Customs Duties And Taxes In India

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Index 

  1. Introduction 
  2. Understanding Basic Customs Duty In India
  3. Integrated Tax On Imported Goods Under CTA
  4. Goods Service Tax Compensation Tax On Imported Goods
  5. Additional Duties Of Customs And Integrated Goods And Service Tax
  6. Imposition Of Protective Duties Under Sections 6 And 7 Of The Customs Tariff Act
  7. Imposition Of Safeguard Duties Under Section 8-B Of The Customs Tariff Act
  8. Exemptions From Safeguard Duty
  9. Countervailing Duty And Subsidised Goods
  10. Anti-Dumping Duties And Preventing Dumping Practices
  11. Introduction Of Social Welfare Surcharge (SWS)
  12. Exemptions From Customs Duty
  13. Conclusion 

Introduction 

Custom duty is an indirect tax on goods that are imported or exported between countries. The term “custom” comes from an old practice that became law over time. 

The Customs Act and the Customs Tariff Act, along with related rules and regulations, form the comprehensive laws governing custom duties on imports and exports in India. These laws not only regulate trade but also aim to prevent smuggling and protect the domestic industry from harm. 

Understanding Basic Customs Duty In India

Basic Customs Duty (BCD) is a tax imposed under the Customs Act, 1962. The primary source of BCD is Section 12 of the Customs Act, which addresses dutiable goods. Clause 1 of Section 12 states, “Except as otherwise provided in this Act, or any other law for the time being in force, duties of customs shall be levied at such rates as may be specified under the Customs Tariff Act, 1975 (51 of 1975 or any other law for the time being in force, on goods imported into, or exported from, India.”

The Customs Tariff Act (CTA) includes two schedules: Schedule I and Schedule II. Schedule I details the duty rates on imported goods, while Schedule II specifies rates for exported goods. Schedule I is extensive, running into hundreds of pages, whereas Schedule II is much shorter. This is because customs duty is primarily imposed on imports, with exported goods rarely subjected to duty. However, the Central Government can amend Schedule II and increase the list of goods subject to export duty under Section 8 of the CTA.

Under Schedule I, goods are categorised and subjected to varying BCD rates. The duty can be determined on an ad-valorem basis (based on the value of the goods) or on a specific rate basis (based on weight or other criteria). BCD rates are divided into standard rates and preferential rates. Generally, goods are subjected to standard rates, but in specific cases, a reduced preferential rate may apply.

To qualify for preferential rates, the importer must:

  1. Make a specific claim for the preferential rate.
  2. Ensure the goods are manufactured or produced in preferential areas notified by the Central Government, as authorised under Section 4(3) of the CTA. Preferential areas are established through trade agreements between countries.

Section 4(2) of the CTA allows the Central Government to make rules to determine the origin of goods in preferential areas and to notify these rules in the official gazette.

Integrated Tax On Imported Goods Under CTA

With the introduction of GST in 2017, goods imported into India are now subject to Integrated Goods and Services Tax (IGST) in addition to Basic Customs Duty (BCD).

According to the newly amended Section 3(7) of the Customs Tariff Act (CTA), an integrated tax is levied on imported goods. This tax is equivalent (but not exceeding 40%) to the rate of IGST charged on similar goods supplied within the country. It is applied to the value of the imported goods in addition to the Basic Customs Duty (BCD) and any other additional duties.

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Goods Service Tax Compensation Tax On Imported Goods

GST Compensation Tax is imposed on goods and services within India to compensate states for potential revenue losses. The newly amended Section 3(9) of the Customs Tariff Act (CTA) extends this tax to imported goods, applying the same rate as on similar goods in intra-state or inter-state supply within India. This tax is in addition to the Basic Customs Duty (BCD), integrated tax, and any additional duties.

Additional Duties Of Customs And Integrated Goods And Service Tax

With the introduction of Integrated Goods and Service Tax (IGST), most additional customs duties have been incorporated into it, except for certain articles still subject to excise duties on their domestic manufacture or production.

Section 3 of the Customs Tariff Act (CTA) addresses duties levied in addition to Basic Customs Duty, known as Additional Duties of Customs or Countervailing Duties.

Additional Duty under Sub-Section 1: For certain goods produced or manufactured domestically, the government imposes excise duty. To ensure fairness for domestic manufacturers, Section 3(1) mandates an additional duty on imported goods equivalent to the excise duty on similar domestic goods. If the excise duty is a percentage of the value rather than a fixed amount, the additional duty on imports is calculated similarly.

Furthermore, Section 3(1) clarifies that if a domestic equivalent of an imported article is not produced in India, the additional duty will match the excise duty on a similar domestic article.

Since the introduction of GST in 2017, few goods remain subject to excise duty. Therefore, the additional duty under this subsection is rarely imposed, applying only in exceptional cases where imported goods have domestic counterparts subject to excise duty.

Special Additional Duty/Counter-Balance Duty under Sub-Section 3: Many articles produced domestically are not subject to excise duty, so Sub-section 1 of Section 3 does not apply to imported articles of similar nature. However, the raw materials or other inputs used in domestic production might be subject to excise duty. This creates a disadvantage for domestic producers, as they bear a cost that international competitors do not. To address this imbalance and ensure fairness, Section 3(3) allows the Central Government to impose a counterbalance duty on imported goods. This applies even if additional duty under Sub-section 1 has not been levied, ensuring that both domestic and international producers are on an equal footing.

Special Additional Duty/Counter-Balance Duty under Sub-Section 5: In addition to excise duty, domestic articles are subject to taxes such as sales tax, value-added tax (now subsumed by GST), local taxes, or other similar taxes on their sale, purchase, or transportation within the country. Section 3(5) empowers the Central Government to levy a counterbalance duty on imported goods if similar domestic goods are subject to these taxes. This provision is applicable regardless of whether the imported article has been subjected to duties under Section 3(1) or Section 3(3).

 

Imposition Of Protective Duties Under Sections 6 And 7 Of The Customs Tariff Act

Sections 6 and 7 of the Customs Tariff Act empower the Central Government to impose protective duties on certain imported goods to safeguard domestic industries. The procedure for imposing such duties is as follows:

  1. Recommendation by the Tariff Commission: The Tariff Commission of India recommends and specifies the amount or rate of protective duty to the Central Government.
  2. Government Notification: If the government agrees that the duty is necessary for protecting a domestic industry, it imposes the duty through a notification in the official gazette. The duty amount cannot exceed the Commission’s recommendation.
  3. Parliamentary Approval: The government must present the notification as a Bill before Parliament within six months of issuing the notification. If this is not done, or if the Bill is not passed, the duty will become invalid.
  4. .Adjustment of Duties: If the government later believes the duty is either excessive or insufficient to meet its objective, it can adjust the amount. This adjustment must also follow the process of parliamentary approval as outlined above.
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Imposition Of Safeguard Duties Under Section 8-B Of The Customs Tariff Act 

Under Section 8-B of the Customs Tariff Act (CTA), if certain imported goods are flooding the market or causing significant harm to domestic industries, safeguard duties can be imposed. However, before such duties are imposed, an inquiry must confirm the threat or actual damage posed by these goods.

Additionally, according to Section 8-B (2), the Central Government can impose a provisional safeguard duty, lasting up to 200 days, based on a preliminary inquiry. This allows for swift action to protect domestic industries even before a final determination is made.

Exemptions From Safeguard Duty

Certain imported goods are exempt from safeguard duties under specific conditions:

  1. Quantity Threshold for Developing Nations: Imported articles from developing nations are exempt from standard duty if their supply to India does not exceed 3% of the total imports of that article.
  2. Multiple Developing Countries: Goods imported from more than one developing country are exempt if each country’s share is less than 3%, and the total aggregate share is under 9% of the total import.
  3. Exemption for Certain Entities: Imported goods by 100% Export-Oriented undertakings (EOUs) or holdings in Free Trade Zones or Special Economic Zones (SEZs) are exempt. However, the government may issue specific notifications excluding certain goods from this exemption.

Countervailing Duty And Subsidised Goods

To address the impact of subsidies on imported goods, Section 9 of the Customs Tariff Act (CTA) allows the Central Government to impose a countervailing duty. This duty aims to level the playing field for domestic producers against traders benefiting from subsidies. The duty is imposed by official gazette notification and applies to goods not directly imported from their country of origin or in the same condition as when exported.

The Central Government can impose a countervailing duty not exceeding the amount of subsidy granted. This provision also sets a limit of five years for the duration of the duty, which can be revoked earlier if needed.

Before the final determination of the duty amount, the government can impose a provisional countervailing duty, ensuring it does not surpass the subsidy amount.

If the domestic industry suffers significant harm due to a sudden influx of subsidised imports, Sub-section 4 allows for a retrospective imposition of the countervailing duty. However, this must occur within 90 days from the notification’s issuance to maintain fairness in the process.

Anti-Dumping Duties And Preventing Dumping Practices

Section 9A of the Customs Tariff Act (CTA) addresses the issue of dumping, where goods are exported at prices lower than their normal value. To counteract this practice in India, anti-dumping duties are imposed under this section. However, these duties must not exceed the margin of dumping (Normal Value minus Export Value) and are limited to a maximum of 5 years, subject to earlier revocation if necessary.

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The government can levy anti-dumping duties to prevent dumping practices, ensuring the duty amount does not exceed the margin of dumping.

If traders attempt to circumvent anti-dumping duties, Section 9A (1A) allows the government to include such circumventing goods under the scope of Section 9A (1) after conducting an inquiry.

During the determination process of the duty amount, the government can impose a provisional estimate. If the final calculated duty is lower, the excess amount is refunded, ensuring fairness in the duty imposition process.

Section 9A (3) of the Customs Tariff Act grants the government the authority to retrospectively impose anti-dumping duties within 90 days from the notification’s issuance. This provision is activated if, upon investigation, it is confirmed that:

  1. The exporter has persistently engaged in dumping practices, causing harm or posing a potential threat to the domestic industry, or the importer was aware of such practices.
  2. The domestic industry has suffered significant injury due to massive dumping of articles within a short period, rendering prospective anti-dumping duties insufficient to address the harm inflicted.

Introduction Of Social Welfare Surcharge (SWS)

A social welfare surcharge is an additional fee or tax imposed on certain goods or services to fund specific social welfare programs or initiatives. It is typically levied by governments with the aim of generating revenue to support various welfare activities such as healthcare, education, poverty alleviation, environmental conservation, and other social causes. The surcharge amount is usually a percentage of the base price of the goods or services and is collected along with other taxes.

The SWS is applied at a rate of 10% on the total of duties, taxes, or cesses imposed on goods as per Section 12 of the Customs Act, 1962. However, certain duties are exempt from SWS, including safeguard duties under Section 8B of the CTA, countervailing duties on subsidised goods under Section 9 of the CTA, anti-dumping duties under Section 9A of the CTA, and the SWS on imported goods itself.

Exemptions From Customs Duty

The Central Government has the authority to grant exemptions from customs duty for certain goods or entire categories of goods. These exemptions can be broadly categorised into two types:

  1. General Exemption: A general exemption occurs when the Central Government issues a notification in the official Gazette, exempting goods of a specific description from all or part of the customs duty. This exemption can either be unconditional or subject to specific terms and conditions.
  2. Special Exemption: A special exemption is granted on a case-by-case basis, usually for specified goods, due to unique or exceptional circumstances warranting such exemption.

Conclusion 

India started as a closed economy after gaining independence, aiming to protect domestic industries from foreign competition due to historical exploitation. However, as global trends shifted towards liberalisation, privatisation, and globalisation (LPG), India opened up to foreign capital and goods. This change exposed domestic industries to competition but also brought economic growth.

To protect local industries while embracing LPG, India amended the Customs Tariff Act, 1975, introducing measures like anti-dumping duties (Section 9A) to tackle dumped goods flooding the market. These legal provisions ensure fair competition while leaning towards safeguarding Indian producers, aligning with India’s commitment to LPG.

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