Union Budget 2026: Customs duty reforms high on the wish list 

A rejig in the customs duty regime, including a rationalisation of the tariff rates and procedural reforms, is one of the most keenly awaited aspects of the Union Budget 2026-27.

While the government has indicated that it plans to review the customs duty regime, after the rationalisation of the goods and services tax (GST), experts and stakeholders are awaiting the presentation of the Union Budget on February 1 for more clarity. In early December, Union Finance Minister Nirmala Sitharaman said the simplification of customs would be the next big reform agenda for the government.

A restructuring of the multiple tariff rates into three to four slabs, a possible amnesty scheme for customs, trade facilitation measures, including clarity on the authorised economic operator scheme and Special Valuation Branch (SVB), as well as reforms related to special economic zones (SEZs), are other key expectations from the Budget with regards to customs duty.

Official sources have indicated that a review of the customs duty regime is underway, and some measures are likely in the Budget.

The need for reforms

In the previous few Budgets, the Centre has been working on several of these issues, including a recalibration of the import duty structure and a reduction in the average import duty. Union Budget 2025-26 removed seven tariff rates for customs duties, leaving only eight rates, including the zero rate, and also rationalised rates on several items.

India’s average effective tariff rate is seen at about 14%, and the tariff rejig could bring it lower, helping improve the country’s competitiveness in the face of US tariffs and the focus on Make in India. Further, India is negotiating free trade agreements with several countries,and  simpler customs processes would be required.

“Customs reform has become a macroeconomic imperative, with nearly 29% of GDP and $1.16 trillion in trade passing through the border system,” underlined a recent report by the Global Trade Research Initiative.

Tariff rationalisation

The report has recommended 23 reforms spanning tariff policy, customs procedures, export incentives and manpower deployment and noted that tariffs are no longer a revenue tool. “Customs duties now account for just 6% of gross tax revenue and average only 3.9% of the value of imports,” it pointed out.

The distribution of tariff revenue is highly skewed: nearly 90% of import value is concentrated in fewer than 10% of tariff lines, while the bottom 60% of tariff lines generate under 3% of customs revenue. Maintaining a complex tariff schedule for such limited fiscal return imposes high administrative and compliance costs, it argued, adding that extreme tariffs, such as the 150% duty on alcohol, should be rationalised.

The GTRI report underlined that India must simplify its customs duty structure by reducing the actual number of duty slabs rather than merely the Basic Customs Duty (BCD) rate slabs, adding that the reforms in the last Budget excluded the large number of specific duties, mixed duties, and conditional rates, which continue to create hundreds of effective tariff slabs in practice. A part of the BCD was also shifted to the Agriculture Infrastructure and Development Cess (AIDC) to show a lower slab count on paper, while keeping the total import duty unchanged, undermining the stated reform objective.

Process reforms

“Policymakers should pursue a time-bound Customs amnesty to mitigate legacy disputes,” said a note by PwC India. It also highlighted the need to expand trade facilitation and digitisation—including enhancements across Customs Authority for Advance Ruling (CAAR), Manufacturing and Other Operations in Warehouse Regulations (MOOWR), and the Authorized Economic Operator (AEO) programme to drive risk-based clearances and reduce port dwell times further.

It has also called for implementing a targeted tariff rationalisation and exemption review to address duty inversions while possibly deploying entry-based exemptions that cushion external tariff shocks. Lastly, it has suggested a recalibration of the SEZ norms so that customs duty is limited to the duty foregone on imported inputs.

Deloitte India has suggested a revamp of the SVB process. “Due to cumbersome and time-consuming SVB investigations in related party transactions, there is a huge pendency of cases with SVB cells,” it said, adding that during the pendency, all import assessments are mandatorily kept provisional, which leads to much uncertainty regarding the financial liability on account of customs duties for the trade. It has also called for revamping and strengthening the AEO certification framework and expanding it to support trusted Indian exporters as well.