India has robust trade ties with the rest of the world. This means India does not only export its goods to the rest of the world but also imports many essential items from abroad. This transaction of goods is charged with what is called a customs duty. In simple words, customs duty is a tax imposed on imports —sometimes exports — of goods.
There are various reasons why a sovereign nation imposes customs duty over the import and export of goods. While the primary motive is always revenue generation, other motives include protection of domestic industries from the entry of foreign goods, reducing imports, protecting forex reserves in times of crises and reducing deficits.
How are customs calculated?
Customs duty in India comes under the Customs Act 1962 and Customs Tariff Act of 1975. Since the implementation of the Goods and Services Tax (GST), Integrated Goods and value-added Service tax (IGST) is also levied on imported goods. Under IGST, all products and services are taxed under four basic slabs of five percent, 12 percent, 18 percent, and 28 percent.
The rates of customs duties are either specific or on ad valorem basis. Ad valorem means that the rate is determined by the value of the product. The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 serves as the guide to determine the valuation of a good.
The 2007 law also helps customs officials determine the valuation of goods for which quantifiable data does not exist, or if they are not able to verify the true value of the declared good. There are a number of methods to determine the value of a good.
Officials may determine the valuation through the comparative value method, wherein they compare the good with the transaction value of identical goods, or by the deductive value method, wherein officials determine the valuation based on sale price in the importing country. Another method is the computed value method which accounts for the cost of materials, fabrication and profit in the country of production. There is also a method known as the fallback method which incorporates all the previously mentioned techniques but allows greater flexibility to officials.
Types of customs duty
Basic customs duty: Basic customs duty is a type of duty or tax imposed under the Customs Act, 1962. The basic customs duty varies for different items and the Central government has the power to reduce or exempt any goods from the charges.
Countervailing duty (CVD): Countervailing Duty is also known as the additional duty. It is equal to the excise duty imposed on a product manufactured or produced in India. It is implemented under Section 3 (1) of the Indian Custom Tariff Act.
Special CVD: In order to equalise imports with local taxes which are imposed from time to time, a special countervailing duty is imposed on imported goods.
Anti-Dumping duty: Often companies in developed countries sell their goods at a lower rate in developing countries. This may be done to dispose off their excess goods or to damage the domestic economy. Hence, every government imposes an anti-dumping duty to ensure that the product being sold is not below the normal rate.
Protective duties: Whenever the Central government feels the need to protect the interests of Indian industry, it imposes protective customs duty at recommended rates as per Section 6 of Customs Tariff Act, 1975.