Customs Duty is a tax collected on imports and exports by the customs authorities of a country. It is usually based on the value of goods that are imported. Depending on the context, import duty may also be referred to as tariff, import tax, customs duty, and import tariff. Customs Duty is an important topic in the UPSC IAS Exam Economy Syllabus.

Customs Duty

• Customs duty is a charge levied by a country's customs authority on imports and exports. It is usually calculated depending on the value of imported items.
• It is sometimes used as a tool to penalize a particular nation by charging high import duties on its products.
• The customs duty is a kind of fee that is collected by the customs authorities for the movement of goods and services to and from that country.
• The tax that is levied for the import of products is referred to as import duty, while the tax levied on the goods that are exported to some other country is known as export duty.
• Import tariffs are intended to generate revenue for local governments while also providing a competitive advantage to locally grown or manufactured commodities that are not subject to import duties.
• Customs duty rates are either specific or ad valorem, meaning they are calculated depending on the worth of the goods.
• Almost all items brought into the country are subject to customs taxes.
• Life-saving medications, fertilizers, and food grains are exempt from customs duties.
• The Customs Act of 1962 defines custom duty in India, and the Central Board of Excise & Customs is responsible for all matters about it.

Factors on which Customs Duty is calculated

The customs duty is calculated based on various factors such as the following:

• The place of acquisition of the good.
• The place where the goods were made.
• The material of the goods.
• Weight and dimensions of the good etc.

Computation of Customs Duty

The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, are used to determine the value of imported goods. If there are any uncertainties about the truth or correctness of a given item's worth, it is valued using the following method:

• Rule 4 & 5 – Comparative value method that compares the transaction value of identical or similar items.
• Rule 7 – Deductive value method that uses sale price of such good in the importing country.
• Rule 8 – Computed value method that employs costs related to materials, fabrication, and profit in the country of production.
• Rule 9 – The Fallback method is based on previous methods with an element of higher flexibility.

Types of Customs Duty in India

Customs duties are broken down into various parts, such as:

Basic Customs Duty

• This is imposed on imported commodities that fall under Section 12 of the 1962 Customs Act. The tax rate is determined by the First Schedule of the 1975 Customs Act.

Protective Duty

• This is imposed when customs authorities believe that the export of a specific good will harm the country's economy.

Education Cess

• This is taxed at 2%, plus a higher education cess of 1%, which is included in the customs duty.

Safeguard Duty

• This is levied if the customs authorities feel that the exports of a particular good can damage the economy of the country.

Countervailing Duty (CVD)

• Countervailing duties are levied to compensate for the negative effects of import subsidies and to protect domestic producers.

Integrated Goods & Services Tax (IGST)

• GST, which went into effect on July 1, 2017, absorbed most indirect taxes, including Additional Duties of Customs (commonly known as CVD) and Special Additional Duty of Customs (SAD).

• The IGST is levied on imported goods to level the playing field for domestic manufacturers.
• Value on which IGST is calculated is equal to Value of imported Goods + Basic Customs Duty + Social Welfare Surcharge

Anti-Dumping Duty

• Anti-dumping duty is a levy placed on imports from other nations that are priced lower than the fair market value of equivalent items in the domestic market.
• When the government considers that imports are being "dumped" in the domestic market due to low prices, it levies anti-dumping duties.

Social Welfare Surcharge (SWS)

• It is a tax on the value of products, including the value of the Basic Customs Duty. Unless the product is exempt from the tax, it is usually 10%. The Social Welfare Surcharge, which was implemented in the 2018 Budget, is imposed instead of education cess.

Compensation Cess

• This is an additional tax applied in addition to GST on both imported and domestically manufactured commodities that are designated as notified (primarily in the luxury and sin categories), such as Special Utility Vehicles, Cigarettes, Tobacco, Aerated Water, and so on.

Customs Handling Fee

• In addition to the applicable customs duty, the Indian government charges a 1% customs handling fee on all imports.

Tariff rates, excise charges, regulatory duties, and countervailing duties are all updated in the yearly budget, which is released in February.

Advantages of Customs Duty

• The goal of levying customs duty is to protect each country's economy, jobs, environment, and citizens by regulating the movement of commodities in and out of the country, particularly restricted and restrictive goods.
• Every good has a predetermined rate of duty that is determined by several criteria, including where it was purchased, where it was manufactured, and what it is composed of. This gives a clear idea of the country’s tax with its global partners.
• In addition, anything you bring into India for the first time must be declared according to customs regulations. For example, you must declare any products purchased in a foreign country as well as any gifts received outside of India.
• Manipulating the Customs Duty can help in promoting sustainable energy, reducing non-essential imports, encouraging domestic industry, and raising income.
• Customs duty on numerous inputs can be reduced to encourage domestic manufacture, while duty on completed products can be raised to generate additional money.

Disadvantages of Customs Duty

• Raising import taxes is now widely acknowledged to be effective only as an anti-dumping strategy against another country.
• The economy remains in continuous tussle due to manipulation in Customs Duty. Manufacturers in other industry segments will fight fervently for equal protection from imports as a result of a duty cut in one sector.
• Customs Duty weakens the economy's competitiveness, potentially forcing consumers to settle for inferior items.
• The protection is given by increasing the duty on imports acts as a reward for local manufacturers' persistent inefficiency, raising the cost of goods.
• A protected environment would put a premium on enterprises that invest in R&D, disincentivizing innovation.
• Competing countries have already labeled the hike in Customs duty as a violation of World Trade Organization (WTO) rules.
• While India has used emergency powers in its Customs rules to implement these hikes, it will be tough to persuade players such as Japan, the EU, and the US of their validity.
• As a result, India's credibility as a trading partner may be harmed, making external markets less favorable to Indian products.

Conclusion

Customs duty has the potential to affect the entire ecosystem as well as the country's export potential. Due to its numerous disadvantages, import duties are not considered a desirable instrument for making a country's domestic sector globally competitive. Many corporations are hesitant to manufacture in India since doing business here is still challenging; this should be addressed first. Manipulation in custom duties should be done only in exceptional circumstances, and it must strike a balance between the interests of consumers and local manufacturers.

GS Mains Questions and Model Answers

Q1. Discuss the significance of custom duty in promoting India’s economic growth.

Answer: Custom duties play a significant role in promoting India’s economic growth by regulating trade, protecting domestic industries, and generating government revenue. By imposing duties on imports, the government ensures that foreign goods do not dominate the domestic market, encouraging local production and employment. Custom duties also act as a tool for the government to control the balance of trade by discouraging excessive imports. Furthermore, the revenue generated from custom duties contributes to infrastructural development and public welfare schemes. However, the government must maintain a balance between protectionism and globalization to avoid isolation from international markets. In recent years, rationalizing custom duties has been a focus to attract foreign investment and integrate with global supply chains, thus fostering long-term economic growth.

Q2. Analyze the impact of custom duty reforms under India’s trade policy.

Answer: Custom duty reforms are critical for aligning India’s trade policy with global trade practices. Reforms, such as reducing tariffs and introducing ease-of-doing-business measures, have facilitated trade and enhanced India’s competitiveness in the global market. The introduction of simplified procedures through e-portals and risk-based assessments has improved customs clearance time, boosting export performance. However, duty reforms must carefully address the concerns of domestic industries, especially in sensitive sectors like agriculture and manufacturing. Striking a balance between protecting domestic interests and fostering free trade remains a challenge. The government’s custom duty policies must evolve with changing global dynamics, ensuring that India remains a competitive player in international trade while safeguarding domestic industries.

Q3. Evaluate the challenges and opportunities associated with India’s custom duty structure.

Answer: India’s custom duty structure offers several opportunities, including the protection of local industries, revenue generation, and control over the flow of imports. It provides a mechanism for encouraging Make in India initiatives by imposing higher duties on imported goods. However, the challenges lie in balancing the need for revenue with the requirement to maintain trade competitiveness. High custom duties can lead to trade disputes and reduce foreign investment, as seen in certain sectors. Additionally, frequent changes in duty rates can create uncertainty for businesses. Going forward, the government must focus on predictable, transparent policies that attract investment while supporting local industries. A rationalized custom duty structure will play a pivotal role in making India an attractive destination for manufacturing and trade.

Previous Year Questions on Custom Duty

1. UPSC CSE 2021

Question: "Discuss how India’s custom duty policy aligns with its ‘Make in India’ initiative."

Answer: India’s custom duty policy plays a crucial role in advancing the ‘Make in India’ initiative by providing tariff protection to domestic industries and discouraging imports of goods that can be produced locally. Higher import duties on non-essential goods and intermediate products encourage manufacturers to source raw materials from domestic suppliers, thus fostering local production. Furthermore, reduced duties on essential raw materials promote manufacturing efficiency. The custom duty policy also serves as a deterrent to dumping practices, ensuring a level playing field for Indian industries. However, aligning custom duties with ‘Make in India’ requires balancing trade protection with the need to integrate with global supply chains. Predictable duty structures, coupled with infrastructural improvements and ease-of-doing-business initiatives, will further boost India’s manufacturing capabilities and enhance its global competitiveness.

2. UPSC CSE 2020

Question: "Evaluate the role of anti-dumping duties in India’s trade policy."

Answer: Anti-dumping duties are an essential part of India’s trade policy, aimed at protecting domestic industries from unfair competition. These duties are imposed when foreign manufacturers export goods at prices lower than their normal value, disrupting the local market. The primary objective is to ensure fair competition and prevent the flooding of the domestic market with cheap imports. Anti-dumping measures have been particularly effective in sectors like steel, chemicals, and electronics, where Indian manufacturers face stiff competition from countries like China. However, the imposition of anti-dumping duties must be carefully calibrated to avoid retaliatory measures from trade partners and ensure compliance with World Trade Organization (WTO) rules. Proper enforcement of anti-dumping duties strengthens India’s trade policy by fostering fair competition, supporting local industries, and maintaining a healthy trade environment.