdictions, can substantially reduce litigation.
6. Consideration of re-introduction/ revival of provision contained in Section 115 BAB i.e. Tax on income of new manufacturing domestic companies, which remained to be further extended in the Interim Budget 2024.
7. Taxation of AIF Category-III - FPI has been provided with the certainty that gains on sale of shares will be taxed as Capital gains under the Act. There is no certainty regarding domestic funds registered as AIF-III with similar operations as FPI. This is a long pending request for providing tax certainty.

However, CBIC chairman Sanjay Kumar Agarwal has noted that correcting the inverted duty structure is not always straightforward, in an interview with Financial Times. We have to check the share of a particular item in a finished product’s value, he explained, signalling at possible delays.

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