Whalesbook
The Imperative for Customs Reform
India's intricate customs duty and indirect tax framework is under scrutiny as the nation prepares for Budget 2026. Despite ongoing efforts to digitize processes and improve trade facilitation, businesses and industry experts highlight persistent challenges. These include a substantial volume of unresolved disputes, a complex web of duty slabs and exemptions, and issues like 'duty inversion' where import duties on raw materials exceed those on finished goods. Such complexities not only hinder smooth trade but also erode the competitiveness of domestic manufacturing, a sector critical to India's economic ambitions. With global trade dynamics shifting due to geopolitical fragmentation and reassessment of supply chain strategies, enhancing the ease of doing business is paramount. PwC's recent recommendations, aimed at making the system more predictable and efficient, are now central to discussions surrounding the upcoming fiscal plan.
Clearing the Litigation Backlog
One of the most pressing issues identified is the extensive backlog of customs disputes. As of March 2024, approximately Rs 1.52 lakh crore in customs duty remained tied up in legal proceedings [3]. PwC proposes implementing an amnesty scheme, akin to successful initiatives in GST and income tax, which would allow companies to settle long-standing cases by paying a portion of the disputed duty, with interest and penalties waived. This approach is intended to unburden courts and administrative agencies, accelerate revenue collection for the government, and provide much-needed certainty for businesses. The Global Trade Research Initiative (GTRI) echoes this sentiment, advocating for a one-time settlement window to resolve legacy disputes and unlock stuck revenue [3, 8].
Simplifying Duty Structures and Addressing Inversion
India currently operates with up to eight customs duty slabs, augmented by over a thousand exemptions and special notifications, creating significant classification complexities [10]. PwC recommends consolidating these into fewer, more transparent rates to reduce confusion and disputes. A critical focus is on rectifying 'duty inversion,' where tariffs on essential inputs are higher than on final products. This disadvantages domestic manufacturers, particularly in strategic sectors like electronics, electric vehicles, renewable energy, and semiconductors. By proposing tariff cuts on such inputs, the aim is to bolster local production and make Indian goods more competitive against imports [3, 8, 34]. GTRI further suggests a move towards zero duty on most industrial raw materials and a standard low duty of around 5% on finished goods [8].
Reforming Special Economic Zones (SEZs)
The framework governing Special Economic Zones (SEZs) is also targeted for reform. Currently, SEZ units selling goods to the domestic market (Domestic Tariff Area or DTA) face duties on the full transaction value, including value added within the SEZ. PwC suggests that duties should only apply to the imported inputs, not the domestic value addition [7, 11]. This adjustment is expected to encourage SEZ units to increase domestic sales, thereby improving capacity utilization and fostering greater integration with the broader Indian economy. This mirrors proposals for parity with other schemes like the Manufacturing and Other Operations in Warehouse Regulations (MOOWR) scheme [35].
Enhancing Trade Facilitation and Digitization
Beyond tariff structures, PwC emphasizes the need for deeper digitization of customs procedures. This includes expanding the scope and accessibility of advance rulings, simplifying digital processes for warehouse-related transfers, and providing greater benefits to trusted traders under the Authorized Economic Operator (AEO) program. Enhanced integration through platforms like Bharat Trade Net is seen as crucial for reducing paperwork and expediting clearances [3, 5]. Experts note that while technological advancements have been made, issues with consignment hold-ups and delayed relief persist, necessitating increased officer accountability and a service-oriented culture within customs administration [5].
Market Context and Outlook
These proposed reforms are being discussed against a backdrop of global economic uncertainty and domestic market volatility. Geopolitical tensions and US trade policies have contributed to foreign institutional investor (FII) outflows and a weakening rupee, impacting Indian stock markets [12, 18, 33]. Despite these headwinds, India's economy forecasts a 7.0% GDP growth for FY26-FY27, underscoring underlying resilience [12]. The average customs duty on imports is relatively low, around 3.9%, and customs revenue constitutes only about 6% of gross tax revenue, suggesting that tariffs are not a primary revenue source but rather an instrument for industrial policy [8, 27]. The success of these reforms hinges on their adoption in Budget 2026, which could significantly reduce trade friction, lower costs for domestic manufacturers, and align India more closely with global trade facilitation standards.