Customs law in India is the legal mechanism that governs the import and export of goods across the country’s international borders. It plays a pivotal role in regulating trade, collecting revenue, and protecting the domestic economy. While today’s customs regime is structured and codified through legal statutes and administrative procedures, its origins are ancient. The concept of levying duties on the movement of goods has evolved over centuries, shaped by trade practices, economic policies, and international commitments. This article introduces the origins, constitutional authority, scope, and basic components of customs law, laying the groundwork for understanding various duties imposed on goods at the border.
Historical Background of Customs Law
The roots of customs duty can be traced back to ancient India. During early times, merchants crossing into different kingdoms were expected to offer gifts or tributes to the ruling authority. These offerings were not merely symbolic; they served as a means for rulers to earn revenue from trade. With time, this informal practice turned into a more organized method of taxation known as customs duty. Historical records indicate that such levies existed even during the Vedic period, highlighting the long-standing significance of taxing goods in transit.
The term customs itself is derived from customary practices, reflecting its origins in traditional trade. As trade expanded and governance systems matured, it became necessary to institutionalize and regulate the process through legal enactments. In post-independence India, the enactment of the Customs Act, 1962 marked a major milestone in formalizing the structure and enforcement of customs laws. This law continues to serve as the backbone of India’s customs framework.
Constitutional Framework and Legislative Competence
The authority to levy customs duties in India originates from the Constitution. Entry 83 of the Union List in the Seventh Schedule empowers the central government to impose duties on goods imported into or exported from India. This means that customs is a subject under the exclusive jurisdiction of the Union, and only the central legislature can enact laws relating to customs duties.
The two key legislations governing customs in India are the Customs Act, 1962 and the Customs Tariff Act, 1975. The Customs Act lays down the procedures, enforcement mechanisms, powers of customs officers, offences, and penalties. The Customs Tariff Act, on the other hand, provides the statutory rates of duties applicable on goods under different tariff entries. These laws are supported by various rules, notifications, and circulars issued by the central government and the customs authorities to implement specific provisions.
Territorial Extent and Extra-Territorial Application
Section 1(2) of the Customs Act, 1962 specifies that the Act extends to the whole of India. This includes all territories within the borders of the Republic of India, encompassing land, sea, and airspace. Importantly, an amendment introduced in 2018 further extended the applicability of the Act to certain offences committed outside India. However, this extension applies strictly for the purpose of dealing with contraventions or offences and does not expand the general jurisdiction of customs law to overseas transactions.
The idea behind such a provision is to ensure that enforcement actions can be taken against individuals or entities who attempt to violate customs laws from outside the country, thereby upholding the integrity of the Indian customs system.
Role and Functions of the Customs Department
The customs department is an essential part of the country’s trade and revenue administration. It operates under the Ministry of Finance through the Central Board of Indirect Taxes and Customs. The department performs several critical functions including revenue collection, regulation of cross-border trade, prevention of smuggling, enforcement of prohibitions and restrictions, and facilitation of legitimate trade.
The revenue collection function involves the assessment and collection of customs duties on imports and certain exports. In terms of regulation, the department enforces compliance with laws related to trade policy, import-export restrictions, and licensing requirements. The department also works to prevent the illegal import and export of prohibited or restricted goods such as narcotics, weapons, counterfeit products, and endangered species. Furthermore, customs facilitates trade by implementing faster clearance procedures, promoting digital documentation, and working with international bodies to harmonize procedures.
Customs Waters and Territorial Jurisdiction
Customs officers have jurisdiction not only over land entry and exit points but also over maritime boundaries. Under the Customs Act, two categories of waters are defined for enforcement purposes: territorial waters and customs waters.
Territorial waters extend up to 12 nautical miles from the baseline of the Indian coast and are considered part of the sovereign territory of India. Customs officers have full enforcement powers in this area. Beyond this, up to 24 nautical miles from the baseline, lie the customs waters. While not part of the sovereign territory, this area is recognized for the specific purpose of customs enforcement. Officers are empowered to board vessels, inspect cargo, and take preventive measures to check smuggling or illegal imports even before goods reach Indian shores.
The inclusion of customs waters within the operational area of customs authorities enhances their capability to control and regulate maritime imports effectively.
Taxable Event under Customs Law
The taxable event under customs law is the occurrence that gives rise to the liability to pay customs duty. For imported goods, the taxable event is the time of importation into India. For exported goods, it is the time of exportation out of India. These moments are critical in determining the applicable rate of duty, value of the goods, and procedural requirements.
It is essential to note that the actual time of clearance of goods from the port is not the taxable event. Instead, the liability arises at the time when goods cross the territorial boundary of India. This distinction is important because rates and exemptions applicable on that date will determine the amount of duty payable.
Goods under the Customs Act
The term goods has been defined comprehensively under the Customs Act. It includes every kind of movable property. This broad definition ensures that a wide variety of tangible items are brought within the scope of customs law, ranging from raw materials and machinery to consumer goods, vehicles, and capital equipment.
According to Section 12 of the Customs Act, customs duty is levied on goods regardless of whether they are owned by individuals, companies, or even the government. Thus, government-owned imports are also not exempt from duty unless a specific exemption is granted through a notification. This universality underscores the principle that all goods entering or leaving the country should be subject to uniform legal treatment.
Applicability of Customs Duties on Imports and Exports
Although customs duties are typically associated with imports, there are instances where duties are also levied on exports. However, the primary focus remains on imports, as these represent a potential threat to domestic industries and a major source of revenue. Export duties are selectively imposed, mostly on raw materials or natural resources that the government wants to conserve or manage.
Different types of duties are imposed on imports, such as basic customs duty, integrated goods and services tax, social welfare surcharge, and other additional levies. Each of these serves a distinct purpose and is governed by separate provisions within the customs and tariff laws. On the export side, duties are imposed selectively on items listed in the Second Schedule to the Customs Tariff Act. The objective is usually to regulate the outflow of sensitive commodities or ensure domestic availability of key resources.
Need for Classification of Goods
Classification of goods is a fundamental requirement for determining the rate of customs duty. Each product imported or exported must be classified under a specific tariff heading provided in the Customs Tariff Act. This classification enables the customs authorities to identify the applicable duty rate, applicable exemptions, and compliance requirements.
Accurate classification also ensures uniformity in the treatment of goods and facilitates trade data analysis and policy formulation. Misclassification, whether intentional or due to error, can lead to disputes, penalties, and delays in clearance.
Introduction to Customs Tariff and Harmonized System
To streamline the classification process and align with international standards, India follows the Harmonized System of Nomenclature developed by the World Customs Organization. This system assigns a six-digit code to goods, and India expands it further to create eight-digit tariff headings. The Customs Tariff Act contains two Schedules:
The First Schedule covers the import tariff and contains detailed classifications along with applicable rates of duty for each category of goods.
The Second Schedule covers the export tariff and lists goods subject to export duty. The number of items in this schedule is relatively small, and many are exempted by notifications from time to time.
General Rules for Interpretation
The Customs Tariff Act contains general interpretative rules to aid in the classification of goods. These rules lay down principles for deciding under which tariff heading a particular item should be classified. The rules guide classification in cases where goods are made up of different components, have multiple uses, or are packaged with accessories.
Correct application of these rules is crucial because incorrect classification can lead to underpayment or overpayment of duty, legal disputes, and penalties. Importers and exporters are therefore advised to carefully study these rules and apply them correctly when declaring their goods for customs purposes.
Types of Customs Duties Levied on Imports and Exports in India
Customs duties in India are imposed primarily on the movement of goods across international borders. These duties serve multiple objectives, such as generating revenue, regulating international trade, safeguarding domestic industries, and fulfilling international commitments. While customs law lays the foundation for taxation, the types of customs duties specify the form and nature of levies applied on different categories of goods.We examine the various customs duties applicable in India, including their objectives, methods of calculation, and legal provisions.
Basic Customs Duty (BCD)
Basic Customs Duty is the most common and foundational form of customs duty imposed on imported goods. It is levied under Section 12 of the Customs Act, 1962 and governed by the First Schedule to the Customs Tariff Act, 1975. The rate of basic customs duty varies depending on the classification of the goods under the Harmonized System of Nomenclature.
The primary objective of BCD is to provide a level playing field to domestic manufacturers by neutralizing the cost advantage that imported goods may have. The rates of BCD are revised periodically through the annual Union Budget, and changes are implemented via Finance Acts or notifications. BCD is calculated on the assessable value of the imported goods, which includes cost, insurance, and freight.
Additional Customs Duty (Countervailing Duty)
Additional Customs Duty, also known as Countervailing Duty, was earlier levied under Section 3(1) of the Customs Tariff Act to counterbalance the excise duty that domestic manufacturers were required to pay. This ensured that imported goods did not enjoy an undue advantage due to the absence of local manufacturing levies.
However, with the introduction of the Goods and Services Tax, central excise duty on most products has been subsumed, and therefore, additional customs duty is now applicable only on a limited number of goods such as petroleum products and tobacco. The rate of this duty is generally equal to the central excise duty applicable on similar goods produced within India.
Integrated Goods and Services Tax (IGST) on Imports
Under the GST regime, imports are treated as inter-State supplies and are subject to Integrated Goods and Services Tax. IGST on imports is levied under Section 3(7) of the Customs Tariff Act, 1975 in conjunction with the IGST Act, 2017. It is charged in addition to the basic customs duty and is calculated on the aggregate of the assessable value and the applicable BCD.
The IGST paid at the time of import is available as input tax credit to the importer, subject to eligibility. This enables seamless credit flow and ensures that the tax burden does not cascade across the supply chain. The rate of IGST on imports is generally equal to the rate applicable on domestic supplies of similar goods.
Social Welfare Surcharge (SWS)
Social Welfare Surcharge was introduced in the Union Budget of 2018. It is levied under Section 110 of the Finance Act, 2018 on the aggregate of customs duties (excluding IGST and GST compensation cess) charged on imported goods. The purpose of SWS is to fund social welfare schemes initiated by the central government.
The standard rate of social welfare surcharge is 10 percent, although certain goods may attract a lower or nil rate as notified by the government. The surcharge increases the landed cost of goods and must be considered by importers while determining the final price of imported products.
Protective Duties
Protective duties are imposed under Section 6 of the Customs Tariff Act to protect the interests of domestic industries against injury caused by excessive imports. These duties are recommended by the Tariff Commission after conducting an inquiry and analyzing the impact of imports on local manufacturers.
Protective duties are not permanent and are levied for a specific period until the concerned domestic industry becomes competitive enough to withstand import competition. The central government has the discretion to impose, modify, or remove these duties based on the recommendations of the Tariff Commission.
Safeguard Duty
Safeguard duties are levied under Sections 8B and 8C of the Customs Tariff Act to protect the domestic industry from a sudden surge in imports that cause or threaten to cause serious injury. Unlike anti-dumping duty, which targets unfair pricing, safeguard duty focuses on quantity-based injury regardless of pricing behavior.
The imposition of safeguard duty is contingent on an investigation by the Directorate General of Trade Remedies. If the findings confirm injury to the domestic industry, a safeguard duty is imposed for a limited time and is gradually reduced to provide relief and allow time for adjustment. This duty is generally WTO-compliant and subject to international trade agreements.
Anti-Dumping Duty
Anti-dumping duty is levied to counteract the dumping of goods into the Indian market at prices lower than their normal value in the exporting country. This practice, known as dumping, can injure domestic industries by distorting market conditions. To counter this, anti-dumping duty is imposed under Sections 9A and 9B of the Customs Tariff Act.
The Directorate General of Trade Remedies conducts detailed investigations to assess whether dumping is taking place, the extent of dumping margin, and whether it is causing material injury. Based on the report, the central government may impose anti-dumping duty equal to or less than the dumping margin.
Anti-dumping duties are country-specific and product-specific. They are valid for a maximum period of five years but can be extended through a sunset review if dumping continues.
Countervailing Duty on Subsidized Imports
Countervailing duty on subsidized imports is imposed under Section 9 of the Customs Tariff Act. It aims to counterbalance any subsidy offered by the exporting country to its domestic producers, which can distort the competitive balance in the importing country. This duty is applied when such subsidization causes injury to Indian industries.
Similar to anti-dumping duty, the imposition of countervailing duty requires an investigation and recommendation from the Directorate General of Trade Remedies. The duty is generally equivalent to the amount of subsidy provided to exporters in the foreign country and is levied for a fixed period.
Export Duty
Although the primary emphasis of customs duties lies on imports, certain goods are also subject to export duties. Export duties are levied under the Second Schedule of the Customs Tariff Act, primarily to regulate the outflow of sensitive goods, raw materials, and essential commodities. The objective is to ensure domestic availability or to earn more revenue when the international prices are exceptionally high.
Export duty is calculated on the Free on Board (FOB) value of the goods. Items such as iron ore, raw hides, skin, and certain agricultural produce are commonly subjected to export duty. Export duty rates are periodically reviewed depending on trade conditions and domestic requirements.
Cess on Imports
In some cases, the government may impose a cess on imported goods for specific objectives. These cesses are levied through separate enactments and are used to fund specific sectors or welfare schemes. For instance, the Health Cess is levied on certain medical devices to promote indigenous manufacturing under the Make in India initiative.
Such cesses are calculated as a percentage of the value of goods or customs duties and are not eligible for credit or set-off. Therefore, they directly add to the landed cost of imported goods.
Valuation for the Purpose of Levying Duties
Customs duties are computed based on the value of imported goods. The assessable value is determined under Section 14 of the Customs Act and Customs Valuation Rules. It is generally the transaction value of the goods, that is, the price actually paid or payable by the importer, subject to certain additions.
These additions include freight, insurance, handling charges, commissions, and any royalty or license fees paid as a condition of sale. If the declared value is found to be unreliable or incorrect, customs officers may reject it and determine the value using other methods such as computed value, deductive value, or fallback method. Accurate valuation is critical because it forms the base for calculating customs duties, and any undervaluation or overvaluation may lead to penalties, confiscation, or legal proceedings.
Exemptions and Concessions
The government may grant exemptions from customs duties through notifications under Section 25 of the Customs Act. These exemptions may be unconditional or subject to specific conditions, such as end-use, certificate requirements, or licensing. Exemptions may be granted in the interest of trade facilitation, economic development, or to meet international obligations.
Goods imported under various trade agreements or Free Trade Agreements may enjoy concessional duty rates. These concessions are offered reciprocally and promote international cooperation. However, importers must fulfill rules of origin criteria and furnish appropriate documentation to avail these benefits.
Customs Duty Drawback
To encourage exports and ensure that domestic taxes and duties do not get embedded in exported products, the government provides a customs duty drawback facility. Under this scheme, exporters are refunded the customs duties paid on imported inputs used in the manufacture of export goods.
Drawbacks can be claimed under the All Industry Rates notified by the government or through a brand rate mechanism if the prescribed rates do not cover specific products. The scheme promotes competitiveness in the global market and ensures that exports are zero-rated effectively.
Other Charges Collected at the Time of Import
Apart from customs duties, various other levies may be collected at the time of import clearance. These include port handling charges, demurrage fees, warehousing charges, and late filing penalties. While not technically customs duties, they affect the landed cost of goods and are governed by separate regulations under customs and port authorities.
Clearance procedures also involve the payment of processing fees for electronic documentation, testing charges, and inspection costs in certain cases. These charges must be budgeted by importers and exporters while planning cross-border transactions.
Import and Export Procedures
All goods entering or leaving the country must pass through prescribed customs procedures. These procedures aim to ensure that goods comply with legal and regulatory requirements, the correct amount of duty is paid, and prohibited or restricted items are appropriately monitored.
For imports, the customs process begins with the filing of a Bill of Entry by the importer or their customs broker. This document provides details about the nature, value, and quantity of goods. It is submitted electronically through the Indian Customs Electronic Gateway.
For exports, the procedure involves filing a Shipping Bill, which contains information on the goods being shipped, their value, destination, and applicable export benefits. Export goods also undergo customs verification before being allowed for shipment.
Filing of Bill of Entry
A Bill of Entry is a legal declaration filed under Section 46 of the Customs Act when goods are imported. It must be filed before the end of the next day after the arrival of the goods at a customs station. The Bill of Entry can be for home consumption, warehousing, or ex-bond clearance.
The Bill of Entry contains details of the importer, description of goods, quantity, Harmonized System classification, invoice value, freight, insurance, country of origin, and other particulars necessary for assessment. It must be accompanied by commercial invoices, packing lists, licenses if required, and certificates of origin in applicable cases.
Once the Bill of Entry is assessed and duty is paid, the goods are cleared for home use or directed to a bonded warehouse.
Filing of Shipping Bill
For exporting goods, the exporter or their authorized representative must file a Shipping Bill under Section 50 of the Customs Act. This is the key document for obtaining export clearance. It must be filed electronically on the customs portal before the goods are presented for inspection at the port or airport.
Details such as exporter’s name, buyer’s information, invoice value, Harmonized System classification, port of destination, export incentives claimed, and export promotion scheme details are included in the Shipping Bill. In the case of goods exported under a Letter of Credit, supporting bank documents are also submitted.
Only after the Shipping Bill is assessed and the Let Export Order is issued by the customs officer, can the goods be loaded for export.
Risk Management System (RMS)
To streamline the process of assessment and reduce manual intervention, the customs department has adopted the Risk Management System. RMS assesses the level of risk associated with an import or export consignment and decides whether it should be cleared directly or examined further.
Consignments classified as low-risk based on parameters like past compliance history, type of goods, and declared value are cleared with minimal scrutiny. High-risk consignments undergo detailed physical examination or documentation checks. RMS helps balance trade facilitation with effective control.
Customs Valuation and Assessment
Customs duty is calculated based on the valuation of goods as per Section 14 of the Customs Act. This value includes the transaction price, freight, insurance, and all charges incurred until the goods reach the port in India. If the declared transaction value is found to be inaccurate or suspicious, customs authorities may apply alternate valuation methods.
Assessment of duty is done after examining classification, applicability of exemptions, preferential rates under trade agreements, and correctness of documentation. Self-assessment is permitted under customs law, where the importer or exporter assesses the duty payable, which is subject to verification by customs officers.
Examination of Goods
Based on the level of risk and the nature of the transaction, customs may decide to physically examine the imported or exported goods. This is done to confirm the declared description, classification, quantity, and value. Any discrepancy may result in reassessment, penalty, or seizure.
Examination is conducted in the presence of the importer or exporter’s representative. For sensitive goods, testing may be done by government laboratories. Samples are drawn in triplicate, sealed, and analyzed. In some cases, on-site inspection is replaced by scanning through container scanners or x-ray machines.
Customs Warehousing
Imported goods that are not immediately required or where duty payment is deferred can be stored in a customs bonded warehouse. Warehousing is allowed under Sections 57 to 73 of the Customs Act. Goods can remain in a warehouse without payment of duty for up to one year, extendable in certain circumstances.
A Bond is executed with customs to ensure compliance, and goods can only be removed from the warehouse upon payment of duties. This facilitates deferred duty payment and allows businesses to manage inventory more efficiently. Warehouses must be licensed and are subject to regular inspections.
Provisional Assessment
If the importer or customs officer is unable to determine the final duty due to lack of complete information, a provisional assessment may be conducted under Section 18. The importer must execute a bond with surety to pay any differential duty that may arise after final assessment.
Provisional assessment is finalized within a specified period once all requisite documents, test reports, or clarifications are received. Interest may be levied on the differential duty payable, and any excess duty paid is refunded.
Refunds and Re-Exports
Importers and exporters may claim a refund of customs duty in cases such as excess payment, goods not conforming to order, or goods re-exported due to damage or rejection. Section 27 of the Customs Act governs the process of claiming refunds.
The refund application must be made within one year from the date of payment. Supporting documents like assessment orders, proof of payment, and return of goods are required. In the case of re-exports, duty drawback or refund of duties is allowed, subject to conditions such as proof of export and certificate of inspection.
Customs Compliance Verification and Audits
To ensure proper compliance with customs laws, the department conducts post-clearance audits. These audits verify the correctness of valuation, classification, declaration, and duty payments. Audits are conducted under the Customs Audit Regulations, 2018.
Audits may be transaction-based or period-based, and focus on import-export records, shipping documents, bank records, inventory details, and contracts. Businesses must maintain all relevant records for five years. Any discrepancies can result in demand notices, penalties, or cancellation of benefits.
The aim of customs audits is not only to detect violations but also to educate businesses, identify systemic issues, and improve overall compliance standards.
Enforcement Powers and Search & Seizure
Customs officers are empowered to prevent smuggling, misdeclaration, undervaluation, and evasion of duty. They can inspect, search, and seize goods, documents, or vehicles suspected of being used in customs violations. These powers are granted under Sections 100 to 110 of the Customs Act.
Officers can search premises without a warrant if they have reasonable belief that goods liable for confiscation are present. Goods found to be in contravention of the law are seized and kept in safe custody. A seizure memo is prepared, and adjudication proceedings follow.
Confiscated goods may be disposed of after adjudication. Officers can also arrest individuals under Section 104 for offences involving fraud, misdeclaration, or smuggling.
Offences and Penalties
Customs law provides for penalties and prosecution for various offences, such as misdeclaration, undervaluation, non-payment of duty, or import/export of prohibited goods. Penalties may be monetary or may involve confiscation of goods and conveyances.
Under Section 112, penalties can go up to the value of goods in case of intentional violation. Section 114 prescribes penalties for export-related offences. Section 135 provides for imprisonment in serious cases, especially those involving substantial revenue loss or repeat offences.
Compounding of offences is available in certain cases, allowing offenders to avoid prosecution by paying a compounding fee.
Advance Ruling Mechanism
To provide clarity and certainty to importers and exporters, the Customs Act provides for an advance ruling mechanism. This allows a person to seek a binding decision from the Authority for Advance Rulings on matters like classification, valuation, applicability of exemptions, and eligibility for benefits under trade agreements.
This mechanism is particularly useful for companies entering into new transactions or importing complex machinery or materials. The ruling is binding on the applicant and the customs department for the declared facts and is valid for a specific period.
EDI and Automation in Customs
To facilitate trade and improve transparency, customs processes in India have been automated through the Electronic Data Interchange system. The Indian Customs Electronic Gateway enables online filing of Bills of Entry and Shipping Bills, payment of duties, tracking of consignments, and communication with stakeholders.
Automation has reduced paperwork, processing time, and the scope of manual errors. It also enables data analytics, risk profiling, and better monitoring of trade flows. Initiatives like Faceless Assessment, Paperless Clearance, and Contactless Customs have further improved ease of doing business.
Role of Customs Brokers
Customs brokers, earlier known as customs house agents, play a crucial role in facilitating import and export transactions. They are licensed professionals authorized to act on behalf of importers and exporters for filing documents, obtaining clearances, and coordinating with customs officials.
They are regulated under the Customs Brokers Licensing Regulations and are required to follow ethical practices, maintain records, and undergo regular training. Their expertise in classification, valuation, duty computation, and documentation makes them valuable partners in international trade.
Appeals and Legal Remedies
If an importer or exporter is aggrieved by a customs decision such as denial of exemption, demand of duty, or confiscation of goods, they may appeal to the Commissioner (Appeals) under Section 128. Further appeals can be made to the Customs, Excise and Service Tax Appellate Tribunal.
Legal remedies also include filing writ petitions in the High Court for violation of constitutional rights or challenging ultra vires actions. The judicial framework ensures checks and balances and protects the rights of trade participants.
Conclusion
Understanding customs law and the various types of customs duties is essential for every stakeholder involved in international trade. The framework laid down by the Customs Act, 1962 serves as the backbone of India’s border control and revenue collection system, regulating the movement of goods while ensuring compliance with both national laws and international trade obligations.
We explored the foundational elements of customs law, including its legislative background, scope, and the institutional framework of customs administration in India. We examined how customs law facilitates trade regulation, protects domestic industries, and contributes significantly to national revenue.
A detailed view of the types of customs duties applicable on imported and exported goods. From basic customs duty to anti-dumping, safeguard, and countervailing duties, each levy serves a specific policy objective. The classification and valuation mechanisms also help determine the appropriate duty rate, making it vital for importers and exporters to understand these aspects thoroughly to ensure compliance and avoid penalties.
We focused on procedural aspects, compliance mechanisms, and enforcement under customs law. We looked into the process of filing import and export documents, risk assessment systems, customs audits, warehousing, refunds, and legal remedies. Additionally, we delved into the enforcement powers of customs officers and penalties for non-compliance, which play a key role in deterring smuggling and safeguarding the economic interests of the country.
Altogether, the customs framework in India reflects a careful balance between facilitating legitimate trade and enforcing regulatory compliance. As India continues to modernize its customs systems through digitalization, automation, and faceless assessment initiatives, the need for awareness and understanding of customs regulations among businesses, professionals, and trade participants becomes even more crucial. Staying informed and compliant not only minimizes legal risks but also ensures smoother trade operations in an increasingly globalized economy.