Calculation of Import Duty in India — Formula, Online Tools and Exemptions
India’s economic growth and rising domestic consumption has spurred import of finished goods, and inputs in the form of raw material, consumables and capital goods. But how are these imports taxed by the Customs authority of India? This article provides a simple explanation of the calculation of import duties and provides linkages to government websites and tools that can be leveraged for detailed research.
The Customs Act of 1962 governs import (and export) tariffs and sets the rules for customs valuation. India's tariff system is based on the Harmonised System of Nomenclature (HSN) of the Customs Co-operation Council.
The sample calculation for identifying import duties on equipment, raw material and other inputs is displayed in Figure I. The calculation has four variable values, where the rate of tax depends upon the HSN Codes of the products. These four variables are:
i. Basic Customs Duty (BCD): This is the tax that is calculated on the Assessment Value of the goods that have landed at the customs border of India. It can vary between 0% to 100%. BCD depends upon the HSN code of the product and the Country of Import.
- BCD for HSN codes is revised from time-to-time and revised duties are published as Notifications on the website of Central Board of Indirect Taxes and Customs (CBIC — www.cbic.gov.in/Customs-Notifications) within the Ministry of Finance's Department of Revenue.
- Several central ministries such as Ministry of Electronics & Information Technology and Department of Heavy Industries have announced Phase Manufacturing Programs (PMPs) to encourage higher value addition in segments of Smartphone (meity.gov.in/content/phased-manufacturing-programme) and Electric Vehicle (EV PMP), respectively. These PMPs have proposed a calendar of increasing BCD on components in a phased manner.
- Indian Customs Electronic Gateway (ICEGATE) is the national portal of CBIC that provides e-filing services to the trade, cargo carriers and other trading partners electronically. It also hosts a Custom Duty Calculator* that can be used to identify applicable BCD on imported goods.
- India Trade Portal is portal developed and maintained by the Federation of Indian Export Organisations (FIEO), Ministry of Commerce & Industry. The portal can be leveraged to identify BCD rates as per arrangements under Most-Favoured Nation (MFN), Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTAs).
- India has signed several FTAs and PTAs with countries in East Asia (Japan, Korea, Malaysia, Thailand, Singapore) and ASEAN Bloc, among others. Details of these agreement can be accessed at this Link on website of Ministry of Commerce & Industry
* Please note that the tool at times may not reflect the recent changes in BCD and hence, we advise you to always check Customs Notifications at CBIC website to access the latest information.
ii. Social Welfare Surcharge (SWS): It is a tax imposed on the value of goods including the BCD value. It is generally 10% unless the good is exempted from this tax.
iii. Integrated Goods & Services Tax (IGST): Introduced on 1 July 2017, GST subsumed most indirect taxes such as excise duties and a special additional customs duty that was applied previously. A concept note on GST can be accessed at this Link on website of GST Council. IGST is imposed on the imported goods to provide a level playing field for domestic manufacturers, who also pay an equivalent tax (Central GST + State GST or IGST) on sale of goods. IGST on imported goods can be set-off against any other GST liability in India. There are five slabs of IGST 0%, 5%, 12%, 18%, 28%.
iv. Compensation Cess: This is an additional tax that is imposed along with GST on both imported items as well as domestically manufactured items on products that are classified as notified E.g. Special Utility Vehicles, Cigarettes, Tobacco, Aerated Water, etc.
At times to discourage import of certain finished goods or input materials that are available in large quantities, Government of India imposes Anti-dumping duties or Safeguard duties over and above the four taxes mentioned above.
There are five mechanisms that can be used to reduce the applicable BCD. Exemption or waiver of IGST is not permitted as per law:
- Special Economic Zone: Units operating in SEZ are exempted from BCD and IGST on Capital Goods, Raw Material and other Fixtures. If these units, do any sales in the domestic market of India then they pay applicable BCD + IGST on the product or service.
- Bonded Warehouses: Bonded Warehouse can be used for storage of goods as well as for manufacturing as elucidated in Circular 38/2018 dated 18 October 2018. Unitholders can defer BCD on imported Capital Goods, Raw Material and other Fixtures. This duty can be deferred until clearance in the domestic tariff area and can be exempted if the products are exported/re-exported. There is no time limit for duty deferment. More on this concept at this Link.
- Free Trade Warehousing Zone: Governed by SEZ Act 2005 and SEZ Rules. Predominately for EXIM trade & storage. Duty deferment permitted on imported goods and also permits trade transactions in foreign currency.
- Foreign Trade Policy 2015-20: Import policy is published by Directorate General of Foreign Trade (DGFT), Ministry of Commerce & Industry. Foreign Trade Policy schemes that can help reduce BCD liability are:
- Project Import Scheme: Relaxes duties for import of specific capital goods
- Advanced Authorization Scheme: Exempts duties for import of inputs for export consignments
- Export Promotion Capital Goods (EPCG): Allows import of capital goods including spares for pre-production, production and post-production at zero duty subject to an export obligation of 6 times of duty saved, to be fulfilled in 6 years from authorization issue date.
- Sectoral Incentive Schemes: Central Government may announce exemption from BCD for specific types of machinery to encourage manufacturing or modernization in certain sectors. E.g. Government of India reduced BCD on 35 capital goods that are used for manufacturing mobile phone components such as a lithium-ion battery, speaker and receiver of mobile phones, data cables, optical fibre etc.
- Free Trade Agreements & Other Preferential Treaties: Most Favoured Nation (MFN) or arrangements under FTA /PTA can help reduced BCD rates. A thorough check should be conducted in Customs Notifications at CBIC or through India Trade Portal to identify such benefits.
Invest India’s sectoral experts can help you evaluated the impact of import duties on your business model in India. They can also help you interpret the level of value addition that is required to manufacture goods in India from an import duty perspective or whether the products can be imported in finished form / Semi-Knocked Down (SKD) form or Completely Knocked Down (CKD) form.