The comments come as a trade war erupted between Canada, Mexico and China on the one hand and the US on the other over President Donald Trump’s move to impose punishing tariffs on them and other countries with which the US has a trade deficit. 

The budget presented by finance minister Nirmala Sitharaman on Saturday brought down the import duty on motorcycles and recast the duty structure applying to cars without an effective reduction. But Agarwal pointed out that even in the case of imported cars, the changes send a positive signal globally due to the way it has been done. 

The reduction in basic customs duty on cars has been balanced by an additional levy of agriculture and infrastructure development cess, which is levied for a specific purpose for a fixed period. This is not considered by global agencies for assessing the average customs tariff of a country. 

Increase in the cess, however, may lead to some loss of revenue for states as revenue from cess is not shareable with states unlike basic customs duty revenue proceeds. Agarwal said that even the effective import duty on passenger vehicles, a legacy rate imposed when India did not have enough auto production capacity, can be lowered in future if stakeholders agree.

Edited excerpts: 

The budget for FY26 has announced customs duty rationalization. Could you give the rationale for these changes?

In the last budget in July, the finance minister announced that a comprehensive review of customs duty will be undertaken, and a rationalization exercise will be conducted. Thereafter, we reviewed all the rates comprehensively and in that exercise, we identified the tax rates which can be eliminated to make the entire structure simple and conducive to economic growth, while keeping economic competitiveness of Indian industry intact by way of a graded duty structure with distinct stages in the value chain. 

Accordingly, the rates at 0, 2.5%, 5%, 7.5% and 10% are the rates where most of the tariff lines are placed and this rate structure has remained stable over almost two decades—have not been touched. The 15% and 20% rates have also been retained because most of the items in these rates are such that these are covered under the production linked incentive scheme or the phased manufacturing programme formulated for the ‘Make in India’ programme. Rates above 20%—that is, 25%, 30%, 35% and 40%—have been eliminated. And the items on these rates have been moved to 20% with additional levy of agriculture and infrastructure development cess (AIDC) to keep the total duty incidence same or slightly lower. Rates above 70%—that is 100%, 125% and 150%—have been moved to 70% with additional AIDC to keep the total tax incidence either intact or slightly lower.  

A few rates were eliminated—they were leading to the impression that the tariff rates in India are quite high, which is not actually true. 

But how does the perception of India’s tariffs change when basic customs duty is reworked to basic customs duty plus surcharge or cess?

The thing is that all over the world, average customs rates are calculated on the basis of most favoured nation (MFN) rate, that is the tariff rate. (MFN rate is the standard tariff that a country applies to imports from other WTO members unless a preferential trade agreement applies.) So, if we keep very high tariff rates but effective rates are low (due to exemptions and other factors), then from the world’s perspective, India’s tariff would look very high. Now by the latest restructure, our average rate has come down from 11.65% to 10.66%. That is a drastic reduction. We were keeping effective rates low but keeping the tariff rates very high and thus creating bad optics. So, we have to correct the optics also.  We have corrected the optics. 

Now, your question is valid, that if we keep duty incidence the same by imposing AIDC… but we must remember that AIDC is a for a specific purpose. We can taper it off more easily because we have sent the signal to the world that our tariffs are not very high and this cess is imposed for a particular purpose—that is, for collection of some funds for agriculture and infrastructure development. This cess can easily be tapered off while keeping the optics good. Customs duty is basically not for revenue raising, it is basically to send the signal to the world, keep the competitiveness of the Indian industry intact. If we keep tariffs too low, our industry may not be able to withstand the onslaught of imports. If we keep the tariffs too high, then the industry will become inefficient. So, we have to keep the tariff at the right rate. So we keep on calibrating it so that it is just the right rate—neither high nor low—which hurts the industry. 

This exercise is more for correcting the optics, because you keep on hearing that US President Donald Trump says that India is a tariff king. So we have to correct the optics also. Otherwise also, we were undertaking this exercise to rationalize the rates. Why keep such high rates? These are legacy rates. When there was no automobile manufacturing in the country, we kept the rates very high, because otherwise, a lot of imports would take place. Now automobile industry is established in the country. Currently on cars, we have kept the rate the same, but in future, yes, if stakeholders are consulted and everyone agrees, then the rate can be brought down. 

What is the duty change on imported cars and bikes?

The effective import duty comprising BCD and cess, on cars, has not changed. On motorcycles, the effective import duty including social welfare surcharge was 55%. Now we have slightly reduced BCD on bikes to 40% for bikes of less than 1600 cc and to 30% for more than 1600 cc, which are not made in India. For bikes made in India, we kept the (tariff) protection higher. It is done in such a way that we correct the optics and send the right signal to our trading partners.