Major Overhaul of Customs Duty Expected in FY26 Budget to Support Indian Manufacturing

Government to Revamp Customs Duty Structure in FY26 Budget to Address Inverted Duty and Boost Domestic Manufacturing.

The upcoming FY26 Budget is expected to feature significant revisions to the basic customs duty (BCD) on over 100 items, with the goal of aligning duty rates with global trade trends and addressing the issue of inverted duty structures, according to a senior government official. Currently, manufacturers face higher import duties on raw materials and intermediate goods than on finished products. This creates an imbalance, particularly in sectors such as information technology hardware, automobile components, and textiles. The government intends to correct this inverted duty structure, which was initially highlighted by Union Finance Minister Nirmala Sitharaman in her FY25 Budget speech in July.

 

Customs Duty Overhaul in FY26 Budget: Impact on Indian Manufacturing and Trade

Sitharaman had promised a comprehensive review of the duty structure, with the aim of simplifying it, facilitating trade, removing duty inversion, and reducing disputes. During a meeting with the finance ministry last month, the Confederation of Indian Industry (CII) recommended duty modifications based on sector consultations, as well as a review of free trade agreements (FTAs) and exemption notifications to address inverted duties. A report by Niti Aayog in July also emphasized the need for a significant overhaul of import tariffs, particularly in the electronics sector, to help India strengthen its position in global value chains. The report set an ambitious target of reaching $500 billion for the electronics sector by 2030, up from just over $100 billion today.

Industry experts have also called for addressing inverted duty structures across several sectors, including textiles, apparel, leather products, automotive parts, telecommunications, and toys. CII has suggested a tiered duty system: 0-2.5% for raw materials, 2.5-5% for intermediate goods, and 7.5-10% for finished products. Currently, many raw materials and intermediates are subject to higher duties than finished goods, primarily because the government encourages local sourcing. However, manufacturers still rely heavily on imports for essential inputs, which drives up costs. By addressing these duty anomalies, local production could be boosted, imports reduced, and Indian manufacturers made more competitive.

India's FY26 Budget: Major Revisions in Customs Duty to Support Domestic Manufacturing

 

In addition to revising customs duties, the government is expected to offer similar concessions for inputs under existing FTAs, where finished products often benefit from lower or zero-duty rates, while inputs are taxed at higher rates. On the direct tax side, experts like Mr. Harsh Bhuta, Partner at Bhuta Shah and Co LLP, have expressed hopes for a comprehensive review of the Income-tax Act to simplify it and make compliance easier. Bhuta has recommended measures such as fast-tracking appeals at the first appellate stage, empowering alternate dispute resolution mechanisms, decriminalizing TDS defaults, broadening the tax base, and providing more clarity on taxation issues to reduce litigation.

Bhuta has also suggested the revival of Section 115 BAB, which addresses taxation of new manufacturing domestic companies, and called for certainty in the taxation of Alternative Investment Funds (AIF) Category-III, similar to the tax treatment provided to Foreign Portfolio Investors (FPI).

However, Sanjay Kumar Agarwal, Chairman of the Central Board of Indirect Taxes and Customs (CBIC), cautioned that correcting the inverted duty structure is not a simple task. He explained in an interview with the Financial Times that the share of a particular item in the value of a finished product must be carefully examined, suggesting that these changes may take time to implement.