Custom Duty : Types, Features, Examples & Updates

What is Customs Duty?

Customs duty is a tax levied on goods that are either exported or imported from one nation to another. This tax is determined as a percentage of the total value of the goods, which encompasses not only the price paid for the items but also any additional expenses such as packing, postage, and insurance. Customs duty is administered by specialized authorities established by local governments to oversee and manage the movement of goods across international borders. The primary objective of customs duty is to safeguard local industries, economies, and businesses by regulating the inflow and outflow of goods.

Geeky Takeaways:

• Customs duty denotes a tax imposed on goods exported or imported between nations.
• It serves as a strategic economic policy tool, applies to both imports and exports, and requires proper clearance procedures.
• Understanding customs duties is crucial for businesses engaged in international trade to ensure compliance and accurate cost projections.

Types of Custom Duty

1. Basic Customs Duty (BCD): Basic Customs Duty is imposed on the value of imported goods at rates ranging from 5% to 40% of the assessable value, depending on the type of goods being imported. It serves as a primary source of revenue for the government and regulates the inflow of goods into the country. BCD rates may vary based on trade agreements between countries.

2. Integrated Goods and Services Tax (IGST): IGST is levied on imported goods based on the Harmonized System of Nomenclature (HSN) code, with the value for IGST calculation potentially including amounts for safeguard duty or anti-dumping duty. It ensures uniformity in tax rates and promotes the seamless movement of goods across state borders. IGST is a destination-based tax levied on goods and services.

3. GST Compensation Cess: This cess is imposed to compensate states for revenue loss due to the implementation of GST and is calculated at 15% of the IGST value. It serves as a transitional measure until a specified date, aiding in the smooth transition to the new tax regime. GST Compensation Cess applies to specific luxury and sin goods.

4. Higher Education Cess: Education Cess has been charged at 2% of the aggregate of customs duties. It comes with an additional Higher Education Cess at 1%, which is also applicable. These efforts contribute to funding educational initiatives and enhancing the quality of education in the country. Education and higher education courses are used to support government educational programs.

5. Countervailing Duty on Subsidized Articles (CVD): CVD is imposed to counteract subsidies given by exporting countries and is overseen by the DGAD (Directorate General of Anti-dumping and Allied Duties). It aims to create a level playing field for domestic producers and prevent unfair trade practices. CVD rates are determined based on the subsidy provided to the exporting country’s industry.

6. Anti-Dumping Duty: This duty is levied on imports to discourage dumping practices and can vary from 0% to 550% of the invoice value of the goods. It protects domestic industries from cheap imports and ensures fair competition in the market. Anti-dumping duty rates are determined based on the difference between the export price and the normal value of the goods.

7. Safeguard Duty: Safeguard duty is applied when there is a sudden surge in imports, providing domestic producers with time to become more competitive. It is typically imposed for a specific period and helps safeguard the interests of domestic industries. Safeguard duty rates are determined based on the increase in imports and their impact on domestic producers.

8. Social Welfare Surcharge on Imported Goods: This surcharge is calculated at 10% of the aggregate of customs duties, taxes, and cesses imposed by the government. It aims to generate additional revenue for social welfare programs and initiatives. Social Welfare Surcharge is used to fund various social welfare schemes, including healthcare and poverty alleviation programs.

9. National Calamity Contingent Duty (NCCD): NCCD is imposed on specified goods as per the Seventh Schedule of the Constitution of India, with rates varying based on imported goods. It serves as a measure to generate funds for addressing national calamities and emergencies. NCCD rates are determined based on the nature and severity of the calamity.

Features of Custom Duty

1. Nature of Tax: Customs duty represents a specific tax imposed solely on goods being exported or imported, distinguishing it from taxes applicable to all goods sold domestically. It’s a targeted tax aimed at regulating international trade.

2. Protection of Local Economies: The primary objective of customs duties is to shield local economies, industries, and businesses by managing the flow of goods across borders. This regulation helps prevent unfair competition and ensures the sustainability of domestic enterprises.

3. Revenue Generation: While safeguarding local economies is crucial, custom duties also function as a means of revenue generation for the government, contributing significantly to the state’s income. This revenue supports various public services and infrastructure developments.

4. Regulation of Trade: Custom duties play a pivotal role in organizing and supervising trade activities, fostering fair competition, and ensuring compliance with trade regulations. They help maintain orderliness in the marketplace and prevent trade malpractices.

5. Distinct Rates for Different Products: The diversity of goods being imported or exported results in varying custom duty rates for distinct products and nations of origin subject to distinct tariffs. This differentiation reflects the unique characteristics and economic significance of each product.

6. Strategic Economic Policy Tool: Custom duties are utilized strategically as an economic policy instrument to safeguard domestic production, stimulate demand for local goods, and bolster the nation’s industrial sector. They are leveraged to achieve broader economic objectives.

7. Clearance Requirement: Goods subject to customs duties must undergo proper declaration procedures as per customs regulations. It ensures adherence to legal requirements and facilitates the accurate assessment and payment of applicable duties.

8. Education Cess: Occasionally, education cess may be levied on duty-exempted goods, contributing to educational initiatives and government revenue. This additional levy supports educational development and access to quality education for all.

Advantages of Custom Duty

1. Protecting Local Industries: Custom duties play a vital role in shielding domestic industries from the pressures of international competition, providing them with a conducive environment to flourish and expand. By imposing tariffs on imported goods, governments create a protective barrier that enables local businesses to compete effectively in the market.

2. Revenue Generation: Customs duties stand as a significant source of revenue for governments, bolstering the country’s income and facilitating the funding of distinct essential initiatives and public services. The revenue generated from these duties contributes to national development and ensures the smooth functioning of governmental operations.

3. Ensuring Fair Competition: Custom duties contribute to maintaining fairness in the marketplace by preventing imported goods from enjoying unfair advantages over locally produced items. By imposing tariffs, countries create a level playing field where domestic businesses can compete on equal terms, fostering a healthy and competitive economic environment.

4. Promoting Exports: Strategically applied custom duties can serve as a tool for promoting exports by incentivizing local producers to engage in international trade. By implementing tariffs that align with export objectives, governments encourage the growth of domestic industries and facilitate their participation in global markets.

5. Economic Policy Tool: Custom duties are deployed as a crucial economic policy instrument to safeguard domestic production, regulate trade activities, and fortify the country’s industrial base. Governments utilize tariffs strategically to achieve broader economic goals, such as fostering economic growth, protecting key sectors, and ensuring national prosperity.

Disadvantages of Custom Duty

1. Complexity of Claiming Duty Drawbacks: Navigating the process of claiming duty drawbacks poses challenges for firms due to the specific requirements and extensive documentation involved. The complex nature of the process demands meticulous attention to detail and a comprehensive understanding of customs regulations.

2. Time Constraints: Businesses face strict time limits when claiming duty drawbacks, typically requiring claims to be lodged within a specified period, such as six months from the date of export. These time constraints can exert pressure on businesses, necessitating efficient and timely completion of documentation and submission processes.

3. Scope Limitations: Duty drawbacks are subject to certain limitations, as they only apply to specific types of customs duties, excluding others like GST and IGST Compensation Cess. This restricted scope may diminish the financial benefits available to businesses, limiting the extent of duty drawback claims.

4. Identification Challenges: For duty drawbacks on imported materials used in manufacturing for export, goods must be easily identifiable, posing a challenge for some businesses. Meeting the identification requirements adds complexity to the process, requiring meticulous tracking and documentation of imported materials.

Recent Updates in Customs Duty

1. Unified Customs Tariff Update in UAE: Dubai Customs has revised the unified customs tariff table for the GCC States, effective January 1, 2024. The amendments impact various sectors such as machinery, transport equipment, chemicals, pharmaceuticals, beverages, food, and computers. Importers and exporters must review and implement the new HS codes for compliance.

2. Import Duty Changes in India: The government of India has increased import duties on silver, gold, and coins to 15%, notably ADIC and basic customs duty, effective January 22. India has also extended the lower import duty on edible oil until March 2025 and imposed a 50% export tax on molasses. Discussions are underway regarding import duty cuts on inputs to boost smartphone exports.

3. Harmonized Tariff Schedule (HTS) Maintenance: The HTS website is currently undergoing maintenance to record legal and statistical changes. This platform provides crucial information on duty rates and import restrictions, aiding in the understanding of customs duties and regulations.

Examples of Custom Duty

For instance, customs duty rates in the United States are determined by the commercial value of goods, whereas in Spain, duties are calculated based on the customs value of the goods. Upon the release of goods to the importing country’s local customs authorities, importers are required to pay customs duty promptly. This tax plays a vital role in estimating international shipping costs and should be considered when pricing goods for resale. Understanding these duty calculations is essential for businesses engaged in international trade to ensure accurate cost projections and compliance with customs regulations.

Conclusion

Customs duty is that it serves as a pivotal tool for governments to regulate international trade, generate revenue, protect local economies, and ensure fair competition in the marketplace. Through various types of customs duties, governments balance the objectives of revenue generation and economic protectionism. While offering advantages like protecting local industries and promoting exports, customs duties also come with challenges such as complexity in claiming duty drawbacks and time constraints. Recent updates in customs duties, like the unified tariff table in the UAE and import duty changes in India, highlight the dynamic nature of trade regulations. Understanding customs duties is essential for businesses engaged in international trade to navigate compliance and cost implications effectively.

Custom Duty – FAQs

Who is responsible for paying customs duty?

Customs duty is paid by distributors and importers, who then transfer the cost to consumers.

When must customs duty be paid?

Customs duty is levied by the federal government at the time of importing and exporting goods from India. Exporters and importers are obligated to settle duty payments accordingly.

What is the customs duty threshold in India?

For Indian residents, foreigners residing in India, or Indian-origin tourists arriving from countries other than Bhutan, Nepal, and Myanmar, the Duty-Free Allowance stands at Rs. 50,000/-. It includes two liters of alcoholic wine/liquor and 100 cigarettes, 25 cigars, or 125 grams of tobacco.

Is there a tax associated with customs duty?

Indeed, customs duty represents an indirect tax applied to both imported and exported goods and services. Import duty pertains to imported goods, while export duty pertains to exported goods.