Custom Duty in India : Definition, Types, Calculation, & Rates

Customs duty serves as the taxation imposed on goods during their movement across international borders, constituting a vital aspect of import and export transactions. Primarily aimed at generating government revenue, it also functions to safeguard domestic industries and regulate the flow of goods.

The specific rate of customs duty is contingent upon factors such as the origin and composition of the goods being transported.

In India, customs duty finds its legal framework in the Customs Act of 1962, with oversight falling under the purview of the Central Board of Excise & Customs (CBEC).

How it Works

The Customs Act of 1962, a cornerstone of India's customs regulations, enables the government to levy duties on imports and exports, regulate trade procedures, and enforce penalties for violations. Under this legislation, the government can also control the movement of goods and prohibit certain imports and exports.

The Central Board of Excise & Customs (CBEC), housed within the Department of Revenue under the Ministry of Finance, is entrusted with overseeing all aspects of customs duty. CBEC formulates policies concerning customs administration, duty collection, smuggling prevention, and detection of duty evasion.

Within CBEC, several divisions, including the Commission rate of Customs and Central Excise Zones, are responsible for field operations. Additionally, CBEC ensures effective tax administration for both foreign and domestic travel.

Import tariffs and export duties are mechanisms employed worldwide to regulate trade, generate revenue, and safeguard domestic industries. Customs duties serve multiple purposes, including discouraging the consumption of harmful products like tobacco and alcohol.

Customs duties can be calculated based on various factors such as the value, dimensions, or weight of goods. Ad valorem duties are levied based on the value of goods, while specific duties are based on quantity or weight. Compound duties combine multiple factors to determine the duty amount.

The Purpose of the Customs Act and Customs Duties

Customs duties serve several key purposes in India's import and export landscape :

Conservation of Foreign Exchange : By imposing duties on imports, the government aims to restrict foreign exchange outflow, ensuring the preservation of valuable currency reserves.

Protection of Trade : Customs duties play a crucial role in safeguarding both imports and exports, aligning with governmental policy objectives, and fostering a balanced trade environment.

Regulation of Exports : Customs duties help regulate the export of goods, ensuring compliance with legal provisions and facilitating smooth trade operations.

Coordination with Foreign Exchange Laws : Customs duties work in tandem with other laws governing foreign exchange, such as the Foreign Trade Act and the Foreign Exchange Regulation Act, to ensure coherence and consistency in regulatory frameworks.

Promotion of Domestic Trade : By imposing tariffs on imported goods, customs duties help protect and stimulate domestic industries, safeguarding them from unfair competition and ensuring their continued viability.

Revenue Protection : Customs duties serve as a significant source of revenue for the government, contributing to the funding of essential resources and public services.

Prevention of Unfair Competition : Customs duties aid in shielding Indian industries from unfair competition, thereby fostering a level playing field for domestic producers.

Combatting Smuggling : One of the primary objectives of customs duties is to prevent smuggling activities and related illicit trade practices, thereby upholding the integrity of the nation's borders and trade channels.

Prevention of Dumping : Customs duties help deter the dumping of goods into the Indian market at unfairly low prices, safeguarding domestic industries and maintaining market equilibrium.

In summary, customs duties in India serve a multifaceted role, encompassing economic, regulatory, and protective functions essential for sustaining a robust and equitable trade ecosystem.

The Difference Between a Tax And a Customs Duty

A duty is a type of tax imposed specifically on goods being imported. Its principal objective is to safeguard local economies by regulating international trade.

On the other hand, a tax encompasses all goods sold within the country, encompassing imports as well. The primary aim of taxes is to generate revenue for the government.

The key disparity lies in their scope: duties are taxes exclusively applicable to imports, whereas taxes apply universally, encompassing imports among other goods. For importers, both represent charges levied on their shipments, typically payable to relevant customs authorities, and both contribute to the overall landed cost. Import compliance and classification solutions prove invaluable in assisting importers in identifying the specific taxes and duties applicable to their products.

Types of Custom Duties

Customs duties represent a ubiquitous aspect of international trade, applied to nearly every imported good. They encompass various types, each serving distinct purposes :

Basic Customs Duty (BCD)

BCD is a fundamental tariff imposed on imported goods, calculated based on the product's value, weight, or other relevant factors. Its primary aim is to protect domestic industries and regulate foreign trade.

Countervailing Duty (CVD)

CVD, also known as anti-subsidy duty, is levied to counteract subsidies provided by foreign governments to their exporters. Its purpose is to ensure fair competition and prevent harm to domestic industries.

Additional Customs Duty or Special CVD

This duty, often referred to as Special CVD, is imposed on specific goods in addition to the Basic Customs Duty. It may serve various objectives, such as revenue generation or industry protection, depending on government policies.

Protective Duty

Protective duties are implemented to shield domestic industries from foreign competition by imposing additional tariffs on competing imported goods. These duties aim to foster the growth and sustainability of local industries.

Anti-dumping Duty

Anti-dumping duties are designed to counteract the practice of dumping, where foreign manufacturers sell goods in the importing country at prices below their domestic market value. The imposition of anti-dumping duties helps prevent unfair competition and protects domestic producers from harm.

Education Cess on Custom Duty

Education cess is an additional levy imposed on the Basic Customs Duty amount to fund educational initiatives and programs. It reflects the government's commitment to investing in education and human capital development.

Each type of customs duty plays a crucial role in regulating trade, protecting domestic industries, and ensuring a level playing field in the global marketplace. Understanding these duties is essential for importers and exporters to navigate the complexities of international trade and comply with relevant regulations.

Customs Duty Calculations in India

Customs fees are determined based on the value of goods or according to specified guidelines, typically following an ad valorem approach. Rule 3(i) of the 2007 Customs Valuation (Determination of Value of Imported Commodities) Rules outlines the methodology for assessing the value of imported goods.

This regulation dictates that the value of imported products should be established primarily using the transaction value, subject to adjustments in accordance with the guidelines outlined in Rule 10.

In cases where quantifiable or objective data regarding valuation factors is lacking, or when valuation conditions are not met, or there are doubts regarding the accuracy of the declared value, Rule 12 of the Valuation Rules 2007 provides for alternative valuation methods. These methods are hierarchically structured as follows :

Comparative Value Method : This method involves comparing the transaction value of the goods with that of similar items (as per Rule 4 & Rule 5).

Deductive Value Method : The sale price of the item in the importing country is used as a basis for valuation (as per Rule 7).

Computed Value Method : This method utilizes costs associated with fabrication, materials, and profit in the country of production (as per Rule 8).

Fallback Method : In cases where the above methods cannot be applied, this method offers greater flexibility and is based on previous approaches (as per Rule 9).

Rates of Customs Duty

The Indian government has increased customs duty on various products, including appliances, footwear, and jewelry, to stabilize the rupee and address the current account deficit. This aims to control imports, raise prices, reduce demand, and support local manufacturers.

Here are the latest rates for Basic Customs Duty (BCD) tariffs :