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Customs Duties - Introduction

Customs Duty

Customs duty is a kind of indirect tax which is levied on goods of international trade. Duties levied in relation to imported goods are referred to as import duty and duties levied on the export consignments are called export duty.

Background Concept

The ancient "custom" of gifting a part of his merchandise by a merchant to the King while entering a kingdom came to be formalized by the modern States into customs duty. Customs duty is imposed on the goods imported into or exported out of the country. Developing economies including India use customs duties as an important source of revenue and also a method to regulate the flow of goods.

Customs Administration

The Central Board of Excise and Customs (CBEC) is the apex body for customs administration. Central Board of Excise and Customs (CBEC) is a part of the Department of Revenue under the Ministry of Finance, Government of India. CBEC deals with the task of formulation of policy concerning levy and collection of customs duties. The Board discharges the various tasks assigned to it, with the help of its field formations namely the Customs, Customs (Preventive) and Central Excise Zones, Commissionerate of Customs, Customs (Preventive), Central Revenues Control Laboratory and Directorates. There are 11 zones of Customs and Customs (Preventive) spread across the country. These zones are headed by the Chief Commissioners. There are 35 Commissionerates exclusively of Customs and Customs (Preventive), 67 Commissioners of Central Excise and Customs (Appeals) and 4 posts of Commissioner (Adjudication) – one each at Mumbai, Chennai, Delhi and Bangalore.

Calculation of Customs Duty

Calculation of Customs duty depends on the determination of assessable value in case of items for which the duty is levied ad valorem. The assessable value is often the transaction value or the value assessed in accordance with Brussels definition. India is an active member of the World Customs Organisation and has adopted various international customs conventions and procedures, including the Harmonised Classification System and the General Agreement on Tariffs and Trade (GATT) based Valuation System.

Harmonized System Code

Products are given an identification code known as the Harmonized System code for the purpose of assessment of Customs duty. This code has been evolved and assigned by the World Customs Organization based in Brussels. Introduction of HS Code in 1990s has largely replaced the earlier Standard International Trade Classification (SITC), though SITC still remains in use for statistical purposes. In drawing up the national tariff, the revenue departments often specify the rate of Customs duty with reference to the HS Code of the product. In some countries and customs unions, 6-digit HS codes are locally extended to 8 digits or 10 digits for further tariff classification. Thus the European Union uses an 8-digit CN (Combined Nomenclature) and 10-digit TARIC codes.

Customs Tariff of India

In India, the Customs Tariff was incorporated as Schedules to the Indian Tariff Act, 1934. The First Schedule to this Act was the Import Tariff and the Second Schedule was the Export Tariff. The Customs Tariff Act, 1975, with the above Schedules, came into effect on 2nd August, 1976. The Import Schedule was based on the Customs Co-operation Council Nomenclature, which was also known as "Brussels Tariff Nomenclature" (BTN). Further, with effect from 28th February, 1986, the above Tariff was revised based on the Harmonised System of Nomenclature (HSN) adopted by the World Customs Organisation (WCO). The Harmonised System Nomenclature (HSN) which is otherwise known as "Harmonised Commodity Description and Coding System" was evolved by the World Customs Organisation and came into effect in the Harmonised System Convention from 01.01.1988, i.e. almost two years later. During the period and until 31st January, 2003, the Tariff consisted of 6 Digit code.

The Eight Digit Code

The Customs Tariff in India remained a 6 Digit Code aligned with the HSN during the period from 28th February, 1986 to 31st January, 2003. However, the Directorate General of Commercial Intelligence and Statistics (DGCIS) had evolved a 8 Digit Code for compilation of imports/exports data and the Directorate General of Foreign Trade had adopted HSN based 8 Digit Code for the Foreign Trade Policy. Therefore, there had been a demand from the trade and industry for the adoption of a common classification code for all trade related transactions. Accordingly, on the 20th January, 2003 the Government of India promulgated the "Customs Tariff (Amendment) Ordinance 2003" making changes in the Customs Tariff Act with effect from 1st February, 2003. Thus, the 6 digit code was replaced by the 8 digit classification code. The Ordinance empowered the Government to bring changes in the First Schedule by subordinate legislation and also to specify standard units of measurements against each Tariff item. The Finance Act, 2006 brought further changes in the First Schedule. The New Schedule is in force with effect from 1st January, 2007.

Types of Customs Duties

In India, customs duties are levied on the goods at the rates specified in the Schedules to the Customs Tariff Act, 1975. The taxable event is import of goods into India or its export out of India. Export duties as specified in the Second Schedule are levied on a very few items only. But import duties are levied universally, barring a few items such as food grains, fertilizers, life saving drugs and equipments, etc.

Basic Customs Duty

This duty is levied on imported goods in terms of section 12 of the Customs Act, 1962, at the rates prescribed under the First Schedule to the Customs Tariff Act, 1975 in terms of section 2 of the Customs Tariff Act. The rates are either standard rates or in the case of imports from certain specified countries at preferential rates.

Additional Customs Duty (CVD)

This duty, commonly referred to as countervailing duty (CVD), is levied on imported goods in terms of section 3 of the Customs Tariff Act, 1975 and is equal to the Central Excise duty leviable on the like goods if produced or manufactured in India. In cases where like article is not so produced or manufactured in India, this duty will be at such rate which is leviable on the class or description of articles to which the imported article belongs. If there is more than one rate of excise duty, then the rate to be applied will be the highest. This duty is calculated on a value base of aggregate of value of the goods including landing charges and basic customs duty. Other duties such as anti-dumping duty, safeguard duty, additional customs duty of 4% etc. are not taken into account.

In the case of goods covered by provisions of the Standards of Weights and Measures Act, 1976, the value base would be the retail sale price declared on the package of the goods less the rebate as notified under section 4A of the Central Excise Act, 1944 for such goods. From 01.03.2001, packaged consumer goods are being charged to this duty on the basis of their Maximum Retail Price (MRP) in India and are also required to conform to Bureau of Indian Standards (BIS) quality standards and MRP labeling. In the case of alcoholic liquors, the additional duty at present is chargeable at a uniform rate as specified by the Central Government irrespective of varying rates in force in the States.

Special Additional Duty (SAD)

A 4% Special Additional Duty (SAD) under section 3(5) of the Customs Tariff Act, 1975 was first imposed in the Union Budget 2005-2006 to counter balance various internal taxes like Sales Tax and Value Added Tax (VAT) and to provide a level playing field to indigenous goods which have to bear these taxes. This was extended in general to all goods in the Budget 2006-2007. Manufacturers will be able to take credit of this additional duty for payment of excise duty on their finished products.

Preferential Rate of Duty

In the case of imports from certain specified countries at prescribed preferential rates.

National Calamity Contingent Duty (NCCD)

It is imposed at present @ Rs. 50/- per MT, on imported crude oil and @ 1% on polyester filament yarn, two-wheelers, motor cars and multi-utility vehicles.

Anti-dumping duty / Safeguard Duty

Anti-dumping duty or Safeguard duty is imposed on import of specified goods with a view to protecting domestic industry from unfair injury. It would not apply to goods imported by a 100% Export Oriented Units (EOU) and units in Free Trade Zone (FTZ) and Special Economic Zone (SEZ). On export of goods, anti-dumping duty is rebatable only by way of a special brand rate of drawback. Safeguard duties do not require the finding of unfair trade practice such as dumping or subsidy on the part of exporting countries but they must not violate the most favoured nation provision, that is, they should not discriminate between imports from different countries. Provisional safeguard duty shall remain in force for a period not exceeding 200 days. Safeguard action is resorted to only if it has been established that a sudden increase in imports has caused or threatens to cause serious injury to the domestic industry. Safeguard action can restrict import of a product for a temporary period by raising the tariffs.

Education Cess

In the Budget 2004-2005, an education cess on the customs duties had been levied on items imported into India. It is chargeable @ 2%, on the aggregate of duties of customs (except safeguard duty and anti-dumping duty) leviable on such goods. This came into effect on 9th July, 2004. No credit of this cess will be available. In addition to this, in the Budget 2007-2008, the Central Government again imposed a Secondary and Higher Education Cess on goods specified in the First Schedule to the Customs Tariff Act, 1975, being goods imported into India. The rate of this cess is one per cent, calculated on the aggregate of duties of customs. If the goods are fully exempted from duty or are chargeable to nil rate of duty or are cleared without payment of duty under bond, no cess will be leviable.

Sample Duty Calculation

Learn how to calculate customs duty payable on the imported goods?

    Old Method New Method
A. Assessable Value: Rs.1,00,000 Rs.1,00,000
B. BCD @7.5% of A Rs. 7,500 Rs. 7,500
C. Total of A+B Rs.1,07,500 Rs.1,07,500
D. CVD @ 16% of C Rs. 17,200 Rs. 17,200
E. E/Cess @2% of D Rs. 344 Rs. 0
F. HSE/Cess @1% of D Rs. 172 Rs. 0
G. Total of B+D+E+F Rs. 25,216 Rs. 24,700
H. E/Cess @2% of G Rs. 504 Rs. 494
I. HSE/CESS @1% of G Rs. 252 Rs. 247
J. Total of G+H+I Rs. 25,972 Rs. 25,441
K. SAD @4% of A+J Rs. 5,039 Rs. 5,018
L. Total Duty (J+K) Rs. 31,011 Rs. 30,459
M. Effective Rate of Duty 31.011% 30.459%