Times have changed
Indian customs tariff is full of instances of inverted tariff is well documented and is a fact which is acknowledged by Ministry of Finance as well. Further, a complex, graded and high tariff regime is a recipe for lobbying by interest groups who want to have maximum protection on their produce. Till India was a closed economy and the imports were restricted with a combination of both the high tariff as well as the Quantitative Restrictions, the inverted tariff resulted in higher prices for consumers. It did not , however, affected the survival of Indian SMEs as they were also protected from imports.

It is not the SSIs but a few large raw material manufacturers who are protected
With removal of QRs and gradual lowering of tariff, the present inverted tariff structure has not only did nullify the protection to SMEs but has made them un-competitive. Today all the major raw materials : Steel, Copper, Aluminium and Plastic raw material are pegged at the highest level of duties. The duties on the finished products of user SMEs is either same or at lower level. At a glance though it might look that duties for Small Scale products are at higher levels and therefore they are protected. In reality, it is the large raw material manufacturers that are protected in the name of small scale.

The Challenge of FTAs
A much greater challenge is coming before SMEs with signing of Free Trade Agreements (FTAs) by India with ASEAN, Sri Lanka, Thailand, South Africa, Singapore etc. Acknowledging the past performance of powerful lobbies of raw material manufacturers- all large companies, the duties on raw material are likely to remain pegged at highest levels while the finished products are slated to enter at zero level of duties after FTAs.

FTAs with present inverted tariff regime is a recipe for disaster. The challenge is compounded as the SMEs by and large are unaware of the serious consequences of inverted tariff structure in globalized era. The only solution to the vexed problem is to have uniform and low duty regime.

Uniform rate of duty
The only way forward to address the problem is :
a. To have uniform rate of duty (for all products)
b. To have the rate of duty at the lowest possible slab e.g. 5% or 8%

· Firstly, the uniform rate will put an end to the debate as to what constitutes raw material and what a finished product.
· Secondly, the uniform coupled with low duty will be an effective disincentive for the vested interest groups that lobby for special favours. The reduction to the gains from lobbying for protection provides a vastly improved signal to valuable entrepreneurial talent which will thus be encouraged to create better and cheaper products the reduction
· Thirdly, it would produce minimum negative impact even of there is reverse tariff escalation after an FTA.
· Fourthly, it would make the SMEs more competitive in exports as at present their cost of claiming the duty back is prohibitive and hence their participation in international trade low.
· Fifthly, it would provide a level playing field to SMEs and ensure that Small scale thrives on their own competency.

(Excerpts from FISME's submissions to Ministry Finance & Ministry of Commerce & Industry)