A fundamental principle of sound public policy, particularly tax policy, is that it should not be overburdened with competing objectives. Customs duty, however, is expected to serve multiple purposes simultaneously. These include supporting economic development, protecting domestic industry, safeguarding national heritage and the environment, ensuring national security, enforcing foreign trade policy, and protecting intellectual property rights. This complexity stems from the fact that customs authorities operate at the country’s points of entry and exit.
The Need to Rebalance Tariffs and Simplify Customs Procedures
In this context, recent statements by India’s Union Finance Minister signal a meaningful shift in approach. The government has expressed its intention to reduce tariff rates that exceed “optimal levels” and to overhaul customs systems by simplifying procedures, reducing discretion, and improving transparency. These measures are expected to make compliance less onerous and improve the ease of doing business, objectives that align closely with the mandate of the Central Board of Indirect Taxes and Customs (CBIC).
The CBIC coordinates with a wide range of ministries, many of which seek tariff protection for their respective domestic industries. While such protection is often justified as a means of promoting self-reliance under initiatives like Make in India, the outcome has not always been positive. In several cases, higher protective duties have reduced the global competitiveness of Indian manufacturers, particularly in export markets.
Trade Policy Complexity and the Role of DGFT
India’s trade ecosystem is further shaped by the Directorate General of Foreign Trade (DGFT), which regulates imports and exports and administers duty exemption and remission schemes, each with detailed conditions. These are in addition to safeguard duties, anti-dumping duties, and multiple cesses, contributing to an increasingly complex customs environment.
The growing number of Free Trade Agreements (FTAs) adds another layer of difficulty. Economist Jagdish Bhagwati has famously described FTAs as “termites in the trading system” because of their restrictive nature. A key challenge lies in Rules of Origin (RoO), which vary across agreements and products. These variations increase compliance costs and enforcement challenges, while also creating incentives to circumvent origin requirements.
High Tariffs Despite Global Commitments
Despite India’s commitments to the World Trade Organization (WTO) and the Trade Facilitation Agreement (TFA), tariff levels remain relatively high. The simple average tariff stands at around 16% for non-agricultural products and approximately 36% for agricultural goods. Although FTA imports often benefit from lower rates, many procedural requirements continue to be viewed as cumbersome by trade participants.
Meanwhile, the volume of trade handled by Indian customs is vast and growing. In 2024-25, India’s merchandise exports were valued at approximately US$825 billion, while imports reached around US$915 billion. Given these volumes, the role of customs in ensuring timely clearance of goods is critical, as delays directly increase costs and reduce competitiveness.
Technology, Risk Management, and Trade Facilitation
Technology has become a key enabler of trade facilitation. The Indian Customs Electronic Data Interchange (ICES) system operates at 252 major customs locations and processes nearly 98% of international trade transactions. On average, it handles more than 1.4 million documents each month.
A robust risk management framework allows nearly 90% of consignments to be cleared based on documentation alone. Only a limited percentage are selected for further examination based on risk indicators. Time Release Studies (TRS) show that average cargo release times across ports are steadily declining, reflecting tangible improvements in customs efficiency.
Rethinking Tariffs and Revenue Priorities
As India moves toward cutting tariffs to “optimal levels,” it is important to recognise that customs revenue, while relevant, is not a major contributor to overall tax collections. For the 2025-26 Budget Estimate, customs revenue is projected at ₹2.4 lakh crore out of a total gross tax revenue of ₹42.7 lakh crore.
Finance Commission Chairman Arvind Panagariya has proposed a uniform 7% tariff on non-FTA imports, with a phased reduction in sectors where rates remain high, such as automobiles. This approach would simplify tariff structures, reduce assessment disputes, and enhance predictability. Reviewing post-import conditions and non-tariff barriers would further help address the perception that compliance requirements are excessively burdensome.
Simplification, Transparency, and Better Coordination
Going forward, the CBIC should prioritise the continuous simplification of procedures and deeper integration of technology. Customs notifications are often highly technical and rely heavily on cross-references to earlier notifications. Ensuring that future notifications are self-contained, while gradually simplifying existing ones, would significantly improve clarity for trade stakeholders.
Identifying chokepoints in the movement of goods is equally important. Although ports involve multiple agencies with distinct responsibilities, customs administrations are well placed to exercise stronger coordination and oversight to improve overall efficiency.
Risk parameters should be reviewed regularly to ensure their continued relevance. Where physical inspections are necessary, they should be conducted swiftly and limited to a clearly defined, risk-based percentage of consignments. Technology has reduced human discretion, but it has not completely removed discretion. When discretion is used carefully and transparently, it is still important for administration.
Adjudication, Capacity Building, and Trust
Concerns about delays and pendency in adjudication are frequently raised by the trade community. Making jurisdiction-wise adjudication data publicly available could help address these concerns and enhance trust. Such transparency would also allow industry stakeholders to engage constructively with the administration.
Continuous training of customs officers is essential. Officers must be technologically adept, administratively competent, sensitive to business needs, and firmly committed to integrity. While most clearances proceed smoothly, strong vigilance and oversight mechanisms remain necessary to prevent rent-seeking and ensure accountability.
Conclusion
Trade facilitation is a shared responsibility. While customs authorities must be efficient, transparent, and responsive, the trading community also has an obligation to comply with the law and engage constructively with port-level administrations. Ultimately, India’s customs system must not only function efficiently but also be seen to do so. The vision and mission of the organisation demand nothing less.
This article is based on views originally expressed by Najib Shah, former Chairman of the Central Board of Indirect Taxes & Customs. The opinions referenced are personal. Source: CNBC-TV18.