All You Need About Tariffs Levied By India

A tariff refers to a type of tax that a nation levies on an imported good. It is levied at that nation’s border. The government of India has used tariffs as tools to collect revenues and protect domestic producers. When used as a protectionist tool, the prices of imports tend to rise in India. Historically, India has levied (MFN) tariff, preferential tariff and average bound tariff. Keep on reading to understand the tariff policy of India. The focus here will be on the average bound tariff. We shall also take a look at the trade-weighted basis here.

Understanding the Tariff Policy of India

Since independence, experts have categorised India as a relatively closed economy. This state of affairs continued till 1990. In 1991, a huge reformation took place in the economic and tariff policy of India. This was due to a series of major trade reforms.

Since 1991, the trading policy has been characterised by the following factors:

• Reduction of tariff barriers
• Reduction of average bound tariff
• Reduction of non-tariff barriers
• Phasing out quantitative restrictions
• Making the entry of foreign investment easier

India, even in the current era, is still considered by experts as an economy that is highly protected. Nevertheless, since 1991, India has moved towards progressive liberalisation. Since the late 1980s, there has been a trebling in the openness indicator of India. Moreover, the expansion of the Indian economy has been taking place at a high rate since 1991. All this can be attributed to the policy of tariff liberalisation with trade openness. This has resulted in a lower average bound tariff.

Applied and Average Bound Tariff

The WTO agreement includes commitments by various nations for binding their respective tariff rates. The binding of these tariff rates takes place at a maximum rate pertaining to the import product category. This maximum rate is an agreed-upon one.

The bound tariff rate refers to the maximum tariff in a product category. This rate tends to differ across different nations and different products. Certain nations apply the policy of higher maximums, while some go for lower maximums.

Generally speaking, higher bound tariff rates are usually followed by developing countries in comparison to developed countries. This is because the developing countries require greater protection from competition compared to the developed nations.

Certain countries set their actual tariffs at lower levels compared to their bound rates. Such countries are those that are characterised by higher bound tariffs. The applied tariff rate is the actual tariff rate that the nations levy.

The calculation of the averages takes place as a simple average. Here, the addition of ad valorem tariff rates takes place. Afterwards, their division takes place by the total number of tariff categories.  These ad valorem tariff rates can be either bound or applied. When they are bound, then the result after the above-mentioned addition and division would give us the average bound tariff rate.

The average bound tariff rate of India, as per the latest WTO data, is 48.5%. Also, the simple MFN average applied tariff of the nation is 13.8% as per the WTO 2017 data available. Moreover, the average WTO-bound tariff for agricultural products in India stands at 113.5%. 

Applied rates in India are also relatively high. Moreover, in WTO, India has bound all agricultural tariff lines. On the other hand, more than 30% of non-agricultural tariffs in India are unbound. Being unbound means that there is no WTO ceiling on the rate.

Trade-weighted Basis

Experts describe trade-weighted basis average as the average rate of duty per imported value unit. It is considered by experts to be normally lower than the simple average duty. The reason for this is that importers usually find high duties less attractive compared to low duties.

High duties results in the following:

• Deflection of imports
• Lowering of the trade-weighted tariff average

According to the 2017 World Trade Organisation estimates of India, the tariffs applicable in general were as follows:

• 13.4% (simple average)
• 7% (trade-weighted average)

As you can see, the trade-weighted basis average of India is lower than the simple average. 

A simple way of calculating India’s trade-weighted applied tariffs is by considering the percentage ratio of customs revenue to imports.

Conclusion

A tariff is a tax that a nation levies on an imported good. It is levied at the border of the concerned nation. Historically, tariffs have been used by the Indian government to collect revenues and protect domestic producers. Since 1991, the trading policy of India has significantly changed. Due to these changes, tariff barriers have been reduced, and foreign investment entry has been made easier. The average bound tariff rate of India, as per WTO, is 48.5%. By considering the percentage ratio of customs revenue to imports, India’s trade-weighted basis tariff can be calculated.