The government may undertake a major exercise to reduce the basic customs duty or import tariff on a large number of goods, especially critical raw materials and intermediate goods, in the Budget for FY27. This will be a fully autonomous initiative to lower the tariff barriers for the benefit of domestic value creation in assorted supply chains, despite the backdrop of Trump tariffs and a flurry of free trade agreements (FTAs) being negotiated.
“A sharper focus on correcting tariff structures will help encourage local value-addition in both manufacturing and services with manufacturing linkages, attract fresh investments, and cushion the impact of a swelling import bill,” said a source.
In parallel, the Customs procedures would be eased further, with greater digitisation, faceless processing and integration of operational parameters of large ports.
“India must progressively reduce its weighted average customs duty from about 14% now to 2% to align with the world’s top economies. A period of rupee depreciation, when import values are higher and the customs base expands, is the most opportune time to do this,” said noted tax expert and former senior IMF economist Arbind Modi. Both the revenue risks and inflation pressures are contained at this juncture, he noted.
Last week Finance Minister Nirmala Sitharaman said a complete overhaul of the customs duty structures would be the next big reform agenda and hinted that the proposed reforms will be comprehensive and entail duty rationalisation.
FTA Landscape
The customs duty cuts are also much easier now as the plans to conclude FTAs with a number of large economies/customs unions are anyway going to result in a shrinking of the common Most Favoured Nation (MFN) route. In the next 12 to 18 months, more than 80% of India’s trade will be conducted under preferential duties as FTA with major partners become operational, sharply up from roughly a quarter now.
The country has signed 15 FTAs already and at least 10 more are being negotiated. Over and above that many other proposals have been received by other countries for FTAs. Barring China that accounts for 11% of total merchandise trade, free trade alliances are being negotiated with all other key trade partners in goods trade, and these agreements will aim at progressively reducing tariffs to almost zero for most goods.
Beyond Tariffs
In the context of major FTAs currently being in discussion, customs reforms must also evolve beyond tariff adjustments, tax experts said. “As tariff barriers gradually diminish under comprehensive trade agreements, the focus of customs policy should increasingly shift towards strengthening trade facilitation, improving procedural efficiency, and ensuring seamless border management,” Partner- Indirect Tax at Nangia Group Rahul Shekhar said.
Already the share of customs duties in overall tax collections is coming down. In 2024-25 Customs accounted for only 8.7% of the total gross tax collection of Rs 37.9 lakh crore. Moreover 85% of tariff revenue comes from just 10% of tariff lines, while 60% of tariff lines contribute less than 3% of revenue.
The customs reforms are also crucial as trade in goods accounts for more than 27% of the GDP so the efficiency in customs management would also add to the overall growth through expansion of manufacturing by bringing more global value chains home. Faster and smoother movement of components and goods with reduced red tape and supported by a big local market would be a big attraction to manufacturers worldwide.
“Emphasis should be towards predictable classification practices with expanding end-to-end digital documentation, faster risk-based border clearances and consistent application of rules across ports uniformly. It also provides confidence to global investors and trading partners,” Shekhar said.
“While risk assessment is being done through digital tools already, it often leads to legitimate imports getting affected. Therefore, more investment needs to be done in Automation and AI-driven risk assessment, real-time data sharing and paperless documentation are some of the reformative measures that should be adopted,” Partner at CMS INDUSLAW Shashi Mathews said.
“Fast-track clearance, targeted support for top exporters, and minimising procedural bottlenecks are very important,” secretary general of Apparel Export Promotion Council Mithileshwar Thakur said.
“Streamlining incentive mechanisms such as Duty Drawback, ROSCTL, EPCG, and Advance Authorization processes, along with allowing deferred duty payments for top traders will strengthen exporters’ cash flow and enable them to compete effectively in global markets,” he said.
Other reform that the industry is seeking is streamlining the way changes in rules, procedures and rates are communicated. “The way out is to rescind an old notification in this regard. New notification should be self-contained without any reference to earlier notifications. This will add to ease in doing business for exporters,” Thakur added.
“The ultimate focus should be on aligning customs procedures with the best international practices and World Customs Organisation (WCO) guidelines to ensure smoother cross-border trade,’ Mathews said.
In the last budget, Sitharaman had removed seven tariff rates. This was over and above the tariff rates removed in the 2023-24 budget. After this, there are only eight remaining tariff rates including ‘zero’ rate. While this reform of reduction of slabs may continue, the ministry is also expected to keep addressing the inverted duty structure in value chains of various products.
“In cases where goods from FTA partners are entering India at lower duties, the issue of inverted duty crops up and are brought for redressal,” an official said.
A more competitive rupee will boost exports and make India a more attractive destination for investment and foreign capital, Modisaid.
The rupee has depreciated by approximately 5.36% against the US dollar so far in 2025 (as of December 11, 2025). The depreciation has led the rupee to hit a new record low of over 90.46.
“High duties and numerous exemptions should be replaced with a simple, uniform 2% tariff to end classification disputes and curb cronyism,” Modi said. The government may sequence this reform by first reducing duties to 5% and then moving to 2% over three years, while eliminating all exemptions, he said. “FTAs should continue to apply wherever their preferential rates fall below the basic customs duty. Lowering import duties on intermediate goods will strengthen downstream industries, stimulate investment in the intermediate goods sector, and generate employment,” Modi said. A sliding rupee need not cause alarm if accompanied by a coherent tariff reform, he added.
“Many critical raw materials and intermediates still attract relatively high import duties, including items such as semiconductor components, display assemblies, PCBs, auto parts, specialty chemicals, polymers, man-made fibres, stainless-steel products, aluminium alloys, and machine tools,” said Kesh Nagpal, Lead–Indirect Tax, AKM Global, a tax and consulting firm. These inputs form the backbone of sectors such as electronics, automobiles, engineering goods, pharmaceuticals, textiles, and renewable energy. When such intermediates are taxed heavily, domestic manufacturers face higher production costs, making it harder for them to compete globally, Nagpal said
“The government, by rationalising customs duties on essential inputs, should align them with finished-product tariffs. Such rationalisation will strengthen Indian manufacturers, boost growth, create jobs, increase exports, and advance the promise of Make in India,” he added.
Another government official told FE that raw materials and intermediaries should ideally be tax-free unless specified otherwise. India is “unnecessarily called a high-tariff country,” the official said, adding that customs duties should follow clearly laid-out principles—just as income tax assumes all revenue is taxable unless exempted, and capital receipts are non-taxable unless specifically brought into the tax net.
Currently, electrical equipment and inputs attract 7.5 % to 20% duty, chemicals (2.5% to 20%), artificial fibres (9: 5% to 20%), steel (5% to 20%) and aluminium alloys (2.5% to 20%).