Ultimate Guide for Understanding Indian Custom Duties and Taxes
Shipping internationally comes up with many challenges and pre-calculations for successful deliveries but the biggest factors that require proper understanding are custom duties and taxes.
To assist you comprehend shipping duties
we have created this ultimate guide to clarify methods, and provide best
practices for handling these practice so you can prepare your Business to meet Custom
regulations.
What
are Custom duties and taxes?
Custom duties and taxes are tariffs
imposed on goods imported from other countries into our nation and on goods
exported to other countries from India. These tariffs are mainly imposed to
control the flow of banned commodities across the international borders. Undoubtedly,
It is one of the biggest source of Central Fiscal Revenue and charging taxes
legitimately is one of the most important task of Custom authorities.
Why
Custom duties matter in International Shipping?
In India Custom duty is well defined
under Act of Customs, 1962 and each and every matter related to Custom
regulations fall under CBEC (Central board of Exercise and Customs).
Government impose tax on international shipments for the following reasons:
- Restrict the flow of prohibited goods in and out of the country
- Raise revenue through legitimate tariffs
- Protect the countries jobs, environment, residents and economy, etc.
Protect domestic companies and maintain healthy competition across the globe
How
to prepare for Custom Duties and Taxes?
The cost of Indian customs tax varies
depending on the commodities involved, where they are coming from, and what
they are made of.
To calculate customs tax rates, you'll
need the HSN code, which is used in the Harmonized Commodity Description and
Coding System, an internationally agreed-upon system of identifying product
kinds.
Then, find the specific Indian customs taxes involved by reference to the Tariff Schedule or the Indian Customs Tariff as laid out in the Customs Act (1962) and Customs Tariff act (1975)
Types of Custom Duty and Taxes in India
Type |
Rate |
When Applicable |
Basic Customs Duty (BCD) |
Decided according to the HSN code of
the product and its origin. It can be from 0% to 100% |
The actual fee paid will depend on
where goods are coming from, what they are, and what they’re made of. |
Countervailing Duty (CVD) |
0 to 12% depending on product |
Countervailing duty is applied on
products which received benefits like tax breaks or or subsidies in the
country where they were manufactured |
Special Additional Duty (SAD) |
4% where applied |
This is to make sure that domestic
manufacturing is not at a disadvantage. SAD is calculated on the total of the
assessable value of the goods, plus other taxes that must be paid such as BCD
and CVD. |
Social Welfare Surcharge (SWS) |
10% where applied |
The Social Welfare Surcharge was
introduced in 2018 to support government social welfare projects. This fee
replaces the Education Cesses which were previously used. |
Safeguard Duty |
By Notification |
If imports are damaging local
producers, they may become subject to Safeguard Duty. |
Anti-Dumping Duty |
By Notification |
Dumping is an unfair international
trade practise that involves selling goods in a foreign market for less than
their production cost or market value. This would be extremely damaging to
local industry and is therefore countered by Anti-dumping Duties where
necessary. |
Compensation Cess |
Applied according to product type, for
things such as cigarettes and pollution-causing products such as coal and
automobiles. |
Compensation Cess was created to
compensate manufacturing heavy states which would lose revenue when the new
IGST was brought in nationally in 2017. |
Integrated Goods and Services Tax |
5%, 12%, 18%, 28% |
The Integrated Goods & Services
Tax (IGST) came into being in 2017. It brought together various other
existing taxes under one umbrella. |
Customs Handling Fee |
1% |
On top of any other taxes payable,
there is a 1% customs handling fee to pay. |
How
Custom duty is calculated in India?
The
amount of customs tax you must pay may be fixed or based on the value of the
specific merchandise. An ad valorem basis calculation is what this is. Ad valorem computations are governed by
the rules outlined in Rule 3(i) of the Customs Valuation Rules, 2007. If your
individual products are not covered by this regulation, the value is computed
according to the hierarchy outlined below.
Method |
When
Applicable |
Comparative Value |
Value can be decided based on
comparison with similar items, under Rule 4 |
Comparative Value |
Value can be decided based on
comparison with similar items, under Rule 5 |
Deductive Method |
Rule 7 allows for valuation based on
the sale price of the items at their point of origin |
Comparative Value |
Rule 8 decides the value based on the
raw material and production costs of the product, as well as expected profit
at the point of origin. |
Fallback Method |
Rule 9 allows for a fallback method,
based on the above rules but with more flexibility |
Every country has a tax threshold, which
is the amount above which a person must start paying taxes on an item. Because
customs duty may not apply to every international shipment, it is best to
examine the tax thresholds for each country to which you intend to ship.
How
the Custom Process works?
The Custom Clearance process starts as soon as your shipment arrives in customs. To better understand how taxes and duties affect the custom clearance process check these:
- The first step starts with proper inspection of the shipment by the custom officer and making sure the shipment has all the mandatory documents attached to it.
- The value and category of your goods on your commercial invoice will be scrutinised by the customs officer. They can also review your website or crowd funding campaign to ensure that the item worth matches what is on the business invoice – so please be truthful with your documents! This will determine whether or not customs and taxes are applicable to your shipment.
- If the package arrives with duties paid, it signifies the sender took care of the payment, allowing the shipment to be freed for distribution. If the shipment comes with unpaid duties, the recipient must handle it. Customs will hold the delivery, and the courier's independent broker will contact the recipient directly for payment.
- The shipment is released and delivered once the custom officer ensures that the tariffs and taxes are paid.
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