India is regarded as one of the most important consumer and manufacturing nations in the world. International commerce requires the purchase of machinery, raw materials, cosmetics, electronics, consumer goods, etc. to become an integral part of trade among nations. Importers must also understand important aspects such as customs duty, taxes, valuation, classification, and regulations applicable to imported goods.
Knowledge of customs duty is crucial, as the right amount of duty applied to goods can influence the overall cost of goods brought to the country, pricing process, and overall success of the business in entering the Indian market.
What is customs duty?
Customs duty is a kind of tax collected by the Government of India, for imported goods and sometimes for exported items. The imports are governed by several legislations, like the Customs Act, 1962, the Customs Tariff Act, 1975, as well as respective regulations and notifications issued by the authority concerning the goods.
The amount of customs duty depends on a number of aspects of each product, like its type, classification and source country.
Principal factors of customs duty on imported commodities
Importers face multiple factors while determining total customs duty payable from imported commodities.
1. Basic Customs Duty (BCD)
Basic Customs Duty (BCD) is basically one of the primary dues levied on any imported goods. The applicable rate differs depending upon product classification in the context of the Customs Tariff.
Certain products may carry a lesser or higher BCD depending upon the national policies on trade and industry. Preferential rates may also be applicable for certain products which are indigenous to countries falling under any Free Trade Agreement (FTA), Comprehensive Economic Partnership Agreement (CEPA) or any other trade preferential arrangement, subject to fulfillment of prescribed Rules of Origin.
2. Social Welfare Surcharge (SWS)
The Social Welfare Surcharge is levied as a ratio of the customs duty as defined under the law. Its applicability and calculation must be verified for the particular goods which are being imported along with its exemptions.
3. Integrated Goods and Services Tax (IGST)
Imported products are typically subject to Integrated Goods and Services Tax (IGST). The IGST rate that applies is based on the nature of the products as per GST regulation, and accordingly, may vary from product to product. For qualifying businesses that are registered with the GST system, IGST paid upon importation could usually be availed as Input Tax Credit (ITC) upon complying with applicable legislation in force.
4. Compensation Cess
Compensation Cess may be applicable to some specified products in addition to the GST. It solely depends on the category and classification of the product being imported on which GST compensation cess may be applicable.
5. Anti-Dumping, Safeguard Duties and others
Besides the regular customs duties, some products may also be subjected to certain remedial dues like Anti-Dumping Duty, Countervailing Duty or Safeguard Duty, wherever applicable. Such charges are generally imposed to deal with relevant trading details concerning unfair pricing, subsidized products, or suddenly found higher imports posing threat to the local industry.
How customs duty is calculated
The computation of customs duty starts by figuring out the assessable value of the imported products using the Indian customs assessment rules. The customs value can consist of the transaction value and any other relevant charges, modification, and additions of the valuation rules.
An example of the calculation is given below:
Assessed value plus:
- Basic Customs Duty (BCD)
- Social Welfare Surcharge applicable
- Other applicable customs duties/cess
= Amount for calculating the IGST applicable
The IGST and any other tax chargeable will be determined as per the local legislation. The precise calculation may vary, depending on the product, exemption notifications and extra duty chargeable to a specific import.
Importance of correct HSN / Customs Tariff classification
Determining the correct HSN / Customs Tariff Heading (CTH) is one of the most critical steps for imports in India.
Classification affects:
- Basic Customs Duty
- Applicable IGST
- Eligibility for exemptions
- Preferential tariffs
- Anti-dumping or other trade remedial duties
- Import restrictions and licensing
- Compliance with the product-specific norms
Incorrect classification may lead to demands for additional duties, interest payments, penalties, delays in clearance, confiscation proceedings, or disputes.
Hence, importers must not arrive at customs liability based solely on the commercial name of the goods.
Country of origin and preferential customs duty
The country of origin can greatly determine the amount of customs duty to be paid.
India has entered into various bilateral trade agreements as well as regional trade agreements, leading to preferential treatment for selected goods. However, just shipping the merchandise from a partner country does not guarantee the preferential duty.
In order to obtain the preferential duty, the goods must be compliant with the Rules of Origin, carry the required documents, meet the value-addition requirement and satisfy other prescribed criteria.
Therefore, importers should assess the applicable agreements before deciding on how to structure their supply chain.
Customs duty is only one part of import compliance
The approvals importers need depend on the kind of goods being imported but may include DGFT, BIS, CDSCO, FSSAI, and Legal Metrology authorities. Typically, cosmetics, medical devices, food items, electronics, and chemicals may require additional registration or approval from the respective authorities before importation is permitted.
Traditionally, it was believed that virtually all costs relating to landing costs were covered by supplier costs. In particular, businesses should calculate the cost beforehand and review both the suppliers’ costs and how much the landed costs would be.
Accordingly, one should not make the mistake of thinking that the only thing needed is to verify one supplier’s costs.
As stated above, one will have to take into account various costs other than the mere purchase price of the goods. The important point is to calculate all costs applicable to the goods for purposes of customs, importing, and selling them in the market.
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Hritvik Gupta is a legal writer and researcher associated with LEGALLANDS LLP, where he contributes analytical and research-driven articles on corporate governance, international trade laws, and policy reforms. His writing reflects a deep understanding of evolving legal frameworks and their impact on cross-border commerce and regulatory compliance.
Hritvik’s work bridges practical legal insight with emerging global regulatory trends, offering readers a balanced perspective that combines academic depth with real-world application. He takes a keen interest in the intersection of law, technology, and international policy, contributing to the discourse on how businesses and governments can adapt to dynamic legal environments.
Through his contributions to Legallands.com, Hritvik aims to make complex legal developments more accessible, insightful, and relevant to businesses, professionals, and policymakers operating in an increasingly interconnected world.
