Basic Primer on Customs Law and Types of Customs Duties

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Table of Contents

Introduction To Customs Law
Types of customs duties on imported and export goods

Check out R.K. Jain’s Customs Law Manual | 2023-24 | Set of 2 Volumes which provides the complete text of the Customs and Allied Laws with a Commentary on Customs Law & Procedure. It exhaustively covers the amended & up to date Acts, Rules, Regulations, Notifications, Forms, Allied Laws, SEZ, Circulars, Public Notices, and Clarifications. This book is amended as on 1st February 2023.

1. Introduction To Customs Law

1.1 Background of customs law

Customs duty is on import into India and export out of India. As per ancient custom, a merchant entering a kingdom with his goods had to make a suitable gift to the King. In the course of time, this ‘custom’ was formalised into ‘Customs Duty’. This is collected on imports (and 1 occasionally on exports too). The word ‘Customary’ is derived from ‘customs’, which indicates that it is a very old tax. Taxes on goods were levied on various goods right from the Veda period.

World Trade Organisation – WTO (World Trade Organisation) was formed on 1st January, 1995, based at Geneva, to replace GATT. WTO provides permanent forum for trade negotiations. WTO is the legal and institutional foundation of multilateral trading system. Its basic principle is equal treatment to products and services of all other WTO countries. (Of course, there are concessions and let-outs).The four main WTO guidelines are –

(i) Trade without discrimination

 (ii) Predictable and growing market access

 (iii) Promoting fair competition and

 (iv) Encouraging development and economic reforms.

WTO promotes free trade by lowering tariffs, quotas, import restrictions, quantity restrictions etc. Countries should ‘bind’ their commitments so that stability and predictability and investment is encouraged.

TRIPS – TRIPS means Trade Related Intellectual Property Rights. It was agreed as follows

(i) Product Patents should be introduced in drugs, food products and chemicals in place of process patents as at present (India introduced product patents w.e.f. 1-1-2005).

(ii) Patent and copyright period should be 20 years (Implemented by India)

(iii) Agricultural hybrid seeds should be allowed to be patented (Not implemented). – – However, Government can undertake compulsory licensing for non-commercial public use and to prevent inadequate supply or exorbitant pricing.

WCO – World Customs Organisation (WCO) [earlier known as Customs Coordination Council] is an international body to develop coordination among customs offices in various countries. WCO has HQ at Brussels. WCO is organisation of 183 Customs Administrations. It is headed by Secretary General who is appointed for five years at a time. WCO was established on 26-1-1952.

1.2 Scope and coverage of Customs Law

Section 1(2) of Customs Act states that The Customs Act, 1962 extends to whole of India and, save as otherwise provided in the Customs Act, it applies also to any offence or contravention thereunder committed outside India by any person. [The words in italics inserted w.e.f. 29-3-2018].The extension of scope outside India is only for purpose of offences and not for any other purposes.

Liability of customs duty – Entry 83 to List I – (Union List) of Seventh Schedule to Constitution reads ‘Duties of customs including export duties’. Thus, import and export duty is a Union subject and power to levy is derived from Constitution of India.

Section 12(1) of Customs Act is the charging section, which provides that duties of customs shall be levied at such rates as may be specified under ‘The Customs Tariff Act, 1975’, or any other law for the time being in force, on goods imported into, or exported from, India. The rate of duty is as prescribed in Customs Tariff Act, 1975, read with relevant exemption notifications. Import duty is levied on almost all items, while export duty is levied only on a few limited products, where India wants to discourage export of those goods.

Section 12 of Customs Act, 1962 and ‘section 3 of The Customs Tariff Act, 1975’ are the ‘charging sections’.

1.3 Functions of Customs Department

Indian Customs handle various tasks, important among them are as follows – Chapter 1 Para 1.2 of CBI&C’s Customs Manual, 2018.

Collection of Customs duties on imports and exports as per Customs Act, 1962 and Customs Tariff Act, 1975
Enforcement of various provisions of Customs Act governing imports and exports of cargo, baggage, postal articles and arrival and departure of vessel, aircrafts etc
.Discharge of various agency functions and enforcing various prohibitions and restrictions on imports and exports under Customs Act and other allied enactments.
Prevention of smuggling including interdiction of narcotics drug trafficking.
 International Passenger clearance.

1.4 Taxable Event for Import duty and export duty

Goods become liable to import duty or export duty when there is ‘import into, or export from India’.

As per section 2(18), ‘export’ with its grammatical variations and cognate expressions, means taking out of India to a place outside India. As per section 2(23) of Customs Act, ‘import’ with its grammatical variations and cognate expressions, means bringing into India from a place outside India.

Section 2(27) of Customs Act defines ‘India’ as inclusive of territorial waters. Hence, it was thought that ‘import’ is complete as soon as goods enter territorial water. Similarly, export is complete only when goods cross territorial waters. There were conflicting judgments of High Courts.

Finally, in Kiran Spinning Mills v. CC 1999 (113) ELT 753 (SC) = AIR 2000 SC 3448 = 2000 AIR SCW 2090 (SC 3 member bench), it has been held that import is completed only when goods cross the customs barrier. The taxable event is the day of crossing of customs barrier and not on the date when goods landed in India or had entered territorial waters. In the case of goods which are in the warehouse the customs barrier would be crossed when they are sought to be taken out of the customs and brought to the mass of goods in the country.

Taxable event in case of warehoused goods – In case of warehoused goods, the goods continue to be in customs bond. Hence, ‘import’ takes place only when goods are cleared from the warehouse – confirmed in UOI v. Apar P Ltd. 1999 AIR SCW 2676 = 1999 (112) ELT 3 (SC) = 1999(6) SCC 118 = AIR 1999 SC 2515 (SC 3 member bench).- followed in Kiran Spinning Mills v. CC 1999 (113) ELT 753 = AIR 2000 SC 3448 = 2000 AIR SCW 2090 (SC 3 member bench), where it was held that taxable event occurs when goods cross customs barrier and not when goods land in India or enter territorial waters.

Date of filing bill of entry is relevant for deciding duty liability – As we will see later, rate of duty and tariff valuation as on date of presentation of bill of entry or date of entry inward of the vessel, whichever is later, is relevant for determining the customs duty payable. Thus, rate of duty when ship enters the port is relevant and not the date when ship enters territorial waters.

Taxable event in case of exports – In UOI v. Rajindra Dyeing and Printing Mills (2005) 10 SCC 187 = 2005 (180) ELT 433 (SC), it has been held that export is complete when goods cross territorial waters of India. If ship sinks within territorial waters, export is not complete and hence duty drawback is not payable. In CC v. Sun Exports 1988 (35) ELT 241 (SC) = 71 STC 149 (SC), it was held that export is complete once the goods leave Indian waters and property passes to purchasers. Even if goods return due to Engine trouble, duty drawback is payable.

In B.K. Wadeyar v. Daulatram Rameshwarlal AIR 1961 SC 311 = 11 STC 757 (SC), it was held that export is complete when ship leaves territorial waters of India.

Note that even if export duty is collected before ship leaves the port, that does not mean that taxable event has occurred. Duty can be collected in advance also.

1.5 Territorial Waters and customs waters

Territorial waters means that portion of sea which is adjacent to the shores of a country. On 22nd March, 1956, President of India had issued a proclamation that territorial waters of India shall extend upto 6 nautical miles from the base line. This was extended to 12 nautical miles w.e.f. 30th Sept., 1967. Later, ‘Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976’ was passed.

Section 3 of the ‘Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976’ specifies that territorial water extend upto 12 nautical miles from the base line on the coast of India and include any bay, gulf, harbour, creek or tidal river. (1 nautical mile = 1.1515 miles = 1.853 Kms). Sovereignty of India extends to the territorial waters and to the seabed and subsoil underlying and the air space over the waters.

Extension of Income Tax Act, Customs Act and Excise Act to designated areas in EEZ – Customs Act has been extended to designated areas in Continental Shelf and Exclusive Economic Zone of India vide notification Nos. 11/87-Cus dated 14-1-1987 and 64/97-Cus dated 1-12-1997. Similarly, Central Excise Law and Service Tax (Chapter V of Finance Act, 1994) have been extended to designated areas in Continental Shelf and Exclusive Economic Zone of India, as declared by Notification No. S.O. 429(E) dated 18-7-1986 issued by Ministry of External Affairs, vide notification No 166/87-CE dated 11-6-1987.

Vide notification No. SO 189(E) dated 7-2-2002 issued by Ministry of External Affairs, Customs Act and Customs Tariff Act has been extended to whole of Exclusive Economic Zone (EEZ) and continental shelf of India for the purpose of

(i) processing for extraction or production of mineral oils and

(ii) Supply of any goods in connection with activities mentioned in clause (i).

Indian Customs Waters As per section 2(28) of Customs Act, ‘Indian Customs Waters’ means the waters extending into the sea up to the limit of Exclusive Economic Zone under section 7 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and includes any bay, gulf, harbour, creek or tidal river.

Thus, ‘Indian Customs Waters’ extend upto 200 nautical miles from base line.

1.6 ‘Goods’ under Customs Act

Customs duty is on ‘goods’ as per section 12 of Customs Act. The duty is payable on goods belonging to Government as well as goods not belonging to Government.

Section 2(22) gives inclusive definition of ‘goods’ as follows – ‘Goods’ includes

(a) vessels, aircrafts and vehicles

(b) stores

(c) baggage

(d) currency and negotiable instruments and

(e) any other kind of movable property.

There is distinction between vessel/aircraft as mere goods and when they come to India as conveyance carrying imported goods. In former case, customs duty is payable and not in later case – CCE v. Aban Lloyd Chiles Offshore (2017) 3 SCC 211 = 60 GST 207 = 78 taxmann.com 25 = 2017 (346) ELT 513 (SC).

Thus, ships or aircrafts brought for use in India or for carrying cargo for ports out of India, would be dutiable. Definition of goods has been kept quite wide as Customs Act is used not only to collect duty on ‘goods’ but also to restrict/prohibit import or export of ‘goods’ of any description. Main two tests for ‘goods’ are

(a] they must be movable and

(b) they must be marketable.

The very fact that goods are transported by sea/air/road means that they are ‘movable’. Since most of imports are on payment basis, test of ‘marketability’ is obviously satisfied.

Dutiable Goods – Section 2(14) define ‘dutiable goods’ as any goods which are chargeable to duty and on which duty has not been paid. As per section 2(15), ‘duty’ means a duty of customs leviable under Customs Act. Thus, goods continue to be ‘dutiable’ till they are not cleared from the port. However, once goods are assessed at ‘Nil’ rate of duty, they no more remain ‘dutiable goods’. Once duty is paid, the goods cease to be dutiable goods – CCE v. Aban Lloyd Chiles Offshore (2017) 3 SCC 211 = 60 GST 207 = 78 taxmann.com 25 = 2017 (346) ELT 513 (SC).

Imported Goods – Section 2(25) defines ‘imported goods’ as any goods brought in India from a place outside India, but does not include goods which have been cleared for home consumption. Thus, once goods are cleared by customs authorities from customs area, they are no longer ‘imported goods’. (Though in common discussions, goods cleared from customs are also called ‘imported goods’). If imported goods are not chargeable to duty, they will not be ‘dutiable goods’.

Smuggled goods are not ‘imported goods’. Hence, exemption that is available to imported goods is not available to smuggled goods – CC v. M Ambalal & Co. (2011) 2 SCC 74 = 196 Taxman 584 = 2017 (260) ELT 487 (SC).

Export Goods – As per section 2(19) of Customs Act, ‘export goods’ means any goods which are to be taken out of India to a place outside India. Goods brought near customs area for export purpose will be ‘export goods’. Note that once goods leave Indian territory, Indian laws have no control over them and hence the term ‘exported goods’ has not been used or defined.

2. Types of customs duties on imported and export goods

Various types of duties are imposed under Customs Act and Customs Tariff Act on imported goods. In some cases, customs duty is imposed on export goods also.

2.1 Basic Customs Duty

Basic customs duty is levied under section 12 of Customs Act. Normally, it is levied as a percentage of Value as determined under section 14(1) of Customs Act. The rates vary for different items, but general rate on non-agricultural goods at present is 10%. Custom duty rates of baggage are discussed in a separate chapter.

Total customs duty payable generally comes to 31% w.e.f. 2-2-2018 – Total customs duty payable w.e.f. 2-2-2018 is 31%, as given below, if IGST rate is taken as 18% and basic customs duty rate is taken as 10%.

Assessable value = CIF Value of imported goods converted into Rupees at exchange rate specified in notification issued by CBI&C.

Calculation of customs duty payable is as follows, w.e.f. 2-2-2018

Seq.
Duty Description
Duty %
Amount
Total Customs Duty

(A)
Assessable Value Rs

10,000.00

(B)
Basic Customs Duty
10
1,000.00
1,000.00

(C)
Social Welfare Surcharge on ‘B’

100.00
100.00

(D)
Sub-total for IGST – A + B+C

11,100.00

(E)
IGST – on ‘D’ as per IGST rate
18
1,998.00
1,998.00

(F)
Total Customs Duty

3,098.00

(G)
Total duty rounded to
Rs.

3,100

2.2 IGST on goods at the time of import

Till 1-7-2017, CVD (Countervailing Duty) equal to excise duty was imposed on imported goods. In addition SAD (Special Additional Duty) of 4% was imposed in lieu of sales tax or Vat. Now, these two duties have been replaced by IGST w.e.f. 1-7-2017, except few products which are subject to excise duty even after 1-7-2017.

As per section 3(7) of Customs Tariff Act, any article being imported into India shall be liable to pay Integrated Goods and Services Tax (IGST) at such rate as is leviable under section 5 of IGST Act, 2017, on a like article on its supply india, on the value of imported article as determined under section 3(8) or section 3(8A) of Customs Tariff Act.

As per section 3(8) of Customs Tariff Act, the ‘value’ will be –

(a) Value of imported article determined under section 14(1) of Customs Act or tariff value of such article under section 14(2) of Customs Act

(b) duty of customs leviable on that article under section 12 of Customs Act and any sum chargeable on that article under any law for the time being in force as an addition to, and in the same manner as, a duty of customs, but does not include any tax referred to in section 3(7) or the cess referred to in section 3(9) of Customs Tariff Act.

Thus, IGST will be payable on –

(a) Assessable Value

(b) Basic customs duty

(c) Social Welfare Surcharge.

As per section 3(11) of Customs Tariff Act, this duty or tax or cess shall be in addition to any other duty or tax or cess imposed under Customs Tariff Act or any other law. As per section 3(12) of Customs Tariff Act, all provisions of Customs Act and Rules, including those relating to drawbacks, refunds and exemptions will apply to this duty, tax or cess.

IGST is not customs duty – IGST collected at time of import is not levied under Customs Act or Customs Tariff Act. Only machinery of Customs Law is used to collect IGST.

IGST is levied under section 5(1) of the Integrated Tax Act and only the procedure for collection has been provided under section 3 of the Tariff Act – Interglobe Aviation Ltd.v.CC, Air Cargo [2020] 121 taxmann.com 70 (CESTAT) = 2020 (43) GSTL 410 (Tri-Del).

IGST on project imports – In case of project imports, the goods will be classified under 9801 and IGST rate will be taken as 18%.

No IGST on baggage – IGST is not payable on baggage.

Exemption from IGST and GST Compensation Cess from 13-10-2017 on imports against Advance Authorisation, EPCG and EOU – IGST and GST Compensation Cess has been exempted from 13-10-2017 on imports under Advance Authorisation, EPCG and EOU without any upper time limit – paras 4.14, 5.01(a) and 6.01(d)(ii) of FTP 2015-2020 amended on 1-7-2022 and relevant customs notifications amended on 30-6-2022.

No exemption from IGST and Compensation Cess on imports under DFIA – W.e.f. 1-7-2017, the exemption will be only to Basic customs duty, safeguard duty, product specific safeguard duty and anti-dumping duty. IGST will be payable on imports under DFIA. – FAQ released by CBI&C in July 2017. This is possibly because the imported inputs are freely transferable after fulfilment of export obligation.

2.3 Refund of IGST paid on goods exported out of India

IGST is not payable when goods are exported. The exporter can export goods without payment of IGST and utilise the corresponding Input Tax Credit for payment of GST on other goods supplied by him. If this is not possible, he can claim refund of Input Credit corresponding to goods exported.

Alternatively, a taxable person has option to pay IGST on goods exported out of India and claim refund. He may like to do this if he has excess Input Tax Credit which may be otherwise not utilizable. Provisions are contained in rule 96 of CGST and SGST Rules, 2017.

Shipping Bill shall be deemed to be application for refund – Shipping Bill filed by exporter of goods shall be deemed to be application for refund of IGST. Export Manifest or Export Report covering the number and date of shipping bill should have been filed. The applicant should have filed valid return in form GSTR-3 or GSTR-3B as the case may be – Rule 96(1) of CGST and SGST Rules, 2017.

2.4 GST Compensation Cess on goods at the time of import

GST Compensation Cess is payable on imported goods w.e.f. 1-7-2017. The rate is same as applicable to similar goods supplied within India.

Thus, GST Compensation Cess will be payable on –

(a) Assessable Value

(b) Basic customs duty

As per section 3(11) of Customs Tariff Act, this duty or tar cess shall be in addition to any other duty or tax or cess imposed under Customs Tariff Act or any other law.

As per section 3(12) of Customs Tariff Act, all provisions of Customs Act and Rules, including those relating to drawbacks, refunds and exemptions will apply to this duty, tax or cess.

Valuation for GST Compensation Cess – The valuation for payment of GST Compensation cess is same as applicable to valuation of IGST under section 3(8A) of Customs Tariff Act – section 3(10A) of Customs Tariff Act inserted w.e.f. 29-3-2018.

2.5 Social Welfare Surcharge as duty of customs

A ‘Social Welfare Surcharge’ has been introduced w.e.f. 2-2-2018 vide section 110 of Finance Act, 2018 on all goods specified in First Schedule to Customs Tariff Act, 1975 imported into India.

It will be collected as duty of customs.

The general rate of Social Welfare Surcharge is 10% of ‘aggregate duties of customs levied and collected under section 12 of Customs Act and any sum chargeable on the goods imported under any other law’, as ‘duty of customs’. Same rate applies to baggage also.

It has been clarified that Social Welfare Surcharge (SWS) is payable @ 10% of aggregate of customs duties. If aggregate customs duty payable is zero, SWS will also be Nil – MF(DR) circular No. 3/2022-Cus. dated 1-2-2022.

However, Social Welfare Surcharge will not be payable on following –

(a) the safeguard duty referred to in sections 8B and 8C of the Customs Tariff Act;

(b) the countervailing duty referred to in section 9 of the Customs Tariff Act;

(c) the anti-dumping duty referred to in section 9A of the Customs Tariff Act;

(d) the Social Welfare Surcharge (SWS) on imported goods levied under sub-section (1).

Social Welfare Surcharge on IGST and GST Compensation Cess payable on imported goods has been exempted vide Notification No. 13/2018-Cus dated 2-2-2018.

Thus, presently, SWS is payable on –

(a) Basic Customs Duty

(b) Countervailing Duty leviable on products which are still covered under Central Excise (mainly petroleum products).

Levy of Social Welfare Surcharge on IGST and GST Compensation Cess on imported goods has been exempted vide Notification No. 13/2018-Cus dated 2-2-2018.

The Social Welfare Surcharge is to fulfil the commitment of the Government to provide and finance education, health and social security.

Social Welfare Surcharge on imports against Advance Authorisation, EPCG and EOU not required – Social Welfare Surcharge is not payable on imports against Advance Authorisation, EPCG and EOU units, when basic customs duty is not payable.

2.6 Road and Infrastructure Cess

A ‘Road and Infrastructure Cess’ on specified imported goods (petrol and diesel) has been introduced w.e.f. 2-2-2018 vide clause 109 of Finance Bill, 2018. Similar Cess has been imposed on excisable goods manufactured in India vide clause 110 of Finance Bill, 2018.

2.7 Health Cess

Section 141 of Finance Act, 2020 makes provisions to imposed health cess of 5% on imported medical devises falling under headings 9018, 9019, 9020, 9021 and 9022. The health cess is effective from 2-2-2020 itself. The ‘value’ for health cess will be ‘value’ as determined under section 14 of Customs Act.

The health cess is in addition to other duties of customs. All provisions of Customs Act in relation to refund, exemption, offences and penalty shall apply to health cess.

Health cess will be exempt for specified medical devices which are exempt from basic customs duty. Inputs/parts used in manufacture of medical devises shall also be exempt – Notification No. 8/2020-Cus dated 2-2-2020 as amended on 1-2-2022.The proceeds of health cess shall be used for financing health infrastructure and services.

2.8 Agriculture Infrastructure and Development Cess (AIDC)

An Agriculture Infrastructure and Development Cess (AIDC) has been imposed on some specified products w.e.f. 2-2-2021, vide section 124 of Finance Act, 2021 as enacted on 28-3-2021. It is ‘duty of customs’. The purpose is to finance agriculture infrastructure and other development expenditure. AIDC rate can be upto rate of customs duty as specified in First Schedule to Customs Tariff Act.

The value for purpose of AIDC is same as per section 14 of Customs Act. All provisions of Customs Act relating to assessment, levy, refund etc. will apply to AIDC.

The goods on which AIDC is leviable and rate of AIDC has been specified in Notification No. 11/2021-Cus dated 1-2-2021. AIDC is not leviable on goods imported under Advance Authorisation, EOU and FTA (Free Trade Agreements).

Gold & Silver (and their dore) imported under export promotion schemes (which is exempt under Notification Nos. 56/2000-Cus dated 5-5-2000 and 57/2000-Cus both dated 8-5-2000) has been exempted from Agriculture Infrastructure and Development Cess (AIDC) w.e.f. 17-2-2021.

AIDC is ‘duty of customs’ and hence has to be included while calculating Social Welfare Surcharge. However, social welfare surcharge is not leviable on AIDC on silver (7106) and Gold (7108) – Notification No. 13/2021-Cus dated 1-2-2021.

2.9 Additional Customs Duty under section 3(1) (CVD)

After introduction of GST w.e.f. 1-7-2017 and abolition of excise duty on most of products, additional customs duty (Countervailing Duty – CVD) is payable on very few products.

Additional Customs duty is equal to excise duty levied on a like product manufactured or produced in India. If like article is not produced or manufactured in India, the excise duty that would be leviable on that article had it been produced in India is the base. If the product is leviable with different rates, then highest rate among those rates is to be considered. The duty is leviable on Value of goods plus customs duty payable.

As per section 3(11) of Customs Tariff Act, this duty or tax or cess shall be in addition to any other duty or tax or cess imposed under Customs Tariff Act or any other law. [This sub-section was earlier 3(7). It has been re-numbered as section 3(11) of Customs Tariff Act w.e.f. 1-7-2017.].

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