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Why are Imports Heavily Taxed in India?

India is one of the leading import countries in the world. In 2019 alone, India imported goods worth more than $478.88 billion. Countries like China, the USA, UAE, Saudi Arabia, Germany, and Switzerland are some of India’s biggest import partners.

The country imports an extensive range of products, including oils, mineral fuels, precious and semi-precious jewellery, electrical machinery, mechanical appliances, and more. In the 2020-21 budget speech, Finance Minister Nirmala Sitharaman increased the import tax on several product categories. So, the question arises, why the import taxes are so high in India? Let us find out.

What are the Product Categories for which Import Taxes were revised in Budget 2020-21?

  • Toys – From 20% to 60%
  • Fully Built Buses and Trucks – From 25% to 40%
  • Electrical Appliances and Kitchenware – From 10% to 20%
  • Furniture – From 20% to 25%
  • Medical Devices – Additional Health Cess of 5%

Why are Import taxes high in India?

The primary reason behind high import taxes in India is ISI (Import Substitution Industrialisation). It is an economic and trade policy wherein imports are replaced with domestic production. The theory has been around since the 1990s, especially in developing countries, to protect local manufacturers from international trade.

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Under the “Make in India” initiative, the Indian government wants to encourage businesses to develop, assemble, and manufacture products in India. The government also incentivises investments made towards manufacturing in India.

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How Does Higher Import Tax Promotes Make in India?

The government wants to encourage Indian companies to consider local manufacturing by increasing import tariffs. It wants Indian entities to set up their supply chains in India instead of importing products from other countries. In the process, the move by the government is also expected to boost the business prospects for MSMEs (Micro, Small, and Medium Enterprises) in the country.

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According to a report, the MSME sector in India contributes around 29% to the country’s GDP. The improved business environment for smaller businesses could help significantly improve India’s GDP and strengthen the country’s economy.

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Is there a Link Between Higher Import Tariffs and Foreign Investments?

Apart from Indian businesses, the higher import tax and government incentives for manufacturing in India also motivate foreign entities to consider local manufacturing. This helps in bringing more foreign investments to the country.

Thanks to the government initiatives, India received record FDI (Foreign Direct Investment) worth $81.72 billion in 2020, a rise of 10% compared to 2019. Moreover, the government has also made several changes to FDI policies and made income tax filing easier to encourage foreign entities to invest in India.

India – A Leading Investment Hub

India is steadily moving towards a leading investment hub from being an import hub. The initiatives like higher import tariffs and incentives on local manufacturing have helped increase foreign investments and reduce the country’s reliance on imports.

The government is expected to regularly launch newer initiatives under the “Make in India” campaign and simplify taxes to reduce imports further, increase exports, and strengthen the country’s economy.

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