Editor’s Note: Please find an updated July 2014 version of this article linked here.
India’s import and export system is governed by the Foreign Trade (Development & Regulation) Act of 1992 and India’s Export Import (EXIM) Policy. Imports and exports of all goods are free, except for the items regulated by the EXIM policy or any other law currently in force. Registration with regional licensing authority is a prerequisite for the import and export of goods. The customs will not allow for clearance of goods unless the importer has obtained an Import Export Code (IEC) from the regional authority.
The Indian Trade Classification (ITC)-Harmonized System (HS) classifies goods into three categories:
Goods not specified in the above mentioned categories can be freely imported without any restriction, if the importer has obtained a valid IEC. There is no need to obtain any import license or permission to import such goods. Most of the goods can be freely imported in India.
Restricted goods can be imported only after obtaining an import license from the relevant regional licensing authority. The goods covered by the license shall be disposed of in the manner specified by the license authority, which should be clearly indicated in the license itself. The list of restricted goods is provided in ITC (HS). An import license is valid for 24 months for capital goods, and 18 months for all other goods.
Canalized goods are items which may only be imported using specific procedures or methods of transport. The list of canalized goods can be found in the ITC (HS). Goods in this category can be imported only through canalizing agencies. The main canalized items are currently petroleum products, bulk agricultural products, such as grains and vegetable oils, and some pharmaceutical products.
These are the goods listed in ITC (HS) which are strictly prohibited on all import channels in India. These include wild animals, tallow fat and oils of animal origin, animal rennet, and unprocessed ivory.
Just like imports, goods can be exported freely if they are not mentioned in the classification of ITC (HS). Below follows the classification of goods for export:
- State Trading Enterprise
Before exporting any restricted goods, the exporter must first obtain a license explicitly permitting the exporter to do so. The restricted goods must be exported through a set of procedures/conditions, which are detailed in the license.
These are the items which cannot be exported at all. The vast majority of these include wild animals, and animal articles that may carry a risk of infection.
State Trading Enterprise (STE)
Certain items can be exported only through designated STEs. The export of such items is subject to the conditions specified in the EXIM policy.
Types of Duties
There are many types of duties that are levied in India on imports and exports. A list of these duties follows below:
Basic duty is the typical tax rate that is applied to goods. The rates of custom duties are specified in the First and Second Schedules of the Customs Tariff Act of 1975. The First Schedule contains rates of import duty, and the second schedule contains rates of export duties. Most of the items in India are exempt from custom duty, which is generally levied on imports.
The first schedule contains two rates: Standard rate and preferential rate. The preferential rate is lower than the standard rate. When goods are imported from a place specified by the central government (CG) for lower rates, the preferential rate is applicable. In any other case, the standard rate will be applicable. If the CG has signed a trade agreement with the country of origin, then the CG may opt to charge a lower basic duty than indicated in the first schedule.
Additional Customs Duty (Countervailing Duty)
In addition to the basic duty on imported goods, a countervailing duty is also applicable to imported goods. The rate of duty is equal to the rate of excise applied to goods manufactured in India. If the article is not manufactured in India, then goods of a similar nature are used to determine the correct duty amount. If there are different rates of duty on similar goods, then the highest rates of the known products will be applied to the article in question.
Additional Duty (VAT)
The CG may levy an additional duty equivalent to sales tax or VAT charged on sale/purchase in India. The rate cannot exceed 4 percent. However, the additional duty shall be refunded when the imported goods are sold if the following conditions are satisfied:
- The importer pays all the custom duties;
- The sale invoice shall bear the indication that the credit of such duty shall not be allowed; and
- Importer shall pay VAT/sales tax on the sale of these goods.
The CG may impose an anti-dumping duty if an article is imported to India at less than its normal price, and will notify the importer if they decide to do so. The amount of duty cannot exceed the margin of dumping. The margin of dumping means the difference between the export price and the normal price.
The notification issued by CG in this regard shall be valid for five years. The period can be further extended. However, the total period cannot exceed 10 years from the date of first imposition.
Countervailing Duty on Subsidized Articles
A countervailing duty is a tariff applied to imported goods to neutralize the effect of a subsidy from the country of origin. If any country grants subsidies on any article to be imported to India, whether directly from the same country or otherwise, then the CG may impose a countervailing duty equal to or less than the subsidy itself. However, the duty will not be imposed if the the article is subsidized for the following reasons:
- Research activities conducted by person engaged in manufacturing or export
- Assistance to disadvantaged regions in destination country
- Assistance in adaptation of existing facilities to new environment requirements.
The notification issued by CG in this regard shall be valid for five years and possibly subject to further extension. However, the total period cannot exceed 10 years from the initial date of imposition.
A safeguard duty is a tariff designed to provide protection to domestic goods, favoring them over imported items. If the government determines that increased imports of certain items are having a significantly detrimental effect on domestic competitors, it may opt to levy this duty on those imports to discourage their proliferation. However, the duty does not apply to articles imported from developing countries. The CG may exempt imports of any article from this duty. The notification issued by CG in this regard is valid for four years, subject to further extension. However, the total period cannot exceed 10 years from the date of first imposition.
In addition to safeguard duties, the CG also bolsters domestic industries using protective duties. Should the Tariff Commission issue a recommendation for a protective duty, the CG may impose on any goods imported to India a protective duty to provide protection to domestic industry.
The duty cannot exceed the amount proposed in the recommendation. The CG may specify the period up to which protective duty shall be in force, reduce or extend the period, and adjust the effective rate.
Education and Higher Education Cess
The education cess, simply put, is a tax designed to fund education and healthcare initatives. An education cess at the rate of 2 percent and higher education cess of 1 percent are levied on the aggregate of duties of customs. However, the aggregate of customs duties does not include the safeguard duties, countervailing duty on subsidized articles, anti-dumping duty, or countervailing duty equivalent to VAT.
Customs duty is payable as a percentage of ‘Value’ which is known as ‘Assessable Value’ or ‘Customs Value.’ The Value may be either:
- ‘Value’ as defined in Section 14 (1) of the Customs Act; or
- ‘Tariff Value’ described under Section 14 (2) of the Customs Act.
Tariff Value – the Tariff Value is fixed by the Central Board of Excise & Customs (CBEC) for any class of imported goods or export goods. Authorities will consider the trend of value of the goods in question while fixing tariff value. Once fixed, the duty is payable as a percentage of this value.
The value of imported goods for the assessment of duty is determined in accordance with the provisions of Section 14 of 1962 and the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. According to the rules, the assessable value equal the transaction value of goods as adjusted for freight and cost of insurance, loading, unloading and handling charges.
In the assessable value, the following criteria are included:
- Commission and brokerage;
- Cost of container, which are treated as being one with the goods for customs purposes;
- Cost of packing – labour or materials;
- Materials, components, tools, etc. supplied by buyer;
- Royalties and license fees;
- Value of proceeds of subsequent sales;
- Other payment as condition of sale of goods being valued;
- Cost of transport up to place of importation;
- Landing charges; and
- Cost of insurance
The following costs are excluded from the assessable value:
- Charges for construction, erection, assembly, maintenance or technical assistance undertaken after importation of plant, machinery or equipment;
- Cost of transport after importation;
- Duties and taxes in India; and
- Types of duties on exports and imports in India are covered in the Customs Tariff Act 1975. The Act provides all the laws and regulations related to customs in India.
Portions of this article was taken from the latest issue of the India Briefing Magazine, titled ‘Trading with India.’ In this issue we focus on the dynamics driving India as a global trading hub. Within the magazine, you will find tips for buying and selling in India from overseas, as well as how to set up a trading company in the country. This issue is available as a complimentary download in the Asia Briefing Bookstore until the end of September.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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