The Hindu Business Line : Tariff as regulatory tool

After the removal of Quantitative Restrictions, customs tariffs are the only fiscal instrument available to policymakers to regulate or influence import-export trade.

G. Chandrashekhar

We were looking at the various laws that govern the commodity markets. In addition to the Essential Commodities Act and Prevention of Food Adulteration Act, market participants have to be familiar with other related laws too. The Export-Import Policy, as well as Procedures related thereto, is a document that lays down the extant policy relating to foreign trade.

The EXIM Policy used to be a voluminous document containing strict rules for regulating import and export of a wide variety of goods (licensing, quantitative restrictions, canalised trade, imports with conditions attached and so on).

Slim document today

After the country embarked on economic liberalisation in 1991, many of the controls on external trade were gradually done away with. Quantitative Restrictions (QRs) on imports and exports were removed in March 2001, while many canalised items were progressively decanalised. Today, we have a slim policy document regulating foreign trade, with considerably fewer restrictions on trade. The development is also consistent with our commitment to the World Trade Organisation (WTO) to allow greater market access to foreign goods.

As external trade controls are dismantled, the domestic market dynamics are subject to international influences, including the volume, price and speed with which goods from abroad flow into the market here. Market participants here have to take cognisance of the freedom to trade. There may also arise situations where the government would like to encourage or discourage imports or exports, depending on the exigencies .

Raising or lowering rate

Export of many commodities has been banned following inflation concerns in recent months. Be that as it may, with the phasing out of external trade controls, the only instrument available to policymakers is tariffs or customs duties. The Customs Tariff Act, 1975 is the document that contains the extant rates of tariffs applicable to various goods when imported or exported.

As exports have been a priority, to encourage exports and make them price-competitive in the overseas market, the government progressively withdrew export duties on a large number of commodities. Many import items are still subject to tariffs or customs duties, the rates of which are specified in the Customs Tariff Act. When the government wants to encourage import of a particular commodity (say, to meet domestic shortfall), it usually lowers the rate of customs duty on that commodity as a result of which the landed cost of imported material is lowered.

Similarly, if it desires to restrict the import of a certain commodity, the rate of customs duty is raised, making imports that much expensive. In other words, after removal of QRs, customs tariffs are the only fiscal instrument available to policymakers to regulate or influence import-export trade. Tariffs are used to protect the domestic producers from import competition.

Market participants need to be familiar with tax laws also. In addition to income-tax and sales-tax, there is Excise duty on the manufacture of specified goods. There are also local levies such as Octroi duty or entry tax, transactions tax, mandi tax and so on. Many of the taxes are sought to be consolidated into VAT (Value Added Tax). The tax laws of the country are complicated and need expertise to unravel their nuances.

Forward Contracts Act

Perhaps the most important law that commodity market participants have to be familiar with is the Forward Contracts (Regulation) Act, 1952. To understand the rationale of the law, one needs to imagine the country’s socio-economic conditions soon after Independence.

Inadequate food supplies, growing population and wide income and wealth disparities were the characteristic features. Shortages and inflation were the norm. The government had a socialistic bent of mind and distrusted private trade and industry.

The need to bring about some orderliness into the commodity market, regulate trade and prevent manipulative practices, through suitable legislation, was felt. A Bill for forward contracts was referred to an expert committee headed by Prof A.D. Shroff and Select Committees of two successive Parliaments; and finally, in December 1952, the Forward Contracts (Regulation) Act, 1952 was enacted.

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