As the Union Budget 2026-27 approaches, attention is increasingly turning to customs policy, an area that directly shapes India’s trade competitiveness, manufacturing costs, and integration with global value chains. Customs duties today regulate merchandise imports exceeding USD 700 billion in recent years, accounting for roughly one-fifth of India’s GDP, making tariff design a critical component of economic policy.
With customs revenues contributing less than 4% of gross tax revenue, industry experts and trade analysts believe the coming Budget offers fiscal space for measured tariff rationalisation and procedural reform, rather than revenue-driven protection.
India’s Tariff Trajectory: Liberalisation With a Recent Pause
India’s customs duties have broadly followed a declining trend since the early 1990s, driven by:
- reductions in Most Favoured Nation (MFN) rates, and
- preferential tariffs under a growing network of Free Trade Agreements (FTAs).
This trajectory experienced a pause and partial reversal between 2018 and 2023, when selective tariff increases were used to encourage import substitution and domestic manufacturing. Recent policy signals suggest this phase has peaked, with renewed emphasis on efficiency, predictability, and global integration.
Why Customs Reform Is Back in Focus: Limited Revenue Dependence
Customs duties now account for a small share of gross tax collections, reducing the fiscal risk associated with tariff reductions, particularly on inputs and intermediates that support domestic manufacturing.
As a result, customs reform is increasingly viewed as a competitiveness and ease-of-doing-business issue, rather than a revenue instrument.
FTAs Are Gradually Reducing MFN Relevance
Since 2019, India has concluded or operationalised trade agreements with:
- Mauritius
- UAE
- Australia
- European Free Trade Association (EFTA)
- United Kingdom
Negotiations with the European Union, India’s largest trading partner, are at an advanced stage, with political announcements on conclusion expected, followed by phased implementation after ratification.
As preferential trade expands, MFN tariffs are becoming less relevant for a growing share of imports, though they remain applicable for non-FTA partners and excluded product categories.
Budget FY 2026-27: What Experts Expect
1. Further Compression of Customs Duty Slabs
The Union Budget FY 2025-26 rationalised Basic Customs Duty (BCD) slabs to eight (including zero). Trade experts now expect:
- further reduction to four or five slabs, and
- removal of avoidable rate dispersion that complicates classification.
This would simplify compliance and reduce disputes without altering policy intent.
2. Correction of Inverted Duty Structures
A key expectation is targeted correction of inverted duty structures, particularly where:
- finished goods enjoy lower tariffs under FTAs, while
- raw materials and intermediates face higher MFN duties.
Aligning input tariffs with finished goods rates would help:
- reduce cost disadvantages for Indian manufacturers, and
- support domestic value addition.
3. Rationalisation of Exemptions and Notifications
Trade think tanks such as Global Trade Research Initiative have pointed out that despite limited statutory slabs, the presence of:
- specific and mixed duties,
- conditional exemptions, and
- overlapping notifications
creates hundreds of effective tariff outcomes in practice. Addressing these layers could significantly improve transparency and reduce discretionary interpretation.
4. Advance Rulings and Dispute Certainty
Industry bodies have suggested extending the validity of customs advance rulings from three years to at least five years. While this remains a proposal, proponents argue it would:
- improve tax certainty, and
- reduce repetitive litigation on classification and valuation.
Customs Simplification as the “Next Big Reform”
Finance Minister Nirmala Sitharaman has previously described customs simplification as the next major reform frontier, following GST and income-tax changes. Policy discussions around Budget FY 2026-27 are reported to include:
- deeper digitisation and single-window integration,
- risk-based and AI-assisted assessments to reduce physical checks, and
- possible mechanisms to address legacy disputes (still at a discussion stage).
SEZ Framework: Industry Proposals Under Review
Industry representatives have also flagged issues in the Special Economic Zone (SEZ) regime, particularly the requirement to pay customs duty on the entire value of goods cleared into the Domestic Tariff Area, including domestic value addition. One proposal under discussion is to:
- levy duty only on the value of imported inputs, and
- exempt domestic value addition using powers under Section 25(1) of the Customs Act.
This remains an industry suggestion, not current law.
External Trade Pressures Add Urgency
Recent tariff actions by the United States on select categories of Indian exports have reinforced the need to:
- lower domestic input costs, and
- streamline customs procedures to improve export competitiveness.
Customs reform is therefore increasingly seen as both a strategic and defensive policy tool.
What Observers Are Saying
Trade experts broadly agree that the focus of customs reform is shifting:
- away from headline tariff hikes, and
- toward speed, certainty, and system efficiency.
Digitisation, reduced discretion, and predictable tariffs are viewed as essential to help Indian manufacturers absorb global trade shocks while remaining competitive.
Conclusion
Budget 2026-27 presents an opportunity to reposition customs policy as an enabler of competitive manufacturing and open trade, rather than a blunt protective instrument. With customs revenues forming a limited share of tax collections and FTAs reshaping trade flows, expectations of reform are grounded in both fiscal logic and trade realities.
Whether the Budget delivers incremental rationalisation or a more structural reset will determine how effectively India balances domestic industry protection with deeper integration into global value chains.
Source: FinancialExpress