What Happened
- The Union Budget 2026-27, presented on February 1, 2026 by Finance Minister Nirmala Sitharaman, announced significant customs duty reductions targeting manufacturing sectors including marine products, textiles, leather, defence, aviation, and renewable energy.
- Key exemptions were introduced for inputs used in manufacturing lithium-ion cells (extended to battery energy storage systems), solar glass inputs, aircraft components, microwave oven parts, and critical mineral processing capital goods.
- The duty-free import limit for inputs used in seafood processing was raised from 1% to 3% of the FOB value of previous year's export turnover.
- Manufacturing units in Special Economic Zones (SEZs) were given a one-time measure allowing them to sell goods in the Domestic Tariff Area (DTA) at concessional duty rates.
- The budget also proposed creating 148 new tariff lines across 21 chapters of the Customs Tariff Act to improve tariff classification granularity.
Static Topic Bridges
Customs Duty: Structure and Policy Tools
Customs duty is a tax levied on goods imported into (or exported from) India under the Customs Act, 1962 and the Customs Tariff Act, 1975. The Basic Customs Duty (BCD) is the primary component; others include the Social Welfare Surcharge (SWS), Integrated GST (IGST), and the Agriculture Infrastructure Development Cess (AIDC). The government uses customs duty as both a revenue tool and an industrial policy instrument — higher duties protect domestic industry; targeted exemptions reduce input costs for manufacturing sectors.
- Governing Acts: Customs Act, 1962 (procedure); Customs Tariff Act, 1975 (duty rates)
- Components: BCD + Social Welfare Surcharge (10% of BCD) + IGST + AIDC (on select items)
- Duty inversions: When duty on raw material > duty on finished product — discourages domestic value addition; Budget 2026 aimed to eliminate such inversions
- Tariff classification: India follows the Harmonised System (HS) of nomenclature — 8-digit classification
- New tariff lines: 148 new lines across 21 chapters proposed to improve specificity
Connection to this news: The customs duty cuts announced are designed to reduce input costs for manufacturers in priority sectors, eliminate duty inversions, and improve India's competitiveness without abandoning protection for finished goods.
Production Linked Incentive (PLI) Scheme and Complementarity with Customs Policy
The PLI scheme, launched in 2020-21, incentivises domestic manufacturing across 14 sectors through output-based financial incentives. Customs duty rationalisation and PLI are complementary instruments — PLI provides a demand-side pull (financial incentives for scale-up), while duty exemptions on inputs reduce supply-side costs. Together, they operationalise the "Make in India" industrial strategy of building domestic manufacturing capacity without permanent protectionism on all inputs.
- PLI scheme: Launched 2020-21 across 14 sectors including mobile phones, pharmaceuticals, food processing, textiles, solar modules, advanced chemistry cells
- Budget 2026 specifically targets PLI-adjacent sectors: EVs (lithium-ion cells), solar (glass inputs), semiconductors (via critical mineral processing)
- PLI pharmaceutical sales in first three years: Rs. 2.63 lakh crore (including Rs. 1.69 lakh crore exports)
- Domestic value addition in PLI pharma: 83.74% as of March 2025
- Mobile phone exports from India have grown substantially following PLI + customs policy alignment
Connection to this news: The customs duty exemptions for lithium-ion cell manufacturing and solar inputs directly support PLI sectors (advanced chemistry cells, solar PV modules), showing the integrated industrial policy logic of Budget 2026.
Special Economic Zones (SEZs) and Domestic Tariff Area (DTA) Sales
SEZs are designated enclaves where businesses operate under a different regulatory and tax regime — they are treated as being "outside" the customs territory of India for duty purposes. Goods produced in SEZs and sold in the DTA (the rest of India) attract full customs duty, making SEZ units primarily export-oriented. The one-time concessional DTA sale window announced in Budget 2026 represents a temporary exception, allowing SEZ manufacturers to access the domestic market at reduced duty rates.
- SEZ Act, 2005: Governs establishment and operation of SEZs; regulates DTA sales
- DTA sales from SEZ normally require payment of applicable customs + excise duties
- FTWZ (Free Trade and Warehousing Zones) are a subset — focused on logistics
- The budget's measure allows manufacturing SEZ units to sell in DTA at concessional rates (one-time) — a demand stimulus for domestic procurement
- SEZs are now being reconceptualized under the Development of Enterprise and Service Hubs (DESH) Bill framework
Connection to this news: The SEZ concessional DTA sale window is a targeted manufacturing boost — it allows SEZ units to offload inventory domestically without full duty burden, reducing working capital pressure and improving utilisation rates.
Key Facts & Data
- Governing law for customs duty: Customs Act, 1962 (procedure) + Customs Tariff Act, 1975 (rates)
- New tariff lines proposed: 148 across 21 HS chapters
- Seafood processing: Duty-free input limit raised from 1% to 3% of previous year's FOB exports
- Lithium-ion cell manufacturing: Exemption extended to battery energy storage system (BESS) capital goods
- Nuclear power: Customs duty exemption extended till 2035, expanded to all nuclear plants irrespective of capacity
- Critical minerals: Capital goods for processing now exempt from customs duty
- Microwave ovens: BCD exemption on specified manufacturing parts
- PLI scheme: Active in 14 sectors since 2020-21
- SEZ Act: 2005; DESH Bill reconceptualisation ongoing