Custom Duty and its Exemption in India

What do you understand by Custom Duty?

  • The Custom duty can be explained as the tax imposed on goods that are transported across International Borders.
  • It is defined under the Customs Act, 1962 and all the matters thereof shall fall under the Central Board of Excise and Customs (CBEC).
  • This tax is applicable to the import and export of goods only.
  • The Customs duty is useful for the Government to raise revenues, protection of domestic industries, and to regulate movements of goods.
  • The tax rate of Customs duty depends upon the place where goods were made and components required while making them.
  • In the past few months, there are many major changes introduced by the Government in the tax collection system of the nation.

Types Custom Duty

  • The custom duties are universally applicable to all goods imported into the country and exported outside the country.
  • The first type of Custom duty is Basic Custom Duty that is applicable to items prescribed under Section 12 of the Customs Act, 1962.
  • Additional Customs Duty– this duty is calculated on the aggregate value of goods.
  • Protective Duty– it aims for the protection of domestic industry against imports.
  • Education Cess– it is levied at 2 percent at another 1% of the aggregate of Customs duties.
  • Anti-dumping Duty– it is imposed when the goods that are imported are at below fair market price.
  • Safeguard Duty– if there is a sudden increase in exports that might damage the domestic industry.

Calculation of Custom Duty

  • The Customs duties are calculated on the value of goods that are determined by Rule 3(I) of Customs Valuation Rules, 2007.
  • This rule limits the value of imported goods at the transaction value as per Rule 10.
  • The valuation of items has to be done in accordance with the following method;
  • Comparative value Method: this method is provided under Rule 4 and 5 and used for the comparison with the transaction value of a similar item.
  • Deductive Value Method: This method calculates the sale price in the country from which goods are imported explained under Rule 7.
  • Computed value Method: In this method, the cost of fabrication, materials, and profit in the producing Country are calculated as provided under Rule 8.
  • The Fallback Method: This method is considered higher flexibility because it depends on previous methods of computing Custom duties.
  • Furthermore, the value of imported goods will be used for calculating GST compensation cess.
  • On the other hand, Integrated Goods and Service Tax shall also contain education cess or higher education cess and safeguard duties.
  • Integrated Goods and Services Tax will not be added to the sum for the purpose of calculating GST Compensation Cess.
  • Although, Basic Customs Duty, Education Cess, and Integrated Goods and Service Tax will be applicable in majority cases such as Countervailing Duty, Special Additional Duty, and GST Compensation cess shall also be applicable.

GST and Custom Duty

  • The three forms of GST in India are
    • Central Goods and Services Tax
    • State Goods and Services Tax
    • Integrated Goods and Service Tax
  • The Central Goods and Service Tax and State Goods and Services Tax are applicable on the Intra-State Transactions only whereas the Integrated Goods and Service Tax is applicable to the Inter-State transactions and deals.
  • Integrated Goods and Service Tax (IGST) is about the goods imported and bring merchandise to India.
  • The goods and services that are imported shall be considered as inter-state supplies where integrated tax will be imposed on them with other customs duties applicable.
  • The value of the imported item for the purpose of levying cess shall be calculated with Basic Custom Duty levied under Integrated Goods and Services Tax Act, 2017.

Input Tax Credit on Import of Goods

  • As per section 2(62) of Central Goods and Service Tax Act, 2017 Integrated Goods and Service Tax payable on import of goods shall be considered within the ambit of Input tax.
  • Under the GST regime of taxation, a registered Importer under GST may avail the benefit of Integrated Goods and Services Tax applied or imposed on the importer as an input tax credit.
  • The input tax credit can be used to complete payment of taxes in the outward supply of goods and basic customs duty shall not be obtainable under the input tax credit.
  • Apart from the input tax credit, the registered importer can also avail of GST Compensation Cess before implementing it in the supply chains.
  • Also, the importer must mention the GSTIN in the Bill of Entry to avail input tax credit of GST Compensation Cess and Integrated Goods and Service Tax (IGST).
  • However, The Basic Customs Duty (BCD) and education cess shall not be available as an input tax credit.

Exemption on Import of Capital Goods in IT and Electronics Industry

  • In the year 2017, the Ministry of Electronics and Information Technology proposed a recommendation before the Ministry of Finance to include exemption of all capital goods for electronics from the Basic Customs Duty (BCD) and Countervailing Duty (CVD).
  • ‘Capital Goods’ shall denote any plant, machinery, equipment, and accessories used in the manufacturing or production of other goods.
  • In one of the notifications released by the Government, the official stated that for increasing the competitiveness of the Indian electronics industry through offsetting disability costs in domestic manufacturing up to some extent.
  • Further, it was stated that all capital goods for the electronics industry will be exempted from Basic Customs Duty and Countervailing Duty (CVD).
  • Although, it has been made clear that capital goods for the manufacture of electronic goods are exempted from Basic Customs Duty (BCD) but since there not much domestic capital goods industry for the manufacture of electronic goods, and they are largely imported and being quite specialized with the limited number of suppliers.
  • The Ministry of Electronics and Information Technology has asked for rationalization of inverted duty structure on the raw materials or manufacturing input of LCD/LED Panels and shall be allowed at zero percent Basic Custom Duty (BCD) with subject to actual user condition.
  • According to the Phased Manufacturing Roadmap by the Ministry of Electronics and Information Technology and NITI Aayog, it has been asserted for the extension of differential duty dispensation to personal computers and servers both.
  • However, the differential duty dispensation is easily available on mobiles, computers, and customer friendly types of equipment.
  • The Ministry has asked to continue it under the GST regime as a key requirement for growth and development.
  • For the electronics and IT sector, technology is deeply involved in software and design. Hence, it is recommended that software products and chip design companies shall be provided the benefit under Section 35(2AB) of the Income Tax Act 1961 which states about the scientific research expenditure deduction cannot be disallowed for approval from prescribed authority in the subsequent year.
  • As per the Government notification, the Government has exempted 35 machine parts that are used for the manufacturing of mobile phone components from the Basic Customs Duty to promote and harmonize handset production in the Country.
  • The items consist of printed circuit board which also known as motherboard, coating machine, assembly loader, Lithium-ion battery, speaker, data cables, optical fibers, and receiver of mobile phones are exempted from basic customs duty.
  • Basic Customs Duty on the above-mentioned items currently ranges from 7.5% to 10% that is fully exempted now.

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