Trade policy review report by the secretariat

3.1.4  Tariffs

3.1.4.1  Applied tariffs

83. 
    Customs duties are levied and collected under Section 12 of the Customs Act, 1962 and the Customs Tariff Act, 1975. The standard rate of tariff is the statutory duty prescribed in the First Schedule to the Customs Tariff Act. Changes to the statutory duty are announced with the annual Budget at the end of February each year (India's fiscal year runs from April to March). However, the "effective" tariff rate at any given time of the year, can be considerably different from the statutory rate due to general and "end-user" based exemptions which lower the standard rate for certain users and adjustments made to the tariff through notifications issued in the Gazette of India which may lower or raise the standard rate. The effective tariff can therefore vary throughout the year due to these changes which add to the complexity of the tariff and uncertainty for traders.
    
84. 
    In addition to the standard rate, other duties are charged at the border. These are: additional or "countervailing" duty (AD) which is charged in place of excise duties (the Central Value Added Tax or CENVAT charged on a like article produced in India) and the special additional duty (SAD) which is to counterbalance state and local taxes. The general AD is 12.5% as of 1 March 2015 (raised from 12%) although rates range from 6% to 30% (plus specific and compound duties for petroleum products), while the SAD is generally 4%; there are a number of exemptions that apply to these general rates. In addition, there are a number of cesses and charges that are applied to customs duties (Section 3.1.5).
    
85. 
    In 2014-15, India's applied MFN tariff in the HS 2012 nomenclature consisted of 11,481 lines at the eight-digit level.¹⁷ The share of the tariff subject to ad valorem rates of duty is 91.2%; there are 3 lines that are subject to specific rates of duty (almonds in shell and shelled, and electrical energy) and 697 lines (compared to 685 lines at the time of the previous Review) carry alternate rates of duty with an ad valorem and specific duty component. The alternate rates apply mainly for textiles and clothing but also natural rubber products (the latter were not subject to alternate rates at the time of the last Review). For lines with alternate rates, the Secretariat has only used the ad valorem part of the rate in its duty calculations (Table 3.3). Ad valorem equivalents were not available. In addition, the effective rate includes any product-specific exemptions announced during 2013-14, up to 1 September 2014; however because India grants exemptions to a number of products on an end-user basis, it is not possible to include all exemptions in the tariff analysis.
    

Table 3.13 India's tariff structure, 2010-11 and 2014-15^a

(%, unless otherwise indicated)

	MFN effective applied rate		Final bound^b
	2010-11	2014-15
Bound tariff lines (% of all tariff lines)	75.6	74.9	74.9
Simple average rate	12.0	13.0	50.0
WTO agricultural products	33.2	36.4	119.2
WTO non-agricultural products	8.9	9.5	35.5
Duty-free tariff lines (% of all tariff lines)	3.2	2.7	1.4
Simple average rate of dutiable lines only	12.4	13.4	51.0
Non-ad valorem tariffs (% of all tariff lines)	6.1	6.1	6.1
Domestic tariff "peaks" (% of all tariff lines)^c	2.2	2.7	0.6
International tariff "peaks" (% of all tariff lines)^d	11.9	13.6	73.0
Overall standard deviation of tariff rates	14.2	16.5	40.0
Coefficient of variation of tariff rates	1.2	1.3	0.7
Nuisance applied rates (% of all tariff lines)^e	0.7	0.02	0.0
Total number of tariff lines	11,328	11,481	8,598
Ad valorem rates	10,277	10,476	7,739
Duty free	361	305	164
Specific rates	5	3	2
Alternate rates	685	697	693

a As at 1 September.

b Final bound rates are based on the 2014 tariff schedule in HS12 nomenclature.

c Domestic tariff peaks are defined as those exceeding three times the overall average applied rate.

d International tariff peaks are defined as those exceeding 15%.

e Nuisance rates are those greater than zero, but less than or equal to 2%.

Note: 2010-11 tariff is based on HS07 nomenclature, 2014-15 tariff is based on HS12 (as at 1 September 2014). Calculations for averages are based on national tariff line level (8-digit). Calculations exclude specific rates and include the ad valorem part of alternate rates.

Source: WTO Secretariat calculations, based on data provided by the Indian authorities.

86. 
    There have been no significant changes to the distribution of tariffs since the last Review. Tariff rates range from zero to 150%. Almost 72% of the tariff (up slightly from 71% in 2010-11) is subject to rates ranging from between 5% up to and including 10%. Around 14.5% (13.1% in 2010-11) of the tariff is subject to rates above 10%, with 0.5% of the tariff (mainly alcoholic beverages) having rates of 150% (Chart 3.1). Dispersion in the tariff as measured by the coefficient of variation has increased slightly.
    

Chart 3.3 Distribution of MFN applied tariff rates, 2014-15

(Number of tariff lines)

Note: Calculations exclude specific rates and include the ad valorem part of alternate rates. Figures in parentheses denote the share of total lines.

Source: WTO Secretariat calculations, based on data provided by the Indian authorities.

87. 
    The simple average applied MFN tariff in 2014-15 is 13%, up from 12% at the time of the last Review (2010-11). The overall increase is mainly due to a rise in tariffs in agriculture (WTO definition), whose overall average at 36.4% remains considerably higher than the average for non agricultural products (9.5%). The increase in the average tariff for agriculture is mainly due to an increase in tariffs for cereals and preparations thereof (from 30.4% in 2010-11 to 40.9% in 2014-15), oilseeds and fats (from 18.5% to 33.2%), and sugars and confectionary (from 33.4% to 41%). Above average tariff protection is also found in a number of other products such as beverages, spirits and tobacco (77.5%), and coffee and tea (74.8%). The average MFN tariff for non-agricultural products also rose from 8.9% to 9.5%, primarily due to increased tariffs on transport equipment from 21.5% to 32.1%. Average tariffs also rose for minerals and metals, chemicals, textiles, leather and rubber and electric machinery (Table 3.4).
    

Table 3.14 Summary analysis of Indian tariff, 2010-11 and 2014-15

	2010-11 effective tariff (MFN)			2014-15 effective tariff (MFN)			Bound Tariff
	No. of lines	Average (%)	Range (%)	No. of lines	Average (%)	Range (%)	Range (%)
Total	11,328	12.0	0-150	11,481	13.0	0-150	0-300
HS 01-24	1,433	35.1	0-150	1,609	37.7	0-150	10-300
HS 25-97	9,895	8.6	0-70	9,872	9.0	0-100	0-150
By WTO definition
Agricultural products	1,431	33.2	0-150	1,496	36.4	0-150	10-300
Animals and products thereof	106	30.8	5-100	124	30.4	5-100	35-150
Dairy products	32	34.4	30-60	33	34.2	30-60	40-150
Fruit, vegetables and plants	355	27.6	0-100	376	29.0	0-100	10-150
Coffee and tea	75	74.7	17.5-100	75	74.8	30-100	55-150
Cereals and preparations	137	30.4	0-90	142	40.9	0-150	35-150
Oils seeds, fats, oil and their products	196	18.5	0-100	208	33.2	0-100	15-300
Sugars and confectionary	38	33.4	10-60	41	35.4	10-60	45-150
Beverages, spirits and tobacco	123	78.7	7.5-150	126	77.5	5-150	35-150
Cotton	11	5.5	0-30	11	2.7	0-30	100-150
Other agricultural products, n.e.s.	358	25.1	0-70	360	25.2	0-70	25-150
Non-agricultural products	9,897	8.9	0-70	9,985	9.5	0-100	0-150
Fish and fishery products	176	29.5	5-30	287	29.6	0-30	35-150
Minerals and metals	1,912	7.1	0-10	1,920	7.4	0-15	0-40
Chemicals and photographic supplies	2,471	8.1	0-10	2,452	8.2	0-10	0-150
Wood, pulp, paper and furniture	495	9.2	0-10	500	9.2	0-10	25-40
Textiles	1,555	9.6	5-10	1,522	10.0	5-10	10-40
Clothing	397	10.0	10-10	396	10.0	10-10	35-110
Leather, rubber, footwear, travel goods	322	10.2	0-70^a	329	10.3	0-70^a	3-40
Non-electric machinery	1,094	7.1	0-10	1,094	7.0	0-10	0-40
Electric machinery	537	6.7	0-10	541	7.0	0-10	0-40
Transport equipment	244	21.5	0-60	244	32.1	0-100^c	3-40
Non-agricultural products, n.e.s.	676	8.6	0-10	681	8.8	0-10	0-40
Petroleum	18	8.2	0-10	19	4.6	0-10	n.a.
By sector^d
Agriculture, forestry and fisheries	621	28.8	0-100	696	29.6	0-100	10-150
Mining	232	5.1	0-10	240	5.3	0-10	5-40
Manufacturing	10,474	11.1	0-150	10,544	12.1	0-150	0-300
Manufacturing excluding food processing	9,605	8.8	0-60	9,574	9.2	0-100	0-150
By stage of processing
First stage of processing	1,261	22.5	0-100	1,372	23.5	0-100	5-150
Semi-processed products	4,339	8.6	0-60	4,337	9.0	0-60	0-150
Fully-processed products	5,728	12.2	0-150	5,772	13.6	0-150	0-300

n.a. Not applicable.

a Tariff lines with applied rates at 70% are unbound.

b Tariff lines with applied rates at 60% are unbound.

c Tariff lines with applied rates at 100% are unbound.

d ISIC Rev.2 classification. Electricity, gas and water is excluded (1 tariff line).

Note: Calculations exclude specific rates and include the ad valorem part of alternate rates.

Source: WTO calculations, based on data provided by the Indian authorities.

1. 
   For several years the "peak" rate of tariff for non-agricultural products has been maintained at 10%, with successive Budgets declaring the intention to reduce peak rates. Tariffs on agricultural and processed products continue to be higher than for semi-manufactured products, reflecting the overall policy to continue to protect agricultural products and to encourage processing of final manufactured products. The wide range of end-user exemptions for industrial use granted in successive annual tariffs also reflects this general policy of encouraging the manufacturing sector. Further reductions to reduce the cost of raw materials were announced in the Budget for 2015-16, including chemicals, and rubber.¹⁸ There is also concern about apparent "inverted" duties (tariffs for primary and intermediate products being higher than for final products) and the Tariff Commission has made a number of recommendations to rectify this inverted duty structure in several industries.¹⁹ The authorities note that such corrections have been made for products like aluminium ingots, and back sheets in recent years. The Budget for 2015-16 announces further reductions in duty on certain inputs to address the problem of duty inversion.²⁰
   

3.1.4.2  Bound tariffs

89. 
    India completed the implementation of its Uruguay Round tariff commitments in 2005. Around 75% of the tariff is bound, of which 100% for agricultural products and 71.1% for non agricultural products. Bound tariffs in the main have ad valorem rates (90%), with non ad valorem alternate rates found mainly in textiles and clothing, while 2 lines are subject to specific rates of duty. The overall average bound rate is 50% and, like the applied tariff, significantly higher for agricultural products (119.2%, WTO definition) than for non-agricultural products (35.5%) (Chart 3.2). The range of bound rates is also considerably higher for agriculture (10%-300%), compared to zero-150% for non-agricultural products, with the highest averages found in HS Sections I-IV.
    

Chart 3.4 Average effective applied MFN and bound tariff rates, by HS section, 2014-15

Note: Calculations exclude specific rates and include the ad valorem part of alternate rates. Only section 2 is fully bound; sections 12, 19 and 21 are fully unbound.

Source: WTO Secretariat calculations, based on data provided by the Indian authorities.

1. 
   The considerable gap between applied and bound rates of tariff provides scope for the Government to raise applied tariffs within that margin. Thus the Government reacts to international price changes and domestic pressures to adjust the applied tariff accordingly.
   
2. 
   India reserved the right to modify its Schedule XII under Article XXVIII:5 of the GATT 1994 for the three-year period commencing 1 January 2015.²¹
   

5.