Government to Address Inverted Duty Structure to Benefit Manufacturing and Supply Chains

In a bid to bolster the competitiveness of domestic manufacturing, the Indian government has initiated steps to correct the ‘inverted duty structure’ impacting key sectors. According to sources, products prioritized under the Make in India initiative, such as washing machines, air purifiers, solar glass, paper, furniture, apparel, and jewellery have been shortlisted for this corrective action.

The inverted duty structure arises when inputs and raw materials attract higher taxes than finished products. This anomaly makes the import of finished goods cheaper than raw materials, disincentivizing local production. It further complicates the Goods and Services Tax (GST) process for manufacturers to claim credit for taxes paid.

For instance, in the paper industry, the import duty on raw pulp stands at 12%, while finished products face a 5% duty. This disparity results in higher imports of finished paper products. From April to February of the last fiscal year, paper and paperboard imports amounted to USD 3.6 billion, whereas pulp and waste paper imports were USD 1.7 billion.

Similar disparities can be noticed for washing machines, air purifiers, solar glass, etc.

“There are many commodities both on the GST side and customs side where inversion in the tax regime still requires correction. We can’t have an inverted duty structure which impacts our competitiveness and affects our export capabilities,” an official recently remarked.

The inverted duty structure can have a significant impact from the perspective of the supply chain industry. Obviously, this structure makes it more expensive to produce goods domestically than to import finished products; and as a result, local manufacturers may struggle to compete, leading to a heavier reliance on imported goods.

This can disrupt the supply chain, making it more complex and potentially less efficient, and becomes an added hiccup for stakeholders to maneuver around. It could involve adjusting sourcing strategies, re-evaluating production processes, and potentially exploring new markets. If the inverted duty structure anomalies are fixed in the coming time, it shall lead to a more robust and resilient supply chain ecosystem in the country.

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