Tariff

Also called: Import duty, Import tax, Customs duty, Export and import duties · Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Class 10, Ch 4 "Globalisation and the Indian Economy"; Class 11, Ch 1 "Indian Economy on the Eve of Independence"; Class 11, Ch 2 "Indian Economy 1950-1990"; Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"; Class 11, Ch 8 "Comparative Development Experiences of India and its Neighbours"; Class 12, Ch 2 "National Income Accounting"; Class 12, Ch 5 "Government Budget and the Economy"; Class 12, Ch 6 "Open Economy Macroeconomics"

Meaning

A tariff is a tax on goods when they cross a country's border. It is mostly charged on imports, where it is called customs duty. Goods leaving the country can also be taxed; this is called an export duty. A tariff does two jobs. It gives the government revenue, and it protects domestic producers, because imported goods become costlier. Tariffs also decide how much protection an industry really gets. This is measured by the effective rate of protection (ERP):

ERP = (V′ − V) / V = (t − a·tᵢ) / (1 − a)

• V = value added at free-trade prices
• V′ = value added at tariff-inclusive prices
• t = tariff on the output
• tᵢ = tariff on the inputs
• a = share of inputs in the output's value, at free-trade prices

Explanation

How a tariff works: the Chinese toys chain (NCERT Class 10)

• A tax is put on imported Chinese toys
• Importers pay the tax and pass it on, so Indian buyers pay a higher price.
• Chinese toys lose their price advantage, so imports fall.

• Buyers shift to local toys, so Indian toy-makers sell more.

• Who gains and who loses

• Domestic producers gain. They sell more, at higher prices.
• The government gains customs revenue.
• Consumers lose. They pay more and have less choice.

• Industries that use the imported good as an input lose, because their costs rise.

• A tariff is a price-based barrier. A quota is a quantity-based barrier, meaning a direct limit on how much can be imported. NCERT calls both "trade barriers".

• Tariffs and PPP (Class 12)
• Purchasing power parity (PPP) says the same good should cost the same everywhere once prices are converted at the exchange rate.
• NCERT says PPP holds only when there are no barriers to trade, such as tariffs and quotas.
• Example: a shirt costs $10 abroad. At ₹85 per $, it should cost ₹850 in India. With a 20% tariff, it lands at ₹1,020.
• This ₹170 gap stays. Traders cannot profit by buying abroad and selling in India, because the tariff takes away their profit. So tariffs are one reason PPP fails in real life.

Forms of tariff

Form	Basis	Example
Ad valorem	A fixed % of the import's value	20% on a ₹1,000 good = ₹200
Specific	A fixed amount per unit	₹50 per kg
Compound	Ad valorem plus specific	10% + ₹20 per kg
Mixed	Ad valorem or specific, whichever is higher (or lower)	10% or ₹30/kg, whichever is higher

• Worked example: what happens when the world price falls from ₹100/kg to ₹50/kg
• A 20% ad valorem duty falls from ₹20 to ₹10, so protection is halved.
• A ₹20/kg specific duty stays at ₹20. Its ad valorem equivalent (AVE) rises from 20% to 40%. The AVE is a specific or mixed duty written as a % of value, so that different duties can be compared.

• So specific duties protect more when world prices fall. They are also easier to collect, because customs officers only weigh or count the goods. They do not need to check invoice values.

• Ad valorem duties keep pace with inflation. When prices rise, the duty in rupees rises too. They are also more transparent, so WTO schedules mostly use them.

• Export duties are taxes on goods leaving the country. Most were removed after the 1991 reforms. Today India uses them selectively:
• to keep goods at home and control domestic prices (food security);

• to make raw-material exports costlier, so the raw materials are processed inside India.

• Duty drawback refunds the customs duties paid on imported inputs that are used in exported goods. The rule is "export goods, not taxes". Exports are zero-rated, which means no domestic tax is left inside the export price.

Tariff structure: escalation, peaks, ERP and inverted duties

• Tariff escalation: the tariff is low on raw materials, higher on semi-processed goods and highest on finished goods. Example: raw cocoa 0% → cocoa paste 10% → chocolate 30%.
• The WTO says escalation "protects domestic processing industries and discourages the development of processing activity in the countries where raw materials originate" [6].

• As a result, poor countries stay stuck exporting unprocessed commodities, which add little value and create few jobs.

• Tariff peak: a high tariff on a sensitive product, such as farm goods, textiles or footwear, when tariffs are otherwise low. For industrialised countries, tariffs of 15% and above are generally treated as peaks [5].

• Nominal tariff vs ERP
• The nominal tariff is the duty printed on the final good.

• The ERP measures how much the whole tariff structure raises an industry's value added (output price minus input cost) above its free-trade level.

• Worked example: a car that sells for 100 at world prices and uses inputs worth 60, so V = 40

Output tariff	Input tariff	V′	ERP
20%	0%	120 − 60 = 60	(60 − 40)/40 = 50%
20%	10%	120 − 66 = 54	(0.20 − 0.6×0.10)/0.4 = 35%
10%	40%	110 − 84 = 26	(26 − 40)/40 = −35%

• Row 1: the ERP (50%) is far above the nominal tariff (20%).
• Row 2: a higher input duty lowers the ERP. So cutting input duties raises ERP.
• Row 3 is an inverted duty structure, where inputs are taxed more than the final good. The ERP becomes negative. The domestic producer ends up worse off than under free trade, and importing the finished good becomes cheaper than making it in India.

In India

• Law and administration: customs duty is levied under India's customs tariff. It is changed through the Union Budget. India's customs levies (BCD, AIDC and SWS) are covered in the taxation note.

• Social Welfare Surcharge is charged only on imports, at 10% [3].

• Budget 2025-26 reforms [4]

• Basic customs duty (BCD) on Interactive Flat Panel Displays (the finished good) was raised to 20%. BCD on open cells (the input) was cut to 5%. The aim was to "rectify inverted duty structure and promote Make in India" [4].
• Seven customs tariff rates for industrial goods were removed. Seven had already been removed in Budget 2023-24. This leaves only eight tariff rates, including zero [4].

• Only one cess or surcharge can now be levied on a good. Social Welfare Surcharge was exempted on 82 tariff lines that already carry a cess [4].

• Tariff forms in practice (2020/21)

• 93.9% of tariff lines were ad valorem.

• 725 lines (6.1%) were non-ad valorem. Only 4 were specific and 721 were mixed, mainly on textiles and clothing (714) and natural rubber products (7) [3].

• Applied tariff levels

• India's simple average applied MFN tariff rose from 13% (2014/15) to 14.3% (2020/21), or 15.4% with AVEs. The main reason was that lines at 0–10% fell from 79.1% (2015) to 67.8% (2020/21) [3].
• The most common rates were 10% (31.7% of lines) and 7.5% (24.4%). The highest was 150% on alcoholic beverages [3].

• 2025: the simple average was 16.0% overall, 36.4% on agriculture and 12.8% on non-agricultural goods. The trade-weighted average was 7.9%, because heavily imported items such as crude oil carry low duties [2]. India's imports were US$ 720.0 billion (2024) [2].

• WTO bound vs applied rates (2025) [2]

• The bound rate is the legal WTO ceiling. The applied rate is what is actually charged at the border. The gap between them is the binding overhang.

	Bound	Applied	Overhang
Total	50.8%	16.0%	~35 points
Agriculture	113.1%	36.4%	~77 points
Non-agriculture	36.0%	12.8%	~23 points

• Binding coverage (the share of tariff lines that have a bound rate) is 74.3% overall and 70.1% for non-agricultural goods [2]. India has bound 100% of its farm lines, at rates from 10% to 300% [3].

• Export duties

• Parboiled rice: 20% (2023), later removed.
• Onions: 40% (2023–24), removed from April 2025.
• Iron ore: the rate depends on the ore's grade.

• The WTO says that frequent changes to export taxes, minimum import prices and licensing "create uncertainty for traders" [3].

• Tariff-rate quotas (TRQs)

• India has TRQs on skimmed milk powder, some types of cream, maize and some edible oils [3].
• The WTO notes that "in general, there are no imports under TRQs" [3].

• Only 0.9% of India's farm lines are under tariff quotas [2].

• Export support: RoDTEP refunds hidden central, state and local taxes built into export costs. Advance Authorisation allows inputs to be imported duty-free for export production.

Don't confuse with

• Quota: a tariff raises the price of imports. A quota directly limits the quantity that can be imported.
• Compound vs mixed tariff: compound = ad valorem plus specific, both charged. Mixed = ad valorem or specific, whichever gives the higher or lower duty.
• Nominal tariff vs ERP: the nominal tariff is the rate on the final good. ERP is the protection to value added. It depends on input duties too and can be much higher than the nominal rate, or even negative.
• Social Welfare Surcharge vs GST: SWS is charged only on imports. GST is charged on both imports and domestic goods [3].

Prelims Hooks

• ERP = (t − a·tᵢ)/(1 − a). Cutting the input duty raises ERP. An inverted duty structure can make ERP negative.
• Specific duties protect more when world prices fall. Ad valorem duties keep pace with inflation.
• A tariff peak is a tariff of 15% or above, a benchmark generally used for industrialised countries [5]. Tariff escalation discourages value addition in countries that export raw materials [6].
• India, 2025: bound 50.8% vs applied 16.0%. In agriculture: 113.1% vs 36.4% [2].
• Tariffication (turning quotas and bans on farm goods into tariffs) and TRQs (a low duty within a set quantity, a high duty above it) came from the Uruguay Round Agreement on Agriculture [7][8].
• After Budget 2025-26, only 8 customs tariff rates, including zero, remain for industrial goods [4].

Mains Points

• Policy space vs predictability: India's large binding overhang in agriculture (113.1% bound vs 36.4% applied, 2025) [2] lets it protect farmers and food security when global prices swing. But frequent rate changes "create uncertainty for traders" [3]. This weakens India's position in FTA talks and its effort to join global value chains.
• ERP-based reform for Make in India
• Low input duties and moderate output duties raise effective protection for manufacturing.
• Correcting inverted duties, as in the IFPD/open-cell change, and cutting the number of rates [4] reduce disputes and support PLI-linked manufacturing.

• The risk: too much effective protection breeds inefficient firms, as happened in the pre-1991 import-substitution era.

• Tariff escalation as an equity issue

• Escalating tariffs in rich-country markets keep developing countries exporting raw commodities [6]. This supports India's push for tariff cuts on processed goods.
• India's own export duties on raw materials such as iron ore aim to keep value addition inside India.
• Duty drawback, RoDTEP and Advance Authorisation keep exports zero-rated, so tariff protection at home does not turn into a tax on exporters.

Related concepts

• Ad valorem tariff
• Specific tariff
• Compound tariff
• Mixed tariff
• Export duties
• Duty drawback
• Tariff escalation
• Tariff peak
• Effective rate of protection
• Bound tariff rate

Read more

• Tariffs: forms, structure and effects