A federal or central government may levy custom duty, which is a tax, on products and services when they travel across international borders. Customs duties, often known as import duties and export duties, can be applied on both imports and exports. In India, customs charges are imposed on all imports (except from a few commodities like food grains, fertilizers, life-saving medications or equipment, etc.) and a select few exported goods as listed in the Second Schedule of the Customs Tariff Act by the Central Government through the Central Board of Excise and Customs.
Customs duties were categorized under a number of headings prior to the implementation of the GST regime, including basic customs duty, additional customs duty, real countervailing duty, protective duty, education cess, and anti-dumping or safeguard duty. As mentioned in the following section, several of these are now part of the IGST regime.
Ever since IGST has replaced the old tax regime, the duty now includes the following heads:
1. Basic Customs Duty
2. Integrated Goods and Services Tax (IGST)
3. GST Compensation Cess
4. Education Cess
5. Countervailing duty of subsidized articles (CVD)
6. Anti-dumping duty
7. Safeguard duty
8. Social welfare surcharge on imported goods
9. National calamity contingent duty
The calculation of customs duties and taxes in India is done either specifically or ad valorem. Put differently, the calculation is based on the worth of the items. This values established in accordance with the guidelines established by the 2007Customs Valuation (Determination of Value of Imported Goods) Rules. When there are questions about the veracity or accuracy of an item's value, it is valued using the following process:
Step 1. Determine the Assessable Value of Goods: Assessable value is calculated by adding the cost of goods, freight charges, and insurance charges. The importers must provide an accurate value of the goods imported to avoid penalties in the future and other legal issues.
Step 2. Identify the Rates Applicable: Find out the rates of customs duty applicable to the goods imported to India vary depending on various factors like the type of goods, nature of classification under HSN (Harmonized System of Nomenclature), and the country of origin.
Step 3. Calculate Basic Custom Duties: Basic customs duty is computed as a percentage of the assessable value of the goods imported. Basic customs duty is levied on all the goods imported to India. You must refer to the customs tariff schedule to determine the rate of basic customs duty.
Step 4. Calculate Additional Customs Duty: In the next step, calculate the additional customs duty, which is also called countervailing duty. It is applied to the imported goods to offset the impact of any subsidies or exemptions that the good might have received in the country of its manufacture.
Step 5. Calculate Education Cess and Other Cesses: Now calculate the EC and SHEC that is calculated on the total customs duty payable. Once you have calculated the customs duty payable, you can calculate the education cess and other cesses. At this stage, you should also calculate any additional duty applicable to the product, like the anti-dumping duty, special additional duty, or the safeguard duty.
Step 6. Consider the exemptions and concessions applicable to the importers: The importers/exporters might be eligible for any concession or exemption on the customs duty payable depending on the nature of the product. Therefore, it is important to consider these exemptions before making the payment of customs duty.
The rate at which customs duty is levied on imported goods is affected by a lot of factors. Given below are the factors affecting the calculation of customs duty -
Value of the Goods: The value of the goods plays the most important role in determining the custom duty chargeable. The tax is generally calculated on the assessable value of the goods. It consists of the cost of goods, freight charges, insurance charges, etc. Therefore, the higher the assessable value, the higher the customs duty.
Country of Origin: The country in which the imported goods are manufactured also affects the customs duty calculation. This happens because India has different trade agreements with different countries. For example, if the goods are imported from a country having a Free Trade Agreement (FTA) with India, the customs duty might be lower than that imposed on other countries.
Nature of Goods: The ways in which goods are classified also affect the calculation of customs duty. The HSN code of the goods determines whether any additional duty, such as anti-dumping duty, is applicable to them.
Other Factors: The other factors that affect the calculation of customs duty include the packaging of goods, mode of transportation, and exemptions or concessions given to the importer.
The Indian government recognizes that the import process flow is more efficient than the export process flow. That does not imply that importing goods from abroad into India is without its challenges. The government claims that ground handling at ports and import customs processing take days when they should just take hours. Additionally, India's transportation system is incredibly underdeveloped, which severely limits trade in general. However, India's foreign trade policy is the primary source of the challenges faced by importers within the country.
The government maintains high custom duties and taxes in India in order to shield domestic industries from a wave of low-cost imports that could force them out of business. But a lot of importers, particularly Micro, Small, and Medium-Sized Enterprises (MSMEs), argue that Indian companies are becoming less competitive due to hefty tariffs.
India has among the highest import duties in the world. Consider its Most Favored Nation (MFN)applicable rate, which WTO member states have agreed to impose on trading partners who are also WTO members (unless a trade agreement is in effect, in which case preferential rates apply). According to the World Trade Organization(WTO), India's MFN applied rate averaged 15% in 2020 and 13.8% in 2019. In comparison, the average MFN application rates in 2020 in the United States, European Union, and China were 3.4 percent, 5.1 percent, and 7.5 percent, respectively. (However, while India's average MFN applied rate is higher than most other nations, its highest MFN rate is not, as seen in the figures below).
India’s Foreign Trade Policy has turned increasingly protectionist in recent years. The emphasis on increasing import duties to protect domestic manufacturers affects importers in three ways:
1. Frequent Duty Hikes
2. Heavy Rate Hikes
3. Aggressive use of Anti-Dumping duty
It can be difficult for an importer, particularly a newbie, to keep track of the numerous duty components that apply to their goods, how each is calculated, and how the overall custom duties are determined. A complicated structure with various components results in increased compliance and administrative expenditures.
India is currently suffering considerable strain in its commercial relations with China and the United States, its two major trading partners. While this may not have the same direct impact on custom duties and taxes in India, it is nonetheless cause for concern and has the potential to become more challenging in the future.
Custom duties in India are categorized into various types such as basic customs duty, additional customs duty, and anti-dumping duty. The assessable value of goods is calculated by adding the cost of goods, freight charges, and insurance charges. The rates of customs duty vary based on factors like the type of goods, HSN classification, and country of origin. Basic customs duty is levied on all imported goods and is calculated as a percentage of the assessable value. The country of origin and nature of goods also impact the customs duty calculation. Importers need to be aware of these factors to understand how customs duties are determined.
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