Customs Duty: India
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What is Customs Duty?
Definition: Customs Duty is a tax imposed on imports and exports of goods.
Description: The rates of customs duties are either specific or on ad valorem basis, that is, it is based on the value of goods. Rule 3(i) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 states that the value of imported goods shall be the transaction value adjusted in accordance with the provisions of its Rule 10.
If objective and quantifiable data do not exist with regard to the valuation factors, if the valuation conditions are not fulfilled, or if Customs authorities have doubts concerning the truth or accuracy of the declared value in terms of Rule 12 of the said Valuation Rules, 2007, the valuation has to be carried out by other methods in the following hierarchical order: (i) Comparative Value Method - Comparison with transaction value of identical goods (Rule 4); (ii) (Comparative Value Method - Comparison with transaction value of similar goods (Rule 5); (iii) Deductive Value Method - Based on sale price in importing country (Rule 7); (iv) Computed Value Method - Based on cost of materials, fabrication and profit in country of production (Rule 8); and (v) Fallback Method - Based on earlier methods with greater flexibility (Rule 9).
Import duties are generally of the following types: 1. Basic duty; 2. Additional Customs duty; 3. True Countervailing duty or additional duty of customs; 4. Anti dumping duty/Safeguard duty.
While revenue is a paramount consideration, Customs duties may also be levied to protect the domestic industry from foreign competition.
India’s Import Tariffs
As in 2018, Oct
Includes information on average tariff rates and types that U.S. firms should be aware of when exporting to the market.
The World Trade Organization estimates that India’s applied most favored nation import tariffs are 13.4 percent (simple average) and 7 percent (trade-weighted average). The World Bank reports that India’s applied average tariffs were 6.3 percent.
An integrated goods and services value added tax (IGST) is applied on all imports into India. IGST is levied on the value of the imported goods plus any customs duty chargeable on the goods.
The GOI Foreign Trade (Development & Regulation) Act and India’s Export Import policy govern the import tariffs. The office of the Director General of Foreign Trade mandates registration for all importers before engaging in import and export activities.
The structure of India’s customs tariff and fees system is complex and characterized by a lack of transparency in determining net effective rates of customs tariffs, excise duties, and other duties and charges. The tariff structure of general application is composed of a basic customs duty, an "additional duty," a "special additional duty," and an education assessment ("cess"). The additional duty, which is applied to all imports except for wine, spirits, and other alcoholic beverages, is applied on top of the basic customs duty, and is intended to correspond to the excise duties imposed on similar domestic products. The special additional duty is a four percent ad valorem duty that applies to all imports, including alcoholic beverages, except those imports exempted from the duty pursuant to an official customs notification. The special additional duty is calculated on top of the basic customs duty and the additional duty. In addition, there is a three percent education cess (surcharge) applied to most imports, except those exempted from the cess pursuant to an official customs notification. India charges the cess on the total of the basic customs duty and additional duty (not on the customs value of the imported product). A landing fee of one percent is included in the valuation of all imported products unless exempted through separate notification. While India publishes applied tariff and other customs duty rates applicable to imports, there is no single official publication publicly available that includes all relevant information on tariffs, fees, and tax rates on imports. However, as part of its computerization and electronic services drive, in 2009 India initiated a web-based Indian Customs Electronic Commerce/Electronic Data Interchange Gateway, known as ICEGATE (http://icegate.gov.in). It provides options for calculating duty rates, electronic filing of entry documents (import goods declarations) and shipping bills (export goods declarations), electronic payment, and online verification of import and export licenses. In addition to being announced with the annual budget, India’s customs rates are modified on an ad hoc and arbitrary basis through notifications in the Gazette of India and contain numerous exemptions that vary according to the product, user, or specific export promotion program, rendering India’s customs system complex to administer and open to administrative discretion.
India’s tariff regime is also characterized by pronounced disparities between bound rates (i.e., the rates that under WTO rules generally cannot be exceeded) and the most favored nation (MFN) applied rates charged at the border. According to the latest WTO data, India’s average bound tariff rate is 48.5 percent, while its simple MFN average applied tariff is 13.4 percent. Given this large disparity between bound and applied rates, U.S. exporters face tremendous uncertainty because India has considerable flexibility to change tariff rates at any time. India’s average WTO-bound tariff for agricultural products is 113.5 percent. Applied rates are also relatively high and on a trade-weighted basis, the average agricultural tariff is 47.2 percent. In addition, while India has bound all agricultural tariff lines in the WTO, over 25 percent of India’s non-agricultural tariffs remain unbound (i.e., there is no WTO ceiling on the rate).
Despite its goal of moving toward the Association of Southeast Asian Nations (ASEAN) tariff rates (approximately 5 percent on average), India has not systematically reduced the basic customs duty in the past six years. India also maintains very high tariff peaks on several goods, including flowers (60 percent), natural rubber (70 percent), automobiles and motorcycles (60 percent to 75 percent), raisins and coffee (100 percent), alcoholic beverages (150 percent), and textiles (some ad valorem equivalent rates exceed 300 percent). Rather than liberalizing its customs duties, India instead operates several complicated duty drawbacks, duty exemption, and duty remission schemes for imports. Eligibility to participate in these schemes is usually subject to several conditions. India maintains very high basic customs duties, in some cases exceeding 20 percent, on drug formulations, including life-saving drugs and finished medicines listed on the World Health Organization’s list of essential medicines.
India also imposes a 10 percent basic customs duty, for medical equipment and devices, such as pacemakers, coronary stents and stent grafts, and surgical instruments; and for parts of medical devices, such as medical grade polyvinyl chloride sheeting for the manufacture of sterile Continuous Ambulatory Peritoneal Dialysis bags for home dialysis Essentially impeding some of India’s climate goals, customs tariffs on some products were increased in 2016 to include Industrial solar water heaters - from 7.5 percent to 10 percent and solar tempered glass/solar tempered (anti-reflective coated) glass for use in manufacture of solar cells/modules/panels - from zero to five percent. Additionally, India raised tariffs on specified telecommunication equipment - from zero to 7.5/10 percent, and on E-readers - from zero to 7.5 percent.
Many of India’s bound tariff rates on agricultural products are among the highest in the world, ranging from 100 percent to 300 percent. While many Indian applied tariff rates are lower (averaging 32.7 percent on agricultural goods), they still present a significant barrier to trade in agricultural goods and processed foods (e.g., potatoes, apples, grapes, canned peaches, chocolate, cookies, and frozen French fries and other prepared foods used in quick-service restaurants). The large gap between bound and applied tariff rates in the agriculture sector allows India to use tariff policy to make frequent adjustments to the level of protection provided to domestic producers, creating uncertainty for importers and exporters. For example, in January 2013, India issued a customs notification announcing an immediate doubling of the tariff on imports of crude edible oils.
In July 2017, India implemented the Good and Services Tax (GST) system to unify Indian states into a single market and improve the ease of doing business. The GST is designed to simplify the movement of goods within India, but it also applies to imports. Before the GST implementation, imports could be subject to an "additional duty," a "special additional duty," an education cess (tax), state level value added or sales taxes, the Central Sales Tax, and/or various other local taxes and charges. The new GST system subsumed a number of these charges, including the "additional duty" and the "special additional duty," that were previously levied on imports into the single GST. The tariff (or "basic customs duty") continues to be assessed on imports separately and has not been incorporated into the GST.
The GST is a two-part system: A State and Central GST that is levied simultaneously on every transaction of goods and services in India, and an "Integrated GST" that covers goods and services sold between all Indian states. Both the Integrated GST and the GST are applied to imported goods. Under the new system, goods and services are taxed under four basic rates – five percent, 12 percent, 18 percent and 28 percent. Some items, like vegetables and milk, have been exempted from the GST. The price of most goods and services increased in the immediate aftermath of the tax, and as expected, economic growth slowed for several months following GST implementation.
As there are thousands of goods that are imported into India, it is not possible to prescribe rates of duty for each type of merchandise. The basic applicable legislation is the Indian Customs Act of 1962, and the Customs Tariff Act of 1975. The Customs Act of 1962 was created to control imports and prevent Illegal imports and exports of goods. The Customs Tariff Act specifies the tariffs rates and provides for the imposition of anti-dumping and countervailing duties.
The Indian customs classification on tariff items follows the Harmonized Commodity Description and Coding System (Harmonized System or HS).
Customs uses six-digit HS codes, the Directorate-General of Commercial Intelligence and Statistics (DGCI&S) uses eight-digit codes for statistical purposes, and the Directorate General of Foreign Trade (DGFT) has broadly extended the eight-digit DGCI&S codes up to 10 digits.
It is also worth noting that the excise authorities use HS codes for classifying goods to levy excise duty (manufacturing taxes) on goods produced in India.
How Customs Duty is calculated
All goods imported into India are subject to duty. There are several factors that go into calculating customs duty, including:
Basic Customs Duty (BCD)
This duty is levied either as 1) a specific rate based on the unit of the item (weight, number, etc.), or more commonly, 2) ad-valorem, based on the assessable value of the item. In some cases, a combination of the two is used.
Social Welfare Surcharge
Social Welfare Surcharge introduced in the Budget 2018 is levied in place of education Cess. The rate is 10% of the value of goods.
Integrated Goods and Services Tax (IGST)
GST is applicable on all imports into India in the form of levy of IGST. IGST is levied on the value of imported goods + any customs duty chargeable on the goods.
Value of imported Goods + Basic Customs Duty + Social Welfare Surcharge = Value on which IGST is calculated
Value x IGST Rate = IGST Payable
GST Compensation Cess
GST Compensation Cess is a levy which will be applicable in addition to the regular GST taxes. GST Cess is levied on supply of certain notified goods – mostly belonging to the luxury and demerit category.
This is levied on specified goods imported from specified countries, including the United States, to protect indigenous industry from injury.
The Indian government may by notification impose a safeguard duty on articles after concluding that increased imported quantities and under current conditions will cause or threaten to cause serious injury to domestic industry.
Customs Handling Fee
The Indian government assesses a 1% customs handling fee on all imports in addition to the applied customs duty.
Therefore, for most goods, total duty payable = BCD + Customs Handling Fee.
Tariff rates, excise duties, regulatory duties, and countervailing duties are revised in each annual budget in February, and are published in various sources, including BIGs Easy Reference Customs Tariff edition. A copy of this book is kept at the USA Trade Information Center in Washington DC and more specific information from this guide is available to U.S. Companies by calling 800-USA-TRADE.
While the Indian government publishes customs tariffs rates there is no single official publication that has all information on tariffs and tax rates on imports.
Duty exemption plan
The Duty Exemption Plan enables duty free import of inputs required for export production. An advance license is issued under the duty exemption plan. The Duty Remission Plan enables post export replenishment remission of duty on inputs used in the export product. Duty Remission plan consists of (a) Duty-Free Replenishment Certificate Scheme (DFRC) and (b) Duty Entitlement Passbook Scheme (DEPB). DFRC permits duty free import charges on inputs used in the export product. The government has wide discretionary power to declare full or partial duty exemptions “in the public interest” and to specify conditions such as end-use provisions. Almost half of India’s total inputs enter under concessional tariffs, though the use of exemptions is falling in tandem with the tariff-reduction program.
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Demands for protectionism on rise/ 2018
Ministries, Industry Bodies Want Higher Import Duty After Govt Move
Two rounds of customs duty hikes by the government to check import of “non-essential items” has increased the clamour for further protection, with some ministries too joining industry players to seek higher tariffs. From lithium-ion batteries to toasters and vinyl flooring, the list is long and growing by the day, finance ministry sources told TOI.
With widening of the current account deficit, the government responded by first raising import duty on 19 items — including diamonds, footwear, refrigerators and air-conditioners — in a bid to reduce imports. This was followed by a second round of hike, which largely focused on telecom equipment as the government sought to get overseas players to make in India.
In recent months, the Narendra Modi government has shown increased signs of protectionism that has split the Centre, with the PMO and the finance ministry supporting the move, while many others have been critical as manufacturing has not shifted. During the government’s tenure, the talk of low customs duty, meant to benefit consumers and weed out uncompetitive producers, has virtually died down as the average import duty on non-agricultural goods has increased (see graphic).
But this has not deterred some of the departments to write to the finance ministry, seeking fresh duty increase, arguing that it will boost domestic production, seen to be crucial to create jobs. In most cases, the higher tariffs are meant to target Chinese imports, which are seen to be flooding Indian markets in several segments such as electronics. Sources said ministries and departments have demanded a duty hike for at least two dozen items, although the revenue department is yet to take a call on it.
Officers suggested that the increase was meant to be a signal and not part of an overall strategy to discourage imports.
Government officers themselves concede that the duty action is unlikely to provide any significant relief. The first round of action, which is estimated to cover around $12 billion — or 2.5% — of India’s annual imports, is expected to result in trade shifting to countries such as Vietnam and South Korea, which have free-trade agreements.
Besides, it provides undue protection to Indian companies and discourages competition, said officials. In addition, they said, the widening of the trade deficit was driven by an increase in crude prices and steps, such as the two applied by the government, are unlikely to help.