Understanding Customs Duty in India: A Comprehensive Legal Framework

Introduction to Customs Duty in India

Customs duty represents one of the oldest forms of taxation in India, serving as a critical instrument for revenue collection and economic regulation. As an indirect tax, customs duty is levied on goods transported across international borders, whether entering or leaving the country. The constitutional authority for imposing such duties derives from Article 265 of the Constitution of India, which establishes that no tax shall be levied or collected except by authority of law[1]. Furthermore, Entry 83 of List I to Schedule VII of the Constitution empowers the Union Government to legislate and collect duties on imports and exports, providing the foundational legal basis for customs administration in India.

The primary legislative framework governing customs duty in India is the Customs Act, 1962, which came into force on February 1, 1963. This Act consolidates and amends the law relating to customs, extending to the whole of India and applying to offences committed outside India by any person. The Act serves multiple crucial functions beyond mere tax collection. It regulates the entry and exit of various categories of vessels, aircraft, goods, and passengers into or outside the country. It provides mechanisms to protect Indian industries from dumping practices and serves as an enforcement tool for other legislation such as the Foreign Trade (Development and Regulation) Act and the Foreign Exchange Management Act[2].

Historical Evolution of Customs Duty in India

The history of customs duty in India traces back to ancient times, with references to taxes on goods found in Vedic literature. However, the modern customs system as we understand it today has its origins in the British colonial period. The British established their first Board of Revenue in 1786 at Calcutta, marking the beginning of organized customs administration. A new Board of Trade was subsequently established in 1808, laying the groundwork for systematic customs collection.

A significant milestone came in 1859 when a uniform Tariff Act was introduced across India, with a general rate of import duty set at 10%, later reduced to 7.5% in 1864. The development of customs law in India became closely linked with the textile industry. Under pressure from British manufacturers who sought to export their products to India, duty on coarser varieties of cotton goods was abolished in 1877. The Sea Customs Act was subsequently passed in 1878, providing the first structured legal framework for maritime customs.

The Indian Tariff Act was passed in 1894, introducing import duty on cotton goods at 5%. Simultaneously, an excise duty on Indian cotton goods was imposed, which faced bitter resentment in India and was finally abolished in 1925. The Land Customs Act was later passed in 1924 to govern customs at land borders, while air customs was initially covered by rules made under the Indian Aircraft Act, 1911. Following India’s independence, the need arose to consolidate the fragmented customs legislation. The Customs Act, 1962 was enacted to consolidate the Sea Customs Act, Land Customs Act, and provisions for air customs into a single, unified legal framework.

Legislative Framework and Types of Customs Duties

The Customs Act, 1962

The Customs Act, 1962 stands as the principal legislation governing customs duty in India. Section 12 of the Act provides the charging provision, stating that except as otherwise provided in this Act or any other law for the time being in force, duties of customs shall be levied at such rates as may be specified under the Customs Tariff Act, 1975, or any other law for the time being in force, on goods imported into, or exported from, India. This provision applies equally to goods belonging to the Government and those not belonging to the Government.

The Act establishes detailed procedures for the clearance of imported goods and export goods. Section 46 requires importers to make entry of imported goods by presenting a bill of entry, while Section 50 requires exporters to make entry by presenting a shipping bill or bill of export. These procedural requirements ensure proper documentation and assessment of duties before goods are allowed to enter or leave the country[3].

The Customs Tariff Act, 1975

Complementing the Customs Act, the Customs Tariff Act, 1975 provides the structure for classification and rates of duties. The Act contains two schedules: Schedule I gives classification and rates of duties for imports, while Schedule II provides classification and rates for exports. Beyond basic customs duty, the Customs Tariff Act makes provisions for additional duties including countervailing duty, protective duty, anti-dumping duty, and safeguard duty.

Section 3 of the Customs Tariff Act provides for the levy of additional duty equal to the excise duty for the time being leviable on like articles if produced or manufactured in India. This ensures parity between imported goods and domestically manufactured goods, preventing unfair competition. Section 9 empowers the Central Government to impose anti-dumping duty on goods exported by a country or territory if such goods are sold at less than normal value, causing material injury to the domestic industry.

Determining the Taxable Event for Import

One of the most critical aspects of customs law concerns determining when the taxable event for import occurs. This question has been subject to extensive judicial interpretation, particularly regarding whether import is complete when goods enter territorial waters or only when they cross the customs barrier. The Supreme Court of India provided definitive clarity on this matter through landmark judgments.

In the seminal case of Garden Silk Mills Ltd. v. Union of India, the Supreme Court held that “the import of goods into India would commence when the same cross into the territorial waters but continues and is completed when the goods become part of the mass of goods within the country; the taxable event being reached at the time when the goods reach the customs barriers and the bill of entry for home consumption is filed”[4]. This judgment established that while import begins upon entering territorial waters, it is not complete for customs duty purposes until the goods cross the customs barrier.

This principle was reinforced in Kiran Spinning Mills v. Collector of Customs, where the Supreme Court explicitly rejected the contention that import is complete when goods enter territorial waters. The Court stated that “the import would be completed only when the goods are to cross the customs barriers and that is the time when the import duty has to be paid and that is what has been termed by this Court as being the taxable event”[5]. The judgment further clarified that the taxable event is the day of crossing the customs barrier, not the date when goods land in India or enter territorial waters.

For warehoused goods, the principle operates differently. When goods are placed in a customs warehouse, they remain in customs bond and have not yet crossed the customs barrier. Therefore, import takes place only when goods are cleared from the warehouse for home consumption. This was confirmed in Union of India v. Apar Private Ltd., where it was held that in the case of goods in a warehouse, the customs barriers would be crossed when they are sought to be taken out of customs and brought to the mass of goods in the country.

Valuation of Imported Goods

Section 14 of the Customs Act, 1962 governs the valuation of goods for customs purposes. The provision states that for the purposes of the Customs Tariff Act, 1975, the value of imported goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation. This provision aligns with Article VII of the General Agreement on Tariffs and Trade and the WTO Agreement on Customs Valuation.

The transaction value method represents the primary basis for customs valuation, reflecting the actual price paid or payable. However, the Act provides for alternative valuation methods when transaction value cannot be determined or is not acceptable. These methods include the transaction value of identical goods, the transaction value of similar goods, the deductive value method, the computed value method, and the residual method.

Procedural Framework and Compliance Requirements

The Customs Act establishes elaborate procedural requirements for import and export operations. Upon arrival of a vessel or aircraft carrying imported goods, the person-in-charge must present an import manifest or import report to the proper officer within twenty-four hours of arrival. This document provides details of all goods brought into India on that vessel or aircraft.

For imported goods, the importer must file a bill of entry under Section 46 before clearance. The bill of entry serves as the fundamental document for assessment of customs duty. After filing, the goods may be examined and tested by the proper officer under Section 17, following which duty is assessed. Upon payment of assessed duty, an order for clearance is issued, allowing the importer to take possession of the goods.

Export procedures follow a parallel framework. The exporter must file a shipping bill or bill of export under Section 50 before goods are loaded for export. The proper officer examines the goods and assesses export duty if applicable. Only after an order granting entry outwards is issued can goods be loaded onto the conveyance for export.

Enforcement and Penalties

The Customs Act contains stringent provisions for enforcement and penalties to prevent evasion and smuggling. Chapter XIII provides officers of customs with extensive powers of search, seizure, and arrest. Officers may search any person who has landed from or is about to board a vessel or aircraft, search any vessel or aircraft for goods liable to confiscation, and arrest persons committing offences under the Act.

Chapter XIV deals with confiscation of goods and imposition of penalties. Goods are liable to confiscation if they are imported or attempted to be imported contrary to any prohibition, if their import or export is notified under Section 11, or if they are liable to confiscation under any other provision of the Act. In lieu of confiscation, the proper officer may give the owner an option to pay a fine. Additionally, penalties may be imposed on persons involved in improper importation or exportation.

International Organizations and Customs Cooperation

World Customs Organization

The World Customs Organization plays a pivotal role in international customs cooperation. Originally established as the Customs Co-operation Council in 1952, the organization adopted the name World Customs Organization in 1994 to reflect its global character. With its headquarters in Brussels, Belgium, the WCO represents 185 customs administrations worldwide, collectively processing approximately 98% of global trade[6].

The inaugural session of the Customs Co-operation Council took place on January 26, 1953, with the participation of 17 founding members. The organization’s membership subsequently expanded to cover all regions of the globe, demonstrating its truly international character. India has been a member of the WCO since 1971, participating actively in the organization’s work on classification, valuation, and customs procedures.

The WCO is particularly noted for its work in developing international conventions, instruments, and tools on topics such as commodity classification, valuation, rules of origin, collection of customs revenue, international trade facilitation, customs enforcement activities, and combating counterfeiting in support of Intellectual Property Rights. The organization developed and administers the Harmonized Commodity Description and Coding System, which serves as an international standard classification system used by customs authorities worldwide. The WCO also administers the WTO Agreement on Customs Valuation, providing a system for placing values on imported goods.

World Trade Organization

The World Trade Organization plays a complementary role in customs matters. The WTO is responsible for administering various agreements that directly impact customs operations, including the Agreement on Customs Valuation and the Agreement on Rules of Origin. The WTO keeps a check on customs activities in individual countries to ensure they do not exceed what is permitted under international trade law. It prevents trade wars that might arise from excessive protective customs duty or unjustified anti-dumping measures.

Recent Reforms and Modernization Initiatives

The Indian customs administration has undergone significant modernization in recent years. The introduction of the Indian Customs Electronic Data Interchange System has enabled electronic filing and processing of documents, reducing delays and increasing efficiency. The system allows importers and exporters to file bills of entry and shipping bills electronically, track the status of their consignments, and make duty payments online.

The implementation of Risk Management Systems represents another major advancement. Under this system, consignments are categorized as high-risk or low-risk based on various parameters. Low-risk consignments receive expedited clearance with minimal examination, while enforcement resources are focused on high-risk consignments. This approach enhances both trade facilitation and enforcement effectiveness[7].

The Authorized Economic Operator program provides additional benefits to compliant traders. Entities that meet specified criteria regarding compliance history, financial solvency, and security standards are accorded AEO status, entitling them to various facilitation measures including expedited clearance and reduced examinations.

In 2021, several significant amendments were made to enhance trade facilitation. A definite period of two years, extendable by one year, was prescribed for completion of investigations. Conditional exemptions were given a validity of two years unless specifically provided otherwise. The Import of Goods at Concessional Rate of Duty Rules were amended to allow job work on imported goods and disposal of goods at payment of duty on depreciated value[8].

Conclusion

Customs duty occupies a central position in India’s tax system and trade policy framework. The legal architecture built around the Customs Act, 1962 and the Customs Tariff Act, 1975 provides a structured approach to regulating international trade, protecting domestic industries, and generating revenue. The judicial interpretations by the Supreme Court of India, particularly regarding the taxable event for imports and valuation principles, have brought clarity and certainty to customs law.

The evolution of customs law from the colonial-era Sea Customs Act to the modern electronic customs system reflects India’s transformation as a trading nation. With ongoing reforms focused on trade facilitation, risk management, and electronic processes, Indian customs administration continues to adapt to the demands of globalized trade. The role of international organizations like the World Customs Organization in promoting harmonization and cooperation ensures that Indian customs practices remain aligned with global standards. As India continues its economic growth trajectory, the customs system will remain crucial for balancing the objectives of revenue collection, trade facilitation, and regulatory enforcement.

References

[1] Constitution of India, Article 265. Available at: https://www.indiacode.nic.in/constitution-of-india 

[2] India Code. (1962). The Customs Act, 1962 (Act No. 52 of 1962). Available at: https://www.indiacode.nic.in/handle/123456789/2475 

[3] Ministry of Finance, Government of India. (2023). An Overview of Customs Act 1962 – Key Provisions. Available at: https://www.pw.live/cs/exams/overview-of-customs-act 

[4] Garden Silk Mills Ltd. & Anr. v. Union of India and Ors., (1999) 113 E.L.T. 358 (SC). Available at: https://indiankanoon.org/doc/1102217/ 

[5] Kiran Spinning Mills v. Collector of Customs, (1999) 113 E.L.T. 753 (SC). Available at: https://indiankanoon.org/doc/342949/ 

[6] World Customs Organization. (2025). About the WCO – History and Mission. Wikipedia. Available at: https://en.wikipedia.org/wiki/World_Customs_Organization 

[7] Blog Pazago. (2024). Decoding the Customs Act 1962: A Comprehensive Guide. Available at: https://blog.pazago.com/post/customs-acts 

[8] India Code. (1975). The Customs Tariff Act, 1975. Available at: https://www.indiacode.nic.in 

[9] Britannica. (2008). World Customs Organization (WCO). Available at: https://www.britannica.com/topic/World-Customs-Organization 

Published and Authorized by Vishal Davda