Government’s Planned Bold Reset Could Make Indian Customs Future-Ready

Perhaps the Wintrack imbroglio at Chennai has become an inflection point for Indian Customs. It has thrown a harsh light on transactional overload, tangled compliance requirements and the role of dubious intermediaries. The Finance Minister’s opening statement at the Hindustan Times Leadership Summit that a “complete overhaul of Customs” is a government priority has sharply raised expectations of reform. How far and how deep will the government go?

Customs implements over 50 national laws. Every restriction or order under laws ranging from food safety standards to telecom to wildlife is enforced by Customs at the border. In the absence of an integrated compliance portal, wading through these requirements is a nightmare for any business. Many QCOs and conformity requirements lie tucked away in obscure corners and surface only during clearance, causing friction and delay.

The foremost ambition of the government should be to resolutely build an integrated compliance portal. It should be mandatory for all departments to list their obligations on it. The law should be bold enough to say that if a requirement is not listed on the portal, neither officer nor importer will be held responsible for non-compliance. An attempt in this direction was made earlier through insertion of section 11(3) in the Customs Act, but its implementation was stalled by inter-ministerial turf wars. To this day, a small footnote in the Act reads: “effective from a date to be notified”.

The Customs tariff remains a major challenge for SMEs. It contains over 11,000 product classifications and a maze of duty rates. Customs duties range from nil to conditionally exempt to 2.5%, 5%, 7.5%, 10%, 15%, 20%, 25%, 30%, 40%, 50% and beyond. The tariff embeds over 200 exemption notifications. One, known as the “Jumbo” notification in local parlance, alone carries over 625 entries, 124 conditions and an attached schedule with 41 lists. Layered on top of complex classification, duty rates and exemptions is the “spaghetti bowl” of free trade agreements, rules of origin and verification procedures. It can hardly get more convoluted.

This complexity is a primary reason why trade remains dependent on Customs brokers, many of whom are widely seen as dodgy, because no businesses can navigate this maze without their hand-holding.

A bold and strong reform for rate rationalisation is called for. The government can take inspiration from the game-changing GST 2.0. While the GST tariff mirrors the complexity of Customs tariff, by converging the tax rates into two – 18% and 5%– it effectively neutralised its tyranny. A similar surgical knife needs to cut through the thicket of Customs rates and notifications.

Another long-standing concern for industry, particularly manufacturing, is the inverted duty structure. Drawing from GST, which provided for refunds on inverted duty structures from its inception, a bold Customs reform could introduce a parallel mechanism to neutralise such distortions and boost manufacturing.

Customs reforms, at their core, require changes in procedures and processes — all well within the powers of the Board — and not space in the upcoming Finance Bill. Outdated regulations and clumsy processes severely mar the taxpayer’s experience. Despite being a pioneer in digitalisation, the department has not kept pace with modern practices in processing transactional compliance.

Customs processes over 12 million declarations annually, or roughly 40,000 per day, in real time, with largely unchanged manpower on the ground. While that is a commendable achievement, data available on the Nhava Sheva Customs website shows that 25% of the consignments are algorithmically selected by the Risk Management System for assessment. A smaller, though significantly large subset of around 10% is picked for physical examination. For a modern Customs administration, an interdiction rate of 25% is abnormally high. It generates unnecessary human interface and becomes a major source of friction and delay.

There is a compelling case to modernise how Customs manages risk and compliance. With the enormous data now available to government, robust entity profiling can enable a regime where 95% of shipments pass without interdiction. To achieve this, Customs must shift from transaction-based risk management to entity-based risk management. Only then will “faceless” Customs truly live up to its name.

The first step to solving a problem is to map it clearly, to know which pieces cannot be fixed, and to reserve our ingenuity for the rest.