In the context of India's trade and industrial policy in 2025, which of the following best explains the challenges posed by the Inverted Duty Structure (IDS) and the policy measures adopted to mitigate its adverse impact on domestic manufacturing?
Show answer & explanation
Correct answer: A
Explanation
Solution: The correct answer is (A) IDS occurs when the import duty on finished goods is lower than that on raw materials or intermediate goods, discouraging domestic value addition; to address this, the government has rationalized tariffs and promoted local sourcing under schemes like 'Make in India' and Production Linked Incentives (PLI).
Explanation:
☛ Inverted Duty Structure (IDS) is an anomaly in the tariff structure where customs duty on finished goods is lower than the duty on raw materials, parts, or intermediate inputs used to produce those finished goods.
☛ This tax structure makes domestically produced goods more expensive than imported finished goods, thereby discouraging domestic manufacturing and value addition.
☛ Under IDS, domestic manufacturers face an unlevel playing field because foreign competitors can import finished goods into India at lower tariffs (often facilitated by Free Trade Agreements - FTAs).
☛ To resolve this anomaly, the Government of India has been rationalizing customs tariffs in union budgets, lowering input duties, raising duties on finished imports, and offering support through the Production Linked Incentive (PLI) Schemes.
Extra Exam-Relevant Facts:
☛ IDS commonly affects sectors such as electronics, textiles, chemicals, steel, and automobile components.
☛ Under the Goods and Services Tax (GST) regime, an inverted duty structure also refers to cases where the tax rate on inputs is higher than the tax rate on output supplies, leading to accumulated Input Tax Credit (ITC), which is refundable under Section 54(3) of the CGST Act.
☛ The Make in India initiative was launched on 25 September 2014 to facilitate investment, foster innovation, and build world-class manufacturing infrastructure.
☛ The Production Linked Incentive (PLI) Scheme was introduced in 2020 to provide financial incentives to domestic manufacturers across 14 key sectors based on their incremental sales.
Important One-Liners for Upcoming Exams:
☛ What tax anomaly occurs when tax rates on finished goods are lower than on inputs? → Inverted Duty Structure (IDS)
☛ Which section of the CGST Act provides a refund for accumulated Input Tax Credit due to an inverted duty structure? → Section 54(3)
☛ In which year was the 'Make in India' initiative launched? → 2014
☛ How many strategic manufacturing sectors are covered under India's PLI scheme? → 14 sectors
☛ Which trade agreements often lead to an inverted duty structure if tariff cuts on finished products exceed those on raw materials? → Free Trade Agreements (FTAs)