Cotton Import Customs Duty Exemption Extended to December 31, 2026: CBIC Notification 35/2026 Explained

Why in News

The Central Board of Indirect Taxes and Customs (CBIC), Ministry of Finance, issued Notification No. 35/2026-Customs dated 30 October 2026, extending the exemption from Basic Customs Duty (BCD) and Agriculture Infrastructure and Development Cess (AIDC) on cotton imports under Customs Tariff Heading 5201 (raw cotton, not carded or combed) to 31 December 2026. The notification amends the earlier Notification No. 19/2026-Customs, substituting the original expiry date of October 31, 2026 with December 31, 2026.

Background

Cotton (Gossypium spp.) is India's most important fibre crop and the foundation of a textile and apparel industry that contributes approximately 2.3% of GDP, accounts for 12% of merchandise export earnings, and employs over 45 million people directly and 100 million indirectly — making it the second-largest employer after agriculture.

India is simultaneously the world's largest cotton producer (growing ~6–7 million metric tonnes annually) and one of its largest importers of cotton, particularly of Extra Long Staple (ELS) cotton varieties (such as American Pima and Egyptian Giza) which Indian soils largely cannot produce at commercial scale. These varieties are essential for premium textile, technical textiles, and high-thread-count fabric segments.

The standard BCD on raw cotton under the Customs Tariff Act, 1975 is 5% (HS Heading 5201). The AIDC was introduced through the Union Budget 2021–22 at a rate of 5% on cotton imports under Section 124 of the Finance Act, 2021. Together, these levies add approximately 10% to import cost, plus ancillary charges — significantly affecting the landed cost of imported cotton for spinning mills.

The duty exemption was first granted in June 2026 (Notification No. 19/2026-Customs) for the June 1 – October 31, 2026 window — a period corresponding to India's cotton off-season, when domestic stocks are typically low ahead of the new crop arrival (October–November). The extension through December 2026 reflects that the new crop arrival has been slower than anticipated, and cotton prices remain elevated.

Current Developments

The October 2026 extension of the duty exemption is significant for several reasons:

• The new kharif cotton crop (arriving October–November) has been slower to reach markets due to late-season rains in major cotton-growing states (Maharashtra, Gujarat, Telangana). Ginners and spinners report delayed opening of arrivals at Agricultural Produce Market Committees (APMCs).
• Global cotton prices (ICE Cotton Futures) have stabilised but remain above the five-year average, reflecting tighter global supply following lower production in the US and Brazil.
• The Textile PLI Scheme Round 4 (portal opened November 1, 2026) is incentivising investment in man-made fibre and technical textiles; several beneficiaries also depend on blended cotton-polyester yarns where raw cotton input costs are directly relevant.

Key Facts

Constitutional Provisions

Article 265 provides that "no tax shall be levied or collected except by authority of law." Duty exemptions issued by the Central Government must therefore be backed by express statutory authority. Section 25 of the Customs Act, 1962 provides this authority, empowering the Central Government to exempt goods from customs duty by notification in the Official Gazette — either generally or subject to conditions.

Union List, Entry 83 (Seventh Schedule, Article 246) gives Parliament exclusive legislative competence over duties of customs, including export duties. Parliament has delegated the power to grant exemptions to the Central Government through Section 25 of the Customs Act, 1962.

Legal Framework

The Customs Act, 1962 is the principal statute governing the levy, assessment, and collection of customs duties on goods imported into or exported from India. Section 25 is the key provision: it empowers the Central Government to exempt any goods from the whole or part of customs duty leviable thereon, by issuing a notification in the Official Gazette — either conditionally or unconditionally. This notification exercises that power.

The Customs Tariff Act, 1975 contains the First Schedule (import tariff) and Second Schedule (export tariff), listing HS-coded commodities and their standard rates. Heading 5201 covers cotton not carded or combed — the standard form in which raw cotton is traded internationally (as cotton lint after ginning).

The Agriculture Infrastructure and Development Cess (AIDC) was introduced via the Finance Act, 2021, applicable on certain imports. Revenue from AIDC is earmarked for agricultural infrastructure development. The exemption from AIDC on cotton imports is granted under the Finance Act, 2021 read with Section 25 of the Customs Act, 1962.

Institutional Framework

The Central Board of Indirect Taxes and Customs (CBIC) under the Department of Revenue, Ministry of Finance, is the apex authority for indirect tax policy and customs administration in India. CBIC administers customs at ports and airports through field formations (Customs Commissionerates).

The Textile Ministry (Ministry of Textiles) is the nodal ministry for the textile sector and would have recommended the extension, given its mandate to support the competitiveness of India's textile industry. The Confederation of Indian Textile Industry (CITI) and other textile bodies had been lobbying for the extension.

The Cotton Corporation of India (CCI) — a Government of India undertaking under the Ministry of Textiles — procures cotton at Minimum Support Price (MSP) and also handles imports under government mandate when domestic availability is tight.

Economic Dimensions

India's textile and apparel sector is one of the country's largest export earners, with exports of approximately $44 billion in 2025–26. Cotton-based yarns, fabrics, and garments account for the majority of this. The duty exemption directly reduces the landed cost of imported cotton by approximately 10%, providing relief to the following segments of the value chain:

• Spinning mills: The first level of processing; use imported ELS cotton for premium yarns. Tamil Nadu, Maharashtra, Gujarat and Telangana host the majority of spinning capacity.
• Textile MSMEs: Small weaving and garment units, which account for over 80% of employment in the sector, are most sensitive to raw material price volatility.
• Export-oriented units (EOUs) and SEZ units in the textile sector benefit from reduced input costs, improving their price competitiveness in markets like the EU and the US.

Banking & financial angle: The textile sector is a significant borrower from the banking system, particularly through schemes like the Technology Upgradation Fund Scheme (TUFS) and priority sector lending for MSMEs. Higher cotton prices erode textile MSME margins and increase the risk of Non-Performing Assets (NPAs) in the sector's loan book. The duty exemption, by reducing input cost pressure, supports credit quality of textile MSME loans — relevant for banks with large textile exposure, including SBI, Bank of Baroda, and specialised institutions like NABARD and SIDBI.

Agricultural Dimensions

The duty exemption on imported cotton raises a nuanced concern for domestic cotton farmers: cheaper imported cotton could theoretically dampen domestic farm-gate prices. The government has addressed this through the Minimum Support Price (MSP) mechanism — MSP for cotton (medium and long-staple) is announced annually by CACP, and the Cotton Corporation of India (CCI) stands ready to procure at MSP. For 2026–27, the MSP for cotton (long-staple, F-414) was announced at ₹7,521 per quintal, up from the previous year.

The duty exemption is designed to apply primarily to ELS/imported varieties not domestically produced in adequate quantities, limiting the competitive impact on Indian farmers growing standard staple varieties.

Challenges

• MSP vs. market price tension: If global cotton prices fall significantly and duty-free imports flood the market, domestic cotton prices could fall below MSP, requiring large-scale government procurement by CCI — placing fiscal stress on CCI.
• Quality and variety mismatch: India's domestic cotton production is dominated by medium-staple varieties; the ELS segment depends on imports. Unless domestic ELS production is scaled up (through better seed and agronomic technology), dependence on imports will persist.
• Farmer income uncertainty: Cotton farmers — concentrated in Maharashtra's Vidarbha region and Gujarat — already face yield volatility from unseasonal rains, pink bollworm infestation, and Bt cotton seed regulation issues. Import competition adds another variable.
• Trade balance impact: Continued cotton imports add to India's import bill; sustainable long-term solution requires domestic production growth, not only duty waivers.

Government Initiatives

• PM MITRA (PM Mega Integrated Textile Region and Apparel) Scheme: Seven integrated textile parks approved across India to create plug-and-play textile manufacturing ecosystems with shared infrastructure.
• Textiles PLI Scheme: Production-linked incentive for man-made fibre and technical textiles, extended to FY2034 in Round 4 (October 2026).
• TUFS (Technology Upgradation Fund Scheme): Interest subvention on loans for modernising textile machinery, improving productivity and quality.
• National Technical Textiles Mission (NTTM): Promotes R&D and adoption of high-value technical textiles (medical, agriculture, defence) to diversify beyond conventional cotton textiles.
• Cotton MSP: CACP recommends annual MSP; CCI operationalises procurement to protect farmer income when market prices fall below MSP.

Way Forward

• A medium-term cotton import policy — with transparent, formula-based triggers for duty relief (e.g., when domestic cotton prices exceed MSP by more than 15% for two consecutive months) — would provide industry predictability without ad hoc extensions.
• Investment in ELS cotton seed development through ICAR and state agricultural universities would reduce India's structural dependence on ELS cotton imports over a 5–10 year horizon.
• The Finance Commission and NITI Aayog have recommended a comprehensive National Cotton Policy that integrates production, processing, pricing, and trade in a single framework.
• Accelerating the Kasturi Cotton India branding programme — tracing and certifying premium Indian cotton through the value chain — will help Indian cotton command higher global prices and reduce import dependence.

Possible Mains Questions

1. India is both the world's largest cotton producer and a significant importer. Analyse the structural factors behind this paradox and evaluate the effectiveness of import duty exemptions as a policy response. (GS-III, 250 words)
2. "India's textile and apparel sector has the potential to create 30 million additional jobs over the next decade, but only if raw material and infrastructure constraints are resolved." Discuss with reference to recent government initiatives. (GS-III, 150 words)

Possible Prelims MCQs

1. Q: CBIC Notification No. 35/2026-Customs extends the exemption on cotton imports from Basic Customs Duty and which other levy?
   (a) Countervailing Duty (CVD)   (b) Integrated Goods and Services Tax (IGST)   (c) Agriculture Infrastructure and Development Cess (AIDC)   (d) Special Additional Duty (SAD)
   Answer: (c)
2. Q: Under which Section of the Customs Act, 1962 does the Central Government have the power to grant exemptions from customs duty by notification?
   (a) Section 12   (b) Section 17   (c) Section 25   (d) Section 28
   Answer: (c)
3. Q: Which of the following HS Tariff Headings covers raw cotton (not carded or combed)?
   (a) 5101   (b) 5201   (c) 5301   (d) 5401
   Answer: (b) — HS 5201 covers cotton, not carded or combed.

Essay Dimensions

1. India's textile sector: can it reclaim its historical position as the world's largest exporter?
2. The politics of agricultural protection: when farmer interests and industry needs collide in cotton policy.
3. Make in India and the textile value chain: from raw cotton to world-class garments.
4. Indirect taxes as industrial policy: the role of customs duty in shaping sectoral competitiveness.
5. MSMEs in India's manufacturing renaissance: vulnerabilities, resilience, and the role of the state.

Interview Questions

1. India is the world's largest cotton producer yet imports cotton. How would you explain this to a sceptic, and what policy would you recommend?
2. What is the Agriculture Infrastructure and Development Cess, and how does its exemption on cotton imports affect the agricultural infrastructure fund?
3. How does the PM MITRA scheme differ from earlier textile park initiatives, and what structural advantages does it offer?
4. A cotton farmer in Vidarbha and a spinning mill owner in Coimbatore have opposite interests regarding this duty exemption. How would you, as a policy maker, balance both?
5. How does India's cotton sector contribute to the broader goal of doubling farmers' income and creating export-oriented manufacturing jobs simultaneously?

FAQ

Q: What is the Agriculture Infrastructure and Development Cess (AIDC)?
A: AIDC was introduced in Union Budget 2021–22 as a cess on certain imports (and some domestic products like petrol and diesel) to fund agriculture infrastructure development. On cotton imports, AIDC is levied at 5% under Section 124 of the Finance Act, 2021.

Q: Why does India import cotton when it is the world's largest producer?
A: India predominantly produces medium-staple cotton varieties. High-value textile and technical textile segments require Extra Long Staple (ELS) cotton (e.g., American Pima, Egyptian Giza), which India does not produce in adequate commercial quantities. These varieties are therefore imported to serve premium and export-oriented textile segments.

Q: How does the cotton duty exemption affect domestic cotton farmers?
A: In theory, cheaper imports could lower domestic cotton prices. In practice, the government mitigates this risk through the MSP mechanism — the Cotton Corporation of India (CCI) procures cotton at MSP when market prices fall below it. The exemption is also designed to apply primarily to imported ELS varieties not produced domestically at scale, limiting direct competition with Indian farmers' output.

Further Reading

• CBIC official notification portal: cbic.gov.in
• Ministry of Textiles: texmin.nic.in
• Cotton Corporation of India: cotcorp.org.in
• Customs Act, 1962 — India Code: indiacode.nic.in