The Union Budget 2025-26 has introduced key reforms toward streamlining India’s customs tariff structure and correcting the inverted duty structure. The Union Budget has done away with seven customs tariff rate classes and now, the customs tariff will have just eight tariff rate classes, including the ‘zero’ rate. The average tariff rate on industrial goods has come down to 10.6 % from more than 13% earlier.
The objective of these amendments is to focus on reinforcing the vigor to boost domestic manufacturing, strengthening exports, accelerating international trade, unlocking domestic consumption-led growth, and providing economic impetus. Customs duties on raw materials and components have been reduced to support domestic manufacturing, promote exports, and boost their competitiveness. Several sectors crucial to India’s manufacturing ecosystem across sectors are set to benefit from the tariff amendments.
Lately, there has been a lot of focus on battery-operated vehicles, battery-operated laptops, phones, and consumer appliances involving batteries. This has created a requirement to recycle the spent batteries for which more feedstocks will be required. Therefore, to cater to this impending necessity, the government has exempted Basic Customs Duty (BCD) on cobalt powder and waste, the scrap of lithium-ion batteries, lead, zinc, and 15 other critical minerals. This will help provide cheaper feedstock to strengthen the Indian recycling industry.
Further, the toy market in India is set to grow exponentially, with a projection of India having 17% of the world’s child population by 2036. Therefore, looking at the emerging market, the government has reduced BCD on the import of parts of electronic toys, which will inherently enhance manufacturing, contributing to the ambitious plan under the existing National Action Plan for Toys to transform India into a global toy manufacturing hub.
The government, vide the instant budget, has followed its fiscal strategy, which is to reduce BCD while increasing the Agriculture Infrastructure and Development Cess (AIDC). The shift allows the central government to retain more revenue due to the fact that AIDC is not shared with the states while BCD is shared with states. For instance, the government has decreased the BCD rate on the import of motor vehicles. However, it is important to note that the effective duty rate on the import of motor vehicles remains the same since AIDC has been made applicable. Therefore, the effective import duty rate remains unchanged on the import of motor vehicles.
Also, there has been a reduction in the customs duty rate on the import of premium motorcycles, irrespective of whether it is a completely built-in unit, semi- or completely knocked-down unit. This will make the import of premium motorcycles cheaper. This might result in shifts of customers towards purchasing cheaper premium bikes of foreign origin rather than domestically manufactured bikes, which will eventually lead to an increase in imports and may adversely impact domestic manufacturing.
For the chemical manufacturing industry, the government has reduced the BCD on certain key chemicals like boric acid, phosphoric acid, and sorbitol, among others. Also, new tariff entries have been introduced to address challenges related to export control regulations faced by exporters of dual-use chemicals. These chemical compounds are used in various arrays of chemicals and chemical products, ranging from basic to specialized chemicals. These amendments are expected to boost manufacturing and exports significantly.
There has been a consistent demand from the textile industry for lowering the customs duty on the import of textile machinery. The government, vide the instant budget, has provided a concessional rate/exemption on additional types of textile machinery that can be used by the textile industry for domestic production in India. This aims to reduce the cost of acquiring high-performance looms and further strengthen domestic manufacturing.
Overall, the reduction in customs duties on raw materials and components is aimed at bolstering domestic manufacturing, supporting emerging sectors, and contributing to India’s ambition of becoming a global manufacturing hub.
While Indian manufacturing has experienced steady growth over the past years, it remains in a vulnerable position. The success of Indian domestic manufacturers not only depends on reforms within India but also on the persistent turbulence in the geopolitical sphere and the impact of global trade tussles. Therefore, the government must strategically navigate the complexities of the global geopolitical landscape to ensure sustained growth and stability in India’s manufacturing sector.
(This article is authored by Smita Singh (Partner) and Prateek Sagar (Principal Associate) at S&A Law Offices)