About
Inverted Duty Structure (IDS) Calculator has been developed by CIRC to calculate the incidence of IDS, arising out of customs duty, on a given product at either 6 or 8 digits HS code.
Objective of the IT tool
- The sole objective of the IDS calculator is to help the user calculate the incidence of IDS arising from custom duty on a given output at either 6 or 8 digits HS code.
- The IT tool aims to help manufacturing firms, trade chambers, export promotion councils, and various other government departments in identifying the incidence of IDS on account of Customs Duty.
Definition of IDS
A product is said to be affected by incidence of IDS if the tax rate levied on inputs exceed the
tax rate levied on product.
E.g. fabric is an input in the production of apparel, if tax rate on fabric is 12% while tax on
apparel product is 5% then the apparel faces incidence of IDS.
Information/Data required to use this tool
- Outputs/Inputs HSN codes at either 6 or 8 digits
- Basic customs duty/ preferential rate on output/inputs
- Health Cess and Social Welfare Surcharge
- Integrated Goods and Services Tax Rate
- Cost of imported inputs
- Total Input Cost: Total import input + Total domestically procured input
Steps Involved
- Fill out the Output Duty form.
- Select the methodology to calculate the incidence of IDS.
- Fill in the Input Duty table.
- Press "Calculate" to generate the result.
- Download the result in both PDF and Excel formats.
To know more about the tool click here
Calculate IDS
Output Duty
Alternate Methodology to Assess Incidence of IDS:
There are two methodologies to assess the incidence of IDS on a given product. Read More
Disclaimer : The result generated by the tool is based on the information provided by the user.
Sources of IDS
Scenario I: Firms are using domestic inputs in production. If the GST rates on domestic inputs are higher than the GST rates applicable to its outputs, the firms are facing an inverted duty structure.
Scenario II: Firms are using imported inputs in production. If the applied rate of duty on inputs are higher than the output duty rate, the firms face an inverted duty structure.
Note that IDS calculator is meant to address only the IDS arising from Customs duty (Scenario II)
Alternate Methodologies to identify IDS
- Compare the total tax/duties paid on raw materials and inputs with the total tax/duty paid on output, if the former is larger than the latter, then output is affected by IDS.
- Compare the duty levied on output with the weighted average of input duties, if the latter exceeds the former, product is affected by IDS.
Note that IDS calculator adopts second alternative in identifying the incidence of IDS.
Alternate Methodology to Assess Incidence of IDS:
There are two methodologies to assess the incidence of IDS on a given product:
- Using weighted average of Input Duties:
- This method calculates weighted average of input duties using “cost of imported input” as weights and compares it with the total applicable duty rate on output.
- This method requires two sets of data:
- Cost of imported inputs
- Total cost of raw materials used in production of output
- This method although requires more data related to cost of production, is more precise and a robust methodology to assess incidence of IDS.
- Using arithmetic average of Input Duties:
- This method calculates arithmetic average of input duties
- This method does not require user to insert cost related data.
- This method, although requires zero additional information on cost of production, is less precise and should be used only when the cost of production data are not readily available with the user.
NOTE: It is proposed that the user should prefer to use the first method (weighted average method) and the second method (arithmetic average method) should be used only when the cost of production data are not available with the user.
Interpretation of IDS
Erosion of Cost Competitiveness:
- IDS levies relatively higher duties on inputs, making imports costlier, and simultaneously it allows relatively easier market access to the imported final product. Firms find it hard to compete against the cheaper imports of final products due to IDS. Whether firms procure inputs from abroad (at higher duties) or from domestic markets, they see a rise in their cost structure ultimately leading to erosion of cost competitiveness.
Erosion of Price Competitiveness:
- As firms lose their cost competitiveness due to IDS, their margin shrinks and they have to charge a price which may be higher than the price charged on imported counter-part products to retain their margins or to at least remain on a point where they break-even.
Impact on Investment Attractiveness:
- In general, Investments and profitability are positively correlated. Since firms' margins shrink due to IDS, their profitability narrows down and Investments become less attractive and if at all Investments take place, it comes at the higher interest rate. Thus, IDS makes private investments less attractive and increases the finance costs of firms.
Credits
Ninad Shah contributed to the conceptual framework. Vikram Ranjan developed the code. Navneet Sharma conceptualized and led the development of the IDS Calculator. Feedback and suggestions are welcome at: nas@circ.in
