Customs duty is levied on the import and export of goods in India. Historically, merchants entering a kingdom with goods were required to make a gift to the king. Over time, this custom evolved into the formal imposition of customs duty. This tax, one of the oldest known taxes, is primarily collected on imports and occasionally on exports. The term ‘customary’ derives from ‘customs’, indicating the antiquity of this form of taxation. Taxation on goods dates back to ancient times, including the Vedic period.
The World Trade Organization (WTO) was established on January 1, 1995, in Geneva to replace the General Agreement on Tariffs and Trade (GATT). It provides a permanent forum for trade negotiations and forms the legal and institutional foundation for the multilateral trading system. The fundamental principle of the WTO is to ensure equal treatment to products and services from all member countries, though certain concessions and exceptions exist. The main WTO guidelines include trade without discrimination, predictable and growing market access, promotion of fair competition, and encouragement of development and economic reforms.
The WTO encourages free trade by reducing tariffs, quotas, import restrictions, and quantity restrictions. Member countries are expected to ‘bind’ their commitments, ensuring stability, predictability, and fostering investment.
Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an agreement under the WTO that governs intellectual property standards among member countries. Important aspects include the introduction of product patents in drugs, food products, and chemicals, replacing process patents. India implemented product patents starting January 1, 2005. The patent and copyright term is set to 20 years. Although the patenting of agricultural hybrid seeds is allowed under TRIPS, India has not implemented this provision. The government retains the right to issue compulsory licenses to ensure public access and prevent excessive pricing.
The World Customs Organization (WCO), formerly known as the Customs Coordination Council, is an international body that promotes coordination among customs administrations globally. Headquartered in Brussels, it includes 183 customs administrations and is led by a Secretary General appointed for a five-year term. The WCO was established on January 26, 1952.
India’s Central Board of Indirect Taxes and Customs (CBIC) released the Customs Manual, 2023, which provides an overview of customs laws and procedures, mainly based on CBIC circulars. This manual serves as a key reference for customs officers and stakeholders.
Scope and Coverage of Customs Law
The Customs Act, 1962, extends to the entire territory of India. As amended in 2018, it also applies to offences committed outside India by any person, but this extraterritorial jurisdiction is limited to offences and contraventions under the Act.
The authority to levy customs duties is derived from the Constitution of India. Import and export duties fall under the Union List in the Seventh Schedule, confirming that customs duties are a federal subject.
Section 12(1) of the Customs Act is the primary charging section. It stipulates that customs duties shall be levied at rates specified in the Customs Tariff Act, 19,7,5, or any other applicable law on goods imported into or exported from India. Import duty applies to nearly all goods, whereas export duty is imposed only on select products that the government aims to discourage from export.
Both Section 12 of the Customs Act and Section 3 of the Customs Tariff Act serve as charging provisions for customs duties.
Changes in Customs Law Made Vide Finance Act, 2023
The Finance Act, 2023, effective from April 1, 2023, introduced several important amendments to the Customs Act.
One significant change relates to conditional customs exemption notifications. Previously, these exemptions were valid only for two years unless renewed. The amendment clarifies that exemptions granted under multilateral or bilateral trade agreements, international obligations, privileges of constitutional authorities, foreign trade policy schemes, central government schemes with validity beyond two years, re-imports, temporary imports, goods imported as gifts or personal baggage, and certain other categories will not be subject to this two-year limit.
The Act also introduces provisions for in-bond manufacture in warehouses. Under Section 65(1), with effect from a date to be notified, the Principal Commissioner or Commissioner can grant permission for manufacture in bonded warehouses, subject to Section 65A and prescribed conditions.
Section 65A, introduced by the Finance Act, 2023, allows warehousing of imported inputs or goods removed from other warehouses on which Integrated Goods and Services Tax (IGST) and Compensation Cess have been paid, for use in manufacture under Section 65. This provision aims to facilitate the import and warehousing of goods with payment of IGST and Compensation Cess but exemption from customs duty and social welfare surcharge. The effective date of this provision will be notified.
Another notable amendment concerns settlement proceedings under customs law. The settlement commission is now required to pass orders within nine months of the application, extendable by three months. If the order is not passed within this timeframe, proceedings will lapse, and the original adjudicating authority will resume the case as if no settlement application was made. This change, effective from April 1, 2023, may adversely affect applicants who have made full disclosure before the commission.
Foreign Trade Policy 2023 Effective from April 1, 2023
The Government of India introduced the Foreign Trade Policy (FTP) 2023 and its associated Handbook of Procedures (HBP) 2023, effective from April 1, 2023. The new policy outlines various export-import procedures, schemes, and incentives, aiming to boost India’s foreign trade. Salient features of the policy will be discussed in later sections.
Functions of the Customs Department
The Indian Customs Department performs a range of important functions as per the Customs Act, 19,6,2, and the Customs Tariff Act, 1975.
The primary role of customs officers is to collect customs duties on imports and exports. They enforce legal provisions governing the movement of cargo, baggage, and postal articles, as well as regulate the arrival and departure of vessels and aircraft.
Customs authorities also act as an agency to enforce various restrictions and prohibitions on imports and exports under the Customs Act and allied laws.
Preventing smuggling is a key function. Customs officers undertake measures to interdict narcotics and other illicit goods trafficking.
Additionally, customs officials manage international passenger clearance at ports of entry.
Taxable Event for Import Duty and Export Duty
Customs duty liability arises when goods are imported into or exported from India.
The Customs Act defines ‘export’ as the taking out of goods from India to a place outside India. Conversely, ‘import’ means bringing goods into India from outside.
‘India’ is defined as including territorial waters. Initially, it was thought that import was complete once goods entered territorial waters, and export was complete once goods crossed territorial waters. However, Supreme Court rulings clarified that the taxable event occurs only when goods cross the customs barrier.
For goods under customs warehousing, import takes place when goods are cleared from the warehouse, i.e., when they cross the customs barrier. This principle was upheld in landmark cases.
The relevant date for customs duty calculation is either the date of filing the bill of entry or the date the vessel enters the port, whichever is later. This ensures that the duty payable is calculated according to the applicable tariff on that date.
In exports, the taxable event is complete when goods cross the territorial waters of India. If goods are lost within territorial waters, the export is not considered complete, affecting duty drawback claims. Several judicial decisions affirm these principles.
It is important to note that the customs authority may collect export duty in advance, but this does not mean the taxable event has occurred.
Territorial Waters and Customs Waters
Territorial waters refer to the sea area adjacent to the shores of a country. India’s territorial waters initially extended up to six nautical miles from the baseline, and later extended to twelve nautical miles.
The Territorial Waters, Continental Shelf, Exclusive Economic Zone (EEZ), and Other Maritime Zones Act, 1976, governs the extent of India’s maritime zones. Territorial waters include bays, gulfs, harbors, creeks, and tidal rivers.
India’s sovereignty extends to territorial waters, seabed, subsoil, and airspace above.
The Customs Act and related laws have been extended to designated areas within the EEZ and continental shelf, covering mineral oil extraction and related goods supply activities.
Indian Customs Waters are defined as extending up to 200 nautical miles, corresponding to the EEZ, including bays, gulfs, harbors, creeks, and tidal rivers.
Definition and Scope of Goods under Customs Law
Customs duty is imposed on ‘goods’ as defined under the Customs Act. The duty applies to goods owned by both the government and private parties. Section 2(22) of the Customs Act provides a broad definition of ‘goods’, which includes vessels, aircraft, vehicles, stores, baggage, currency, negotiable instruments, and any other movable property.
There is an important distinction between vessels and aircraft treated as goods and those used as conveyance carrying imported or export goods. When vessels or aircraft are imported for use or for carrying cargo to or from ports in India, customs duty applies. However, the duty is not leviable when the vessel or aircraft is merely transporting goods and not being imported for use or sale.
The definition of goods is kept broad because customs law serves not only to collect duty but also to regulate and restrict the import and export of various goods. The two main criteria for goods under customs law are that they must be movable and marketable. Goods transported by sea, air, or land fulfill the mobility criterion, and most imports being commercially transacted satisfy the marketability test.
Dutiable Goods and Import Definitions
Dutiable goods, as defined in the Customs Act, are goods liable to duty on which the duty has not yet been paid. Goods continue to be dutiable until they are cleared from customs. If the rate of duty on a particular good is zero, then such goods cease to be dutiable even if they have not physically left the customs area.
Imported goods mean goods brought into India from outside the country, but exclude goods already cleared for home consumption. Thus, once goods are cleared by customs authorities, they lose the status of imported goods, although in common parlance, they may still be referred to as such.
Smuggled goods are not considered imported goods and do not benefit from any exemptions granted to imported goods. Customs authorities treat smuggled goods more severely under the law.
Export goods refer to goods intended to be taken out of India to a destination outside the country. Goods near the customs area prepared for export are treated as export goods. However, once goods cross Indian territory, the laws of India no longer apply to them, and thus the term ‘exported goods’ is not specifically defined.
Basic Customs Duty
Basic customs duty is the principal customs duty imposed on imported goods and is charged as a percentage of the assessable value of the goods. It is levied under Section 12 of the Customs Act.
The rate of basic customs duty varies depending on the type of goods. As a general benchmark, non-agricultural goods attract a basic customs duty of around 10 percent.
The assessable value of imported goods is generally the Cost, Insurance, and Freight (CIF) value converted into Indian Rupees at the exchange rate specified by the customs authorities.
Calculation of Customs Duty Payable
The total customs duty payable on imported goods includes the basic customs duty, social welfare surcharge, and Integrated Goods and Services Tax (IGST).
For example, if the assessable value of imported goods is Rs. 10,000 and the basic customs duty is 10 percent, the duty on the goods would be Rs. 1,000. A social welfare surcharge, usually calculated as a percentage of the basic customs duty, is added. Then IGST is calculated on the subtotal, which includes the assessable value plus basic customs duty and social welfare surcharge.
This combined tax structure results in an effective customs duty rate often totaling around 31 percent.
IGST on Imported Goods
Before July 1, 2017, imported goods were subject to Countervailing Duty (CVD), which was equivalent to excise duty, and Special Additional Duty (SAD), which was imposed instead of sales tax or value-added tax (VAT).
Since July 1, 2017, CVD and SAD have been subsumed under Integrated Goods and Services Tax (IGST), which is imposed at rates applicable to similar goods supplied domestically under the IGST Act, 2017.
Under Section 3(7) of the Customs Tariff Act, IGST on imports is calculated on the value of the imported article, including basic customs duty and any other customs duties except IGST itself.
The value for IGST calculation is determined under Section 3(8) of the Customs Tariff Act and generally comprises the customs assessable value plus basic customs duty and social welfare surcharge.
IGST on imports is collected through customs but is not itself a customs duty under the Customs Act. It is imposed under the IGST Act, and the customs machinery is used merely to collect the tax at the time of import clearance.
IGST on Project Imports and Baggage
Project imports, which are goods imported for specific projects, are classified under a special tariff heading (9801). IGST is generally charged at 18 percent on such imports.
In contrast, IGST is not payable on baggage brought by passengers, which is exempt from this tax.
Exemptions from IGST and Compensation Cess
Imports made under certain government schemes and authorizations are exempt from payment of IGST and Compensation Cess.
For example, imports made under the Advance Authorization Scheme for physical exports are exempted from basic customs duty as well as IGST and Compensation Cess.
Similarly, capital goods imported under the Export Promotion Capital Goods (EPCG) authorization are exempted from IGST and Compensation Cess to encourage exports.
Imports made by Export Oriented Units (EOUs), Software Technology Parks (STPs), Electronic Hardware Technology Parks (EHTPs), and Biotechnology Parks (BTPs) without payment of customs duty are also exempt from IGST and Compensation Cess.
Additional Customs Duties
In addition to basic customs duty and IGST, several other customs duties may be levied on imported goods depending on the nature of the product and government policies.
Additional customs duties are typically imposed to protect domestic industries or to compensate for other taxes like excise duty previously applicable on similar goods produced domestically.
The Finance Act and related notifications specify the rates and conditions for levying these duties. Some duties are temporary and linked to specific government objectives or trade agreements.
Social Welfare Surcharge
The Social Welfare Surcharge is levied on the amount of basic customs duty. It was introduced to fund various social welfare schemes of the government.
Currently, the surcharge is charged at 10 percent of the basic customs duty. This surcharge is added to the customs duty bill and increases the overall customs cost.
It applies to all imported goods except for a few exempted categories. The surcharge is calculated after the basic customs duty but before IGST.
Safeguard Duty
Safeguard duty is a protective measure imposed temporarily on imported goods to prevent injury to the domestic industry caused by a sudden surge in imports.
This duty is imposed following investigations by the Directorate General of Trade Remedies (DGTR) andrecommendations by the Ministry of Commerce.
Safeguard duty is in addition to basic customs duty and other applicable taxes. It is levied to give domestic producers time to adjust to import competition.
The duty is usually imposed for a fixed period and may be reviewed periodically based on market conditions.
Anti-Dumping Duty
Anti-dumping duty is imposed to protect domestic industries from imports sold below their normal value, causing material injury to the domestic industry.
This duty is imposed after a thorough investigation that proves dumping and resulting harm. The Directorate General of Trade Remedies conducts these investigations.
The amount of anti-dumping duty is equal to the margin of dumping found during the investigation, thus leveling the playing field for domestic producers.
Anti-dumping duties apply only to the specific product and exporter under investigation and are imposed for a limited duration.
Countervailing Duty
Countervailing duty (CVD) is imposed to offset the benefit of subsidies given by foreign governments to their exporters.
This duty protects domestic industries from unfair competition by ensuring that imported goods do not have an unfair price advantage due to subsidies.
CVD was earlier levied separately but has largely been subsumed under IGST after GST implementation. However, some exceptions remain where CVD is still applied.
The duty is imposed only after due process and investigation, following the rules prescribed by the World Trade Organization.
Valuation of Goods for Customs Duty
The assessable value of imported goods is determined primarily on the transaction value, which is the price paid or payable for the goods when sold for export to India.
If the transaction value cannot be determined or is unacceptable, alternative methods such as the value of identical goods, similar goods, deductive value, computed value, or fallback methods may be used.
The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, prescribe these methods, consistent with the WTO Agreement on Customs Valuation.
Correct valuation is essential because customs duties and taxes are levied on this value. Any undervaluation or misdeclaration can lead to penalties and prosecution.
Import and Export Procedures
Imports require filing a bill of entry with customs authorities, declaring the nature, quantity, value, and other details of goods.
The customs department inspects the documentation and the goods physically or through risk-based assessment before clearance.
Payment of customs duty, IGST, and other applicable charges is necessary for the release of goods for home consumption.
For exports, shipping bills are filed declaring the details of goods being taken out of India.
Exports are subject to examination and verification before goods leave the customs area. Exporters may claim duty drawback or other incentives depending on the policy.
Warehousing and Temporary Imports
Goods may be stored in customs bonded warehouses to delay payment of duty until they are cleared for consumption.
Temporary imports, such as goods imported for exhibitions or repairs, may be admitted under specific conditions without payment of duty, provided they are re-exported within the stipulated time.
Manufacture in bonded warehouses is allowed under certain schemes to promote export-oriented manufacturing.
The Customs Act and related notifications govern warehousing facilities, their management, and conditions for use.
Role of Customs in Trade Facilitation
Customs plays a vital role in facilitating international trade by ensuring the smooth clearance of goods while maintaining regulatory control.
Risk management and automation have enhanced the efficiency of customs procedures.
Advance rulings, electronic filing, and online payment facilities contribute to transparency and faster clearance.
Customs collaborates with other government agencies to ensure compliance with laws, standards, and security measures.
Customs Offences and Penalties
Customs law contains various provisions for penalizing violations such as smuggling, misdeclaration, undervaluation, and non-payment of duties.
Penalties can include fines, confiscation of goods, imprisonment, or a combination depending on the severity of the offence.
The Customs Act empowers officers to investigate, seize goods, arrest offenders, and initiate prosecution.
Certain offences are cognizable and non-bailable, reflecting the serious nature of customs violations.
Settlement of disputes is possible under specified provisions if full disclosure and compliance conditions are met.
Customs Appeals and Adjudication
Disputes arising from customs assessments, penalties, or confiscations can be appealed to designated appellate authorities.
The first level of appeal is before the Commissioner (Appeals), followed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).
Further appeals lie before the High Courts and the Supreme Court on points of law.
Adjudication processes ensure that decisions are fair, reasoned, and consistent with the law.
Timely resolution of appeals is encouraged to reduce litigation and uncertainty.
International Customs Cooperation
India cooperates internationally through organizations like the World Customs Organization (WCO) to harmonize customs procedures.
Such cooperation helps in combating smuggling, narcotics trafficking, and terrorism financing.
Mutual assistance agreements enable the sharing of intelligence and coordinated enforcement actions.
India’s customs laws incorporate international standards on valuation, classification, and trade facilitation.
Continuous engagement with the global customs community promotes trade and security.
Recent Developments and Future Trends in Customs Law
Recent amendments to customs law aim to simplify procedures, enhance compliance, and promote ease of doing business.
Digitalization initiatives include electronic filing, risk-based inspections, and blockchain pilots for secure trade.
Government policies encourage Make in India and export promotion through various duty exemption schemes.
There is increasing focus on sustainability and compliance with environmental regulations affecting imports.
Customs law is expected to evolve further in response to global trade dynamics, technology, and policy priorities.
Conclusion
Customs law forms a critical pillar in regulating cross-border trade, balancing revenue collection, trade facilitation, and national security.
Understanding the various types of customs duties and procedural requirements is essential for importers, exporters, and practitioners.
Recent reforms reflect a progressive approach towards transparency, efficiency, and alignment with international norms.
Adherence to customs regulations ensures smooth business operations and supports India’s economic growth objectives.