Introduction to Customs Duty

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INTRODUCTION TO CUSTOMSDUTY


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BRIEF BACKGROUND OFCUSTOMS LAW

Customs duty is on import into India andExport out of India. AS per ancient custom, amerchant entering a kingdom with his goodshad to make a suitable gift to the King. In the

course of time, this custom was formalizedinto Customs Duty. This is collected onimports (and occasionally on exports too).

The word customary is derived from

customs which indicates that it is a very oldtax.

Customs duties are probably the oldest formof taxation in India. They are as old as

international trade itself. Just as domestic


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Meaning of Customs Duty

Customs duty is a duty or tax, which is leviedby Central Govt. on import of goods into, andexport of goods from, India. It is collectedfrom the importer or exporter of goods, but

its incidence is actually borne by theconsumer of the goods and not by theimporter or the exporter who pay it.

These duties are usually levied with ad

valorem rates and their base is determinedby the domestic value the imported goodscalculated at the official exchange rate.Similarly, export duties are imposed on

export values expressed in domestic


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Scope and Coverage ofCustoms Law

There are two Acts, which form part ofCustoms Law in India, namely, the CustomsAct.1962 and Customs Tariff Act, 1975:

1. The Customs Act, 1962

The Customs Act. 1962 is the basic Act forlevy and collection of customs duty in India. Icontain various provisions relating to imports

and exports of goods and merchandize aswell as baggage of persons arriving in India.

The main purpose of Customs Act, 1962 isthe prevention of illegal imports and exports

of goods. The Act extends to the whole of theIndia. It was extended to Sikkim w.e.f. 1st


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Scope and Coverage ofCustoms Law2. The Customs Tariff Act, 1975

The Customs Duty is levied on goodsimported or exported from India at the ratesspecified under the Customs Tariff Act,1975.The Act contains two schedules -Schedule 1 gives classification and rate ofduties for imports, while schedule 2 givesclassification and rates of duties for exports.

In the present Act, the Tariff Schedule wasreplaced in 1986. The new Schedule is basedon Harmonised System of Nomenclature(HSN). the Internationally accepted

Harmonised Commodity Description and


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Scope and Coverage ofCustoms LawSection 12(1) of Customs Act is the chargingsection, which provides that duties ofcustoms shall be levied at such rates as maybe specified under The Customs Tariff Act,

1975, or any other law for the time being inforce, on goods imported into, or exportedfrom, India. The rate of duty is as prescribedin Customs Tariff Act, 1975, read with

relevant exemption notifications. Import dutyis levied on almost all items, while exportduty is levied only on a few limited products,where Indian goods are in commanding

position.


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Scope and Coverage ofCustoms LawImports by Government Section 12(2) ofCustoms Act makes it clear that customsduty is payable by Government also. Thus,there is no general exemption to goods

imported by Government. However, variousexemption notifications have been issuedand Imports by Indian Navy, specificequipment required by Police, Ministry of

Defence, coastal Guard etc. are fully exemptfrom customs duty. However, if there is nosuch exemption notification, duty will bepayable even if goods are imported by

Central / State Government.


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Overview / Objectives ofCustoms Act

The customs duty is levied, primarily, for thefollowing purpose:

1. To raise revenue.

2. To regulate imports of foreign goods intoIndia.

3. To conserve foreign exchange, regulatesupply of goods into domestic market.

4. To provide protection to the domesticindustry from foreign competition byrestricting import of selected goods andservices, import licensing, import quotas,and outright import ban. (Protect from


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Nature of Customs Duty

Entry 83 to List I (Union List) of SeventhSchedule to Constitution reads Duties ofcustoms including export duties. Thus,import and export duty is a Union subject

and power to levy is derived fromConstitution. Section 12 of Customs Act,often called charging section, provides thatduties of customs shall be levied at such

rates as ay be specified under The CustomsTariff Act, 1975, or any other law for the time

being in force, on goods imported into orexported from, India.

Goods become liable to duty if there is


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Taxable Event for ImportDuty

Goods become liable to import duty of exportduty when there is import into, or exportfrom India.

As per section 2(18), export with itsgrammatical variations and cognate/similarexpression, means taking out of India to aplace outside India.

As per section 2(23), import with itsgrammatical variations and cognateexpressions, means bringing into India from aplace outside India.

Section 2(27) of Customs Act defines India


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Taxable Event for ImportDuty

There were conflicting judgments of Highcourts.

In Kiran Spinning Mills case, it has been heldthat import is completed only when goodscross the customs barrier. The taxable eventin the day of crossing of customs barrier andnot on the date when goods landed in Indiaor had entered territorial waters. In case of

goods which are in the warehouse thecustoms barrier would be crossed when theyare sought to be taken out of the customsand brought to the mass of goods in the

country.


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Taxable event in case ofExports

In UOI v. Rajindra Dyeing and Printing Mills(2005) case, it has been held that export iscomplete when goods cross territorial watersof India. If ship sinks within territorial waters,

export is not completed and hence dutydrawback is not payable.

In Sun Exports case, it was held that exportis complete once the goods leave Indian

water and property passes to purchasers.Even if goods return due to Engine trouble,duty drawback is payable.

Note that even if export duty is collectedbefore ship leaves the port, that does not


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Territorial Water of India

Territorial waters mean that portion of sea,which is adjacent/closest to the shores of acountry.

As per section 3 of the Territorial waters,Continental Shelf, Exclusive Economic Zonesand Maritime Zones Act, 1976, territorialwaters of India extend Upto 12 nauticalmiles from the baseline on the coast of India

and include any gulf, harbour, creek or tidalriver. Sovereignty/control of India extends tothe territorial waters and to theseabed/ocean and subsoil underlying and the

air space over the waters.


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Indian Customs Waters

Section 2(28) defines Indian customswaters to mean the waters extending intothe sea up to the limit of contiguous/closestzone of India under section 5 of the Territorial

Waters, Continental Shelf, ExclusiveEconomic Zone and other Maritime ZonesAct, 1976 and includes any bay, gulf,harbour, creek or tidal river.

As per provisions of that Act, contiguouszone of India comes immediately afterterritorial waters. The outer limit ofcontiguous zone is 24 nautical miles from the

nearest point of base line. Thus, area beyond


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Indian Customs Waters

Significance of definition of Indian CustomsWaters is as follows:

(1) Customs Officer has power to arrest aperson in India or within Indian customswaters.

(2) Customs Officer has powers to stop andsearch any vessel in India or within Indian

customs waters.(3) A vessel which is within Indian customs

waters or which has been in IndianCustoms Waters can be confiscated which

is constructed or fitted in any manner for


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Goods under Custom Act

Custom duty is on goods as per section 12of customs act. The duty is payable on goodsbelonging to Government as well as goodsnot belonging to Government.

Section 2(22) gives inclusive definition ofgoods as Goods includes (a) vessels,aircrafts and vehicles (b) stores (c) baggage(d) currency and negotiable instruments and

(e) any other kind of movable property.

Thus, ship or aircraft brought for use in Indiaor for carrying cargo for ports out of India

would be dutiable. Definition of goods hasbeen kept quite wide as Customs Act is used


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Dutiable Goods Section 2(14) define'dutiable goods' as any goods which arechargeable to duty and on which duty hasnot been paid. Thus, goods continue to be

'dutiable' till they are not cleared from theport. However, once goods are assessed at'Nil' rate of duty, they no more remain'dutiable goods'.

Imported Goods - Section 2(25) defineimported goods' as any goods brought inIndia from a place outside India, but does notinclude goods which have been cleared for

home consumption. Thus, once goods are


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Export Goods - As per section 2(19) ofCustoms Act, export goods means anygoods which are to be taken out of India to aplace outside India. Goods brought near

customs area for export purpose will beexport goods'. Note that once goods leaveIndian Territory, Indian laws have no controlover them and hence the term exported

goods' has not been used or defined.


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Classification of Customsand Rate of Customs Duty(A)Basic Custom Duty : Basic Custom Duty

levied u/s 12 of Customs Act is generally10% of non-agricultural goods, w.e.f. 1-3-2007. Total duty payable generally comes

to 26.85%. The rate of customs dutyapplicable will be as provided in CustomsAct, subject to exemption notifications, ifany, applicable. In case of imports from

preferential area, the preferential rate isapplicable, if mentioned in the Tariff. It isneedless to mention that if partial or fullexemption has been granted by a

notification, the effective rate (as pernotification) will a l and not the tariff


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(B) Additional Customs Duty u/s 3(1) (CVD) :

Additional Customs Duty is often called CountervailingDuty (CVD). Additional duty is levied under section3(1) of Customs Tariff Act to counterbalance impact ofexcise duty on indigenous manufactures, to ensure levelpaying field.

This duty is equal to excise duty levied on a likeproduct manufactured of produced in India. If like articleis not produced or manufactured in India, the exciseduty that would be leviable on that article had it beenproduced in India is the base.

General excise duty rate is 10.30% w.e.f. 27-2-2010(10% basic plus 2% education cess and Secondary andHigher (HAS) Education cess of 1%).

CVD is payable on assessable value plus basiccustoms duty. In case of products covered under MRP


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(C) Special CVD : This is payalbe @ 4% onimported goods u/s 3(5) of Customs TariffAct. This is additional duty leviable u/s 3(1)and 3(3) of Customs Tariff Act. This is in lieu

of VAT/Sales Tax to provide level playing fieldto Indian goods. Traders importing goods canget refund. CVD is not payable if goods arecovered under MRP valuation provisions.

(D) Education Cess : Education Cess ofcustoms @ 2% and SAH (Secondary andHigher) Secondary Cess of 1% is payable.


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(E) Total Duty : Total import dutyconsidering all duties plus education cess onnon-agriculture goods is generally 26.85%.

(F) Other Duties : NCCD (National CalamityContingent Duty) has been imposed on a fewarticles. In addition, on certain goods, anti-

dumping duty, safeguard duty, protectiveduty etc. can be imposed. Cess is payable onsome goods imported/exported.


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(G) Safeguard Duty : This can be imposedif large imports are causing serious injury todomestic industry. In additions, productspecific safeguard duty on imports from

China can be imposed.


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(H) Anti Dumping Duty :

Dumping is said to occur when the goodsare exported by a country to another countryat a price lower than its normal value. This isan unfair trade practice which can have adistortive effect on international trade. Antidumping is a measure to rectify the situationarising out of the dumping of goods and its

trade distortive effect. Thus, the purpose ofanti dumping duty is to rectify the tradedistortive effect of dumping and re-establishfair trade. The use of anti dumping measure

as an instrument of fair competition is


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Antidumping duty is leviable u/s 9A ofCustoms Tariff Act when foreign exporterexports his good at low prices compared toprices normally prevalent in the exporting

country.Dumping is unfair trade practice and the

anti-dumping duty is levied to protect Indianmanufacturers from unfair competition.

Margin of dumping is the differencebetween normal value (Normal value is thecomparable price at which the goods undercomplaint are sold, in the ordinary course oftrade, in the domestic market of the


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Benefits accruing to local industry due toavailability of cheap foreign inputs is notconsidered. This is a drawback.

CVD is not payable on antidumping duty.Education cess and SAH education cess isnot payable on anti-dumping duty.

In case of imports from WTO countries,

antidumping duty can be imposed only if itcause material injury to domestic industry inIndia.

Dumping duty is decided by Designated

Authority after enquiry and imposed by


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Calculation of Customs Duty

Calculations of customs duty

General customs duty rate for non-agricultural goods s 10%. Total customs dutypayable w.e.f. 27-2-2010 is 26.85% as exciseduty rate is generally 10%

Assessable value = CIF (FOB value + CostInsurance and Freight) Value of imported

goods converted into Rupees at exchangerate specified in notification issued by CBE&Cplus landing charges 1%.


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Particulars Duty % Amt (Rs.) Total Duty

(A) Assessable Value 10,000

(B) Basic Custom Duty 10% 1,000 1,000

(C) Sub total for CVD 11,000

(D) CVD (12% of C) 12% 1,320 1,320

(E) Sub Total for Cess (B+D) 2,320

(F) Edu Cess (2% of E) 2% 46.4046.40

(G) SAH Edu (1% of E) 1% 23.20

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(H) Sub Total for Special CVD 12,389.60

(I) Spl CVD (4% of H) 4% 495.58495.58


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Note:

(1) Buyer who is Manufacturer is eligible toavail Cenvat Credit of D and I above.

(2) A buyer who is service provider iseligible to avail Cenvat Credit of Dabove)

(3) A trader who sells imported goods inIndia after charging VAT/ Sales Tax canget refund of Special CVD of 4 % Iabove.


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Example

Ms. Sharma imported certain goodsweighting 1000 kgs. With CIF value US $40,000. Exchange rate was 1 US $ = Rs. 45on the date of presentation of bill of entry.

Basic customs duty is chargeable @ 10% andeducational cess as applicable. There is noexcise duty payable on these goods, ifmanufactured in India. As per notification

issued by the Government of India, anti-dumping duty has been imposed on thesegoods. The anti-dumping duty ill be equal todifference between amount calculated @ 60per kg. and landed value of goods. You arere uired to com ute custom dut and anti-


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Particulars Duty % Amt (Rs.) Total Duty

(A) Assessable value 18,18,000

(40000 * 45) + (1% landing charges)

(B) Basic Custom Duty 10% 1,81,800 1,81,800

(C) Sub Total for Edu. Cess 1,81,800

(D) Edu. Cess 2% of C 2% 3,636 3,636

(E) SAH Edu. Cess 1% of C 1% 1,8181,818

(F) Sub Total for Special CVD 20,05,254

(G) Special CVD 4% 80,210.60 80,210.60

(H) Total Duty 2,67,464.60

(I) Total Duty rounded To 2,67,465

Landed Cost = Assessable Value + Customs Duty =

18,18,000 + 2,67,465


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Valuation For CustomsDuty

Value for the Purpose of Customs Act :Customs duty is payable as a percentage ofValue often called Assessable Value orCustoms Value.

TARIFF VALUE Tariff Value can be fixed byCBE & C for any class of imported goods orexported goods. CBE & C should considertrend of value of such or like goods while

fixing tariff value. Once so fixed, duty ispayable as percentage of this value. Fixingtariff value is not permitted under GATTconvention. Tariff Value for Crude Palm Oil,,

RBD Palmolein, Palm Oil, Crude Soyabean Oil


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TRANSACTION VALUE Section 14 (1) ofcustoms act states that value of importedand exported goods will be transactionvalue of such goods i.e.the price actually

paid or payable for the goods when sold forexport to India for delivery at the time andplace of importation or for export from Indiafor delivery at the time and place of

exportation, where buyer and seller of thegoods are not related and price is the soleconsideration for sale, subject to suchother conditions as may be specified in therules made in this behalf.


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Price in case of High Sea Sale HSS meanssale of goods by transfer of documentsbefore clearance of goods from customs.

In case of HSS, price charged by importer toasseessee would from the assessable valueand not the invoice issued to the importer byforeign supplier.

Valuation should be on basis of last saleprice. Even if there are more than once highsea sales, the last sale price should be takenfor purpose of valuation, as that is the priceat which final importation has been caused.

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Introduction to Customs Duty

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