This article is in defence of the principle of “One chapter one rate of duty “ in Customs. During the discussions about reform in the industries Chambers, it is often pointed out by some participants that the principle of ‘One Chapter One Rate’ will go against the other principle of “lower duty for raw materials, medium duty for intermediates and high duty for finished goods”.
I am writing this note to evaluate the above contention.
(i) The thesis that raw materials should attract lower rate, etc. is practically impossible to implement since a large percentage of items are both finished products as well as raw materials. All the chemicals for example are raw materials as well as finished products.
(ii) The intermediate as a concept is easy to understand but to identify some products as intermediate is practically not at all easy. May be that one-by-one a few items can be made, but that is not the way in which the tariff can be made, to accommodate individual items.
(iii) Dr. Arvind Virmani has submitted a report in the year 2001 in which Dr. Tarun Das of Department of Economic Affairs was a member. The relevant conclusion that the committee has arrived at is reproduced below:
“The division of all goods into these two categories (intermediates &finished goods, may, however, be quite difficult in practice. In addition to the problem of dual use, there is also the problem of drawing a line between the final, finished consumer good and its sub-assemblies. This can be demonstrated by examining the input-output (I-O) table for the economy). The I-O table of the Planning Commission shows that at this level of dis-aggregation all 98 goods are used as intermediate inputs, out of which 60 are also consumer goods for private individuals. Within this sub-group of 60, 19 are also used as capital goods. Thus at this level of dis-aggregation it is extremely difficult to draw the line between consumption and intermediate or capital goods. As a practical matter it is only possible to select a few important consumer goods (based on the 6 digit HIC classification used in the tariffs) for the purpose of having a distinct tariff.”
I quite agree with the conclusion of Dr. Virmani and others in this report that it is extremely difficult to draw a line of distinction between raw materials, intermediate products and finished goods. And as a practical measure a few identifiable consumer goods such as T.V., air conditioner, pan masala, liquor, which are generally known as goods for conspicuous consumption can be separated for higher duty.
(iv) Economic rationality of ‘one-chapter-one-rate’ is based on the proposition that due to value addition, one rate will give proper protection to all categories of products.
(v) Historically speaking the Ministry of Finance and the CBEC have been trying to follow the principle of “lower duty for raw-materials, etc”. But it always leads to “anomaly” against which CII, FICCI and ASSOCHAM have been complaining. The only way to remove the anomalies is to have ‘one-chapter-one-rate’ and also generally keeping in mind the interest of the indigenous industry.
(vi) Broadly speaking, a grouping can be made of the chapters as follows:
5% 10.00% 15.00%
Raw materials Intermediates Finished goods
Chapters 25 (salt, sulphur) 26 (ore, slag and ash), 31 (fertilizer), 47 (pulp of wood), 48 (newsprint), 98 (laboratory chemicals) Chapters 29 (organic chemicals), 30 (inorganic chemicals), 84 & 85 (machinery), all metals such as steel, zinc, copper, etc. – 15%
Chapter 1 (live animals), chapter 2 (edible meat), chapter 3 (fish), chapter 4 (dairy products), chapter 5 (products of animal origin), cosmetics, soap, textiles, motor vehicles, ships and boats
I have given the examples to focus on how to distinguish between them in practice without any discussion about theory. This is a rough and ready method, which has to be worked out on the basis of the following considerations:
iii) Protection of the indigenous industry
iv) Need for simplification
v) Limit laid down WTO
I am confident that if the above principles are kept in mind, the principle of ‘one-chapter-one-rate’ can be implemented with 95% precision, if at the same time, very large number of exemptions, conditions and lists are abolished and curtailed. This has to be within the general framework of the following rates:
150 – for very high protection
100 – for very high protection
15 – median rate (for finished goods)
10 – lower rate (for intermediates)
5 – raw materials
This is how we can combine the two principles of ‘one-chapter-one-rate’ and the principle of “lower rates for raw materials etc” in a practical manner.