An important drawback of commercial policy or the import tariff policy is the problem of inverted duty structure prevailing in different industries.
Inverted duty structure is a situation where import duty on finished goods is low compared to the import duty on raw materials that are used in the production of such finished goods. For example, suppose the tariff (import tax) on the import of tyres is 10% and the tariff on the imports of natural rubber which is used in the production of tyres is 20%; this is a case of inverted duty structure.
When the import duty on raw materials is high, it will be more difficult to produce the concerned good domestically at a competitive price. Several industries depend on imported raw materials and components.
High tax on the raw materials compels them to raise price. On the other hand, foreign finished goods will be coming at a reduced price because of low tax advantage. In conclusion, manufactured goods by the domestic industry becomes uncompetitive against imported finished goods.
What inverted duty structure brings to the home country is that its industries are less protected as the tariff on the imported finished commodities are low. At the same time, the tariff on the import of raw materials used in the production of the finished goods domestically is high. This discourages the local production of goods using the imported raw materials as the price of imported finisshed goods may seem more attractive.
The disadvantage of the inverted duty structure increases with the increased use of imported raw materials. An inverted duty structure discourages domestic value addition.
For India, there are several examples of inverted duty structure especially after the signing of the India-ASEAN FTA.
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