Budget 2026: What is customs duty, how does it work? Industry's wishlist for Sitharaman

Budget 2026 | Union Finance Minister Nirmala Sitharaman’s presented her ninth consecutive Budget in the Parliament on February 1 2026. The Finance Minister emphasised that the government has consistently chosen reform over rhetoric and addressed global uncertainty.

Recent pre-budget talks highlight customs duty reforms as a game-changer because India's current complex structure, with over eight slabs (0-40%+), thousands of exemptions, and inverted duties, locks up ₹24,000 crore in disputes, delays clearances by weeks, and erodes SME competitiveness in exports amid global tariffs, while simplification could unlock working capital, cut litigation by 70%, speed AI-driven approvals to hours, and boost manufacturing value addition under PLI schemes

What is customs duty, how does it work? 

Customs duty is a tax on imported and some exported goods, protecting local industries from cheap foreign competition, generating over ₹2 lakh crore yearly revenue, and regulating trade under the Customs Act, 1962. Levied at ports and airports, it comprises Basic Customs Duty (BCD, typically 0-40% based on item value), plus Social Welfare Surcharge (10% of BCD), Agriculture Infrastructure Cess (AIDC on select goods), and IGST (up to 28%). Assessable value includes FOB cost, freight, and insurance; for example, a ₹1 lakh gadget at 20% BCD adds ₹20,000 duty before other levies.

Industry expectations on customs duty

Ahead of Budget 2026, industry demands GST-style simplification as the current eight slabs (0%, 5%, 10%, 15%, 20%, 25%, 30%, 40%+) create complexity with specific rates, mixed duties, and disputes worth ₹24,000 crore, hurting SMEs. 

Think tanks like GTRI have sought consolidation into 4-5 transparent slabs based on total duty (BCD + cesses), a single tariff schedule, and a zero-base audit of rules.

"India needs to simplify its customs duty structure by cutting the actual number of duty slabs, instead of only tweaking the basic customs duty (BCD) rates".