Customs duty and Import-Export taxes in India

Customs duty is charged by the federal government on import and export of goods from India. Duty is payable at the time of import and export of goods.

Contributing Advisor

Lalitha Rao

Manager, Corporate Accounting Services

Exports of goods and services are free from duties and duties paid on exported goods/inputs are refunded.

India follows the HSN classification rules, and the goods are classified under different chapters or tariff headings, primarily according to their description, components and use. The duties or taxes applicable on imports are Basic Custom Duty, Social Welfare Surcharge and IGST at applicable rates.

Custom duty on imports

When calculating customs duty, the following taxes are imposed:

• Basic Customs Duty (BCD) levied either as:
  • A specific rate based on the unit of the item (weight, number, etc.), or more commonly,
  • Ad-valorem, based on the assessable value of the item.

In some cases, a combination of the two is used.

• Peak customs duty is the highest general rate applicable to majority of imports. At present, the peak customs duty in India is around 10%. Implication is that the highest basic duty imposed on largest number of imported goods is 10%.
• Social Welfare Surcharge levied at 10% of the value of goods.
• Goods and Services Tax (GST): Integrated Goods and Services Tax (IGST) is levied in the state where the imported goods are consumed, and imported services are received.

IGST is a value added tax and can be set-off at each stage till it is sold to the ultimate consumer.

• Anti-dumping Duty: Imposed if the good being imported is below fair market price.
• Safeguard Duty: Levied if the government feels that a sudden increase in imports can potentially damage the domestic industry.
• Customs Handling Fee: Levied at the rate of 1%.
• Compensation cess: Levied on certain notified goods considered to be ‘sin’ or ‘luxury’ goods. For example, SUV vehicles (more than 4 metres) are charged 50 per cent GST, of which the GST tax rate is 28 per cent and the compensation cess is 22 per cent. Compensation cess is applicable in addition to regular GST. 

Revised custom duty rates

Electronics industry

The basic customs duty (BCD) on mobile phones, printed circuit board assemblies (PCBAs), and chargers has been lowered from 20 percent to 15 percent. Similarly, for precious metals and jewelry, duties on gold and silver have been cut from 15 percent to 6 percent, and on platinum from 15.5 percent to 6.4 percent. These reductions make precious metals more affordable, potentially increasing sales.

Exemptions for oxygen-free copper used in resistor manufacturing and specific components for connector production have been extended, promoting further value addition in electronics. Additionally, the BCD on ferro nickel and blister copper, crucial for steel and copper manufacturing, has been eliminated.

Source: India Budget 2024

Critical goods

For the import of critical minerals, duty exemption is announced on 25 minerals used in strategic sectors like nuclear energy, renewable energy, space, defense, telecommunications, and high-tech electronics.

Source: Central Board of Indirect Taxes and Customs (CBIC)

Medical industry

Customs duties are now exempt on three additional cancer medications—Trastuzumab Deruxtecan, Osimertinib, and Durvalumab. Additionally, duties on x-ray tubes and flat panel detectors for medical x-ray machines have been reduced under the Phased Manufacturing Programme (PMP).

Launched in 2021, PMP aims to boost domestic production of medical x-ray machines and their sub-assemblies, enhancing local value addition.

The Association of Indian Medical Device Industry (AiMeD) supports the tariff reductions on imported x-ray equipment components. AiMeD believes these reductions will sustain investment until India achieves self-reliance in manufacturing these components.

Extension of certain exemptions as per Notification no. 50/2017- Customs (Extension up to March 31, 2026)

Source: India Budget 2024

Leather and textiles industry

Source: CBIC

Others

The BCD on non-biodegradable and hazardous PVC flex banners has been raised from 10 percent to 25 percent to discourage their import.

Source: India Budget 2024

*The Ministry of Finance’s Notification No. 41/2024-Customs, effective August 1, 2024, imposes a 10 percent Basic Customs Duty on most laboratory chemicals under HS code 9802, excluding undenatured ethyl alcohol. The notification comes a week after Sitharaman announced a steep hike in customs duty on imported lab chemicals, from 10 percent to 150 percent.

How are imports and exports taxed under GST?

Imports

The imports under GST are treated as inter-state supply; which means that IGST that is imposed on the inter-state supply of good and services is also imposed on the imports of goods and services. Since GST is a destination-based tax, IGST is levied in the State where the imported goods are consumed and import services are received. Import of services means the supply of any service when,-

• Supplier of Service is located outside India;
• Recipient of services is located in India;
• Place of supply of services is in India;
• Payment in any currency whether in Indian Currency or in foreign exchange; and
• Transactions between establishments of same person also qualify as supply.

Import of goods

• Import of goods into India are deemed as inter-state supplies and accordingly subject to levy of IGST;
• Assessable value of the imported goods shall be determined as per the provisions of customs act and rules prescribed thereunder Custom Tariff Act;
• The assessable value of an article/product imported into India shall be increased by the amount of applicable custom duties and their respective cess; and
• IGST is then, levied and collected on amount computed as mentioned above.

Import of services

• Import of services under GST are subject to levy of IGST which is to be paid by the importer under Reverse Charge Mechanism.
• However, there is an exception to above, in case of import of OIDAR (Online Information and Database Access or Retrieval services) by an unregistered, non-taxable recipient. In this case a simplified procedure is prescribed for the suppliers outside India to take registration under GST in India and discharge the taxes.

Who is liable to pay GST?

The importer of services will have to pay tax on reverse charge basis. But, in respect of import of online information and database access or retrieval services (OIDAR) by unregistered, non-taxable recipients, the supplier located outside India shall be responsible for payment of taxes, such as, OTT Platforms, Apple store, Google Store, etc.

For this purpose, either the supplier will have to take registration or will have to appoint a person in India for payment of taxes.

Under GST, the IGST replaces previous indirect taxes imposed on the import of goods and services. However, customs duty and other protective taxes such as anti-dumping duty, safe-guard duty continue to be levied on imports, in line with the previous tax regime.

Exports

Under GST, exports of goods and services are treated as zero rated supplies and are exempted from taxation

“Export of services” means the supply of any service when,-

• The supplier of service is located in India;
• The recipient of service is located outside India;
• The place of supply of service is outside India;
• The payment for such service has been received by the supplier of service in convertible foreign exchange; and
• The supplier of service and the recipient of service are not merely establishments of a same person.

Letter of undertaking (LUT)

Letter of Undertaking is a document that exporters can file to export goods or services without having to pay taxes. It is submitted by all GST registered exporters of goods and services.

Any registered person can furnish an LUT in GST RFD 11. The exporter declare they will fulfill all the requirements that are prescribed under GST while exporting, without making IGST payment. Whereas LUT can be furnished either for export of goods or export of services without payment of tax at the convenience of the exporter. It consists of an undertaking from the exporter that convertible foreign exchange or Indian rupees wherever permitted by RBI, shall be realized within a period of 1 year or such extended time as may be prescribed from the date of issuance of invoice.

Essential documents for LUT

An LUT can be submitted by any individual who is registered under GST. Following documents are required for LUT:

• LUT cover letter - request for acceptance - duly signed by an authorized person;
• Copy of GST registration;
• PAN card of the entity;
• KYC of the authorized person/signatory;
• GST RFD11 form;
• Copy of the IEC code;
• Cancelled Cheque; and
• Authorization letter.

Deemed Exports under GST

Applicable to supply of such goods manufactured in India and notified as eligible to be considered as deemed exports.

• These goods do not leave India and payment for such goods is received either in Indian rupees or in convertible foreign exchange;
• Deemed Exports are subject to levy of GST and are not zero-rated supplies;
• Such goods are also not eligible to be supplied under a Bond/LUT;
• Refund of GST can be claimed either by the supplier or the recipient; and
• The application for refund filed by the supplier or the recipient shall be considered only if neither party has been unjustly enriched during the course of the transaction.

Categories of goods notified as Deemed Exports:

• Supply of goods by a registered person against Advance Authorization given by the Director General of Foreign Trade (DGFT);
• Supply of capital goods by a registered person against Export Promotion Capital Goods Authorisation;
• Supply of goods by a registered person to Export Oriented Unit; and
• Supply of gold by a bank or Public Sector Undertaking.

Refund of taxes under GST on account of zero-rated exports

• Refund of IGST paid on export of goods:
  • Eligibility: All conditions of zero-rated supplies are complied;
  • Refund application: No refund application is required to be filed separately as the Shipping Bill/Bill of export filed is deemed as refund application;
  • Time limit for claiming refund: No specified time limit prescribed under the law due to automatic nature of refund process; and
  • Eligible documents for verification of claim by the Department: The shipping details entered by the assessee along with the invoicing details while filing GSTR-1 are received by the customs portal for verification of claim. Moreover, filing of valid GSTR-3B return is necessary to substantiate the payment of IGST on export of goods.
• Refund of accumulated input tax credit balance in case goods/services are exported without payment of tax under Bond/LUT:
  • GST paid on input by exporters in the course of domestic sale may be claimed;
  • Refundable amount shall be sanctioned within 60 days from the date of receipt of application; and
  • Except for certain notified categories, 90% of the claim amount will be refunded provisionally within seven days from the date of acknowledgement, subject to final assessment of claim.

Blocked credit

Blocked credit under GST means the supply of goods and services on which availing credit has been restricted by the relevant provisions of law.

Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, then the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

Input tax credit shall not be available in respect of the following:

• Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person;
• Membership of a club, health and fitness centre;
• Rent-a-cab, life insurance and health insurance;
• Travel benefits extended to employees on vacation such as leave or home travel concession; and
• Goods or services or both used for personal consumption.

Mechanism of offset of Input Tax Credit under GST