Introduction of customs duties in India

Introduction

Customs duties in India represent a critical governmental authority responsible for regulating the movement of goods across international borders while simultaneously collecting revenue for the nation. The term ‘Customs Duty’ denotes the tax levied on goods transported across international boundaries, serving as an indirect tax mechanism. This taxation system operates under the framework established by the Customs Act of 1962, which continues to govern India’s import and export activities.

The constitutional foundation for customs taxation derives from Article 265 of the Constitution of India, which explicitly states that no tax shall be levied or collected except by authority of law [1]. Entry 83 of List I to Schedule VII of the Constitution further empowers the Union Government to legislate and collect duties on imports and exports, establishing the federal government’s exclusive jurisdiction over customs matters.

Types of Customs Duties in India

The customs duties regime in India encompasses several categories of duties, each serving distinct regulatory purposes. Basic Customs Duty (BCD) represents the primary levy on imported goods, calculated as a percentage of their assessable value. Countervailing Duty (CVD) operates to neutralize any advantage gained by imported goods that benefit from subsidies in their country of origin. Additional Customs Duty, also known as Special CVD, applies to specific categories of imports requiring additional regulatory oversight.

Beyond these standard categories, the customs duties framework in India also includes Protective Duty, designed to shield domestic industries from unfair foreign competition, and Anti-dumping Duty, which prevents foreign manufacturers from selling products in India below their normal value. These various duty structures work collectively to achieve multiple objectives — protecting domestic industries, generating government revenue, and ensuring compliance with international trade obligations.

Historical Evolution of Customs Law

The historical trajectory of customs taxation in India extends back to ancient times, with references to trade taxes appearing in Vedic literature. However, the modern customs system traces its origins to the British colonial period. The establishment of the first Board of Revenue in Calcutta in 1786 marked the beginning of organized customs administration in British India. This was followed by the creation of the Board of Trade in 1808, reflecting the growing complexity of commercial transactions.

The introduction of a uniform Tariff Act in 1859 represented a significant milestone in customs regulation across India. The general import duty rate stood at 10 percent, though this was subsequently reduced to 7.5 percent in 1864. The subsequent history of customs duty became intricately linked with the textile industry’s development. British manufacturers, seeking to expand their market presence in India, successfully lobbied for the abolition of duty on coarser varieties of cotton goods in 1877.

The Sea Customs Act of 1878 established a comprehensive framework for maritime customs. However, political pressure led to the abolition of all import duties in 1882. The reinstatement of duties in 1894 at a general rate of 5 percent, accompanied by the passage of the Indian Tariff Act in the same year, reflected ongoing tensions between imperial commercial interests and emerging Indian industrial concerns. The imposition of excise duty on Indian cotton goods in 1894, which was not abolished until 1925, generated significant resentment and became a focal point of nationalist economic critique. The Land Customs Act of 1924 extended formal customs procedures to land borders, while air customs regulations developed through rules framed under the Indian Aircraft Act of 1911.

Following independence in 1947, India’s manufacturing sector expanded significantly, necessitating more sophisticated trade regulation. The Customs Act of 1962 consolidated previous legislation, including the Sea Customs Act and Land Customs Act, while incorporating provisions for air customs. This consolidation aligned Indian customs administration with guidelines developed by the World Customs Organization, establishing a modern framework for regulating the movement of goods into and out of India [2].

Legal Framework Governing Customs

The contemporary customs regime operates through an interconnected system of statutes, rules, regulations, and notifications. The Customs Act of 1962 serves as the principal legislation, providing comprehensive provisions for duty levy and collection, import and export procedures, prohibitions on goods movement, and penalties for violations. This Act extends its jurisdiction to the entire territory of India, including territorial waters.

The Customs Tariff Act of 1975 complements the primary legislation by establishing detailed classification systems and duty rates. Schedule I of this Act specifies classifications and rates for imports, while Schedule II addresses exports. The Act also provides the legal foundation for various specialized duties, including Countervailing Duty, preferential duty arrangements, anti-dumping measures, and protective duties tailored to specific industries or circumstances.

Section 156 of the Customs Act empowers the Central Government to frame rules consistent with the Act’s provisions to carry out its purposes. Various rules have been promulgated under this authority, addressing procedural and administrative matters. Similarly, Section 157 grants the Board power to make regulations for implementing the Act’s objectives. The Supreme Court in Sukhdev Singh v. Bhagatram Sardar Singh established that regulations framed under statutory provisions carry the force of law [3].

Notifications issued under various sections of the Customs Act provide flexibility in customs administration. Section 25(1) authorizes the Central Government to grant partial or complete exemptions from duty, while Section 11 permits prohibition of import or export of specified goods. These notification powers enable rapid response to changing economic conditions and policy priorities.

The Central Board of Indirect Taxes and Customs exercises significant influence through circulars issued under Section 151A of the Customs Act. These circulars ensure uniformity in goods classification and duty levy, and customs officers are required to observe and follow Board instructions. While these circulars primarily guide administrative practice, they significantly impact customs operations across the country.

Recent Legislative Developments

The year 2021 witnessed substantial amendments to customs legislation, primarily focused on trade facilitation and compliance enhancement. A definite period of two years, extendable by one additional year, was prescribed for completing investigations, providing greater certainty to trade participants. The amendments also established that conditional exemptions shall have validity for two years unless specifically provided otherwise or varied earlier.

The Import Goods Concessional Rate Rules underwent significant modification to enhance manufacturing flexibility. These amendments permit job work on imported goods, excluding gold, jewelry, and other precious metals. The rules now allow 100 percent outsourcing for manufacture of goods on a job work basis, expanding operational options for importers. Additionally, imported capital goods used for specified purposes can now be cleared upon payment of differential duty, calculated on depreciated value using norms applied to Export Oriented Units under the Foreign Trade Policy [4].

Corresponding changes in the Customs Tariff Act of 1975 and associated rules addressed trade remedial measures. These modifications introduced provisions for anti-absorption investigations, bringing uniformity to the regulatory framework and strengthening India’s ability to respond to unfair trade practices.

Judicial Interpretation of Import and Export

The definition and timing of import and export have generated substantial judicial consideration. The Supreme Court’s interpretation of these terms has significant implications for duty liability and compliance obligations. Section 2(23) of the Customs Act defines ‘import’ as bringing goods into India from a place outside India, while Section 2(18) defines ‘export’ as taking goods out of India to a place outside India.

In New Video Ltd. v. Chief Commissioner of Customs, the court held that customs duty is payable on replacement parts provided free of cost during warranty periods, even when duty was paid on originally supplied parts. This ruling clarified that each importation constitutes a separate dutiable event. Conversely, in Chief Commissioner of Customs v. Aban Loyd Chiles Offshore Ltd, the court recognized that goods imported for repairs and return do not attract customs duty, as such import is not for home consumption [5].

The determination of when import occurs has been subject to extensive judicial analysis. In Gramophone Company of India v. Birendra Bahadur Pandey, the court held that ‘import’ includes goods imported for transit across to Nepal, establishing that the statutory definition encompasses transit scenarios. Indian Airlines v. Chief Commissioner of Customs addressed the treatment of fuel remaining in aircraft tanks after international flights when used for domestic operations, holding that such fuel constitutes ‘import’ and attracts customs duty.

Section 2(27) of the Customs Act includes territorial waters within the definition of ‘India’, initially suggesting that import might be complete upon goods entering territorial waters. However, conflicting High Court judgments necessitated Supreme Court clarification. In Kiran Spinning Mills v. Chief Commissioner of Customs, the Supreme Court definitively held that import is completed only when goods cross the customs barrier. The taxable event occurs when goods cross this barrier, not when they land in India or enter territorial waters. For warehoused goods, the customs barrier is crossed when goods are removed from the warehouse and brought into the mass of goods within the country [6].

The Supreme Court in Garden Silk Mills Ltd. v. Union of India further elaborated this principle, stating that import of goods commences when they enter territorial waters but continues and is completed when goods become part of the mass of goods within the country. The taxable event is reached when goods reach the customs barrier and a bill of entry for home consumption is filed. While slight variations exist between these judgments, the consistent principle is that mixing with the mass of goods in the country after crossing customs barriers constitutes the taxable event for customs duty on imports.

Union of India v. Apar Pvt Ltd confirmed that for warehoused goods, which remain in customs bond, import occurs only upon clearance from the warehouse. This principle was reinforced in Kiran Spinning Mills v. Chief Commissioner of Customs, establishing that taxable events occur at the customs barrier crossing rather than upon physical arrival in India [7].

International Organizations and Customs Regulation

International organizations play crucial roles in harmonizing customs practices and facilitating global trade. The World Customs Organization, originally established as the Customs Cooperation Council in 1952, represents an independent intergovernmental body dedicated to enhancing effectiveness and efficiency of member customs administrations. The organization adopted its current name in 1994 to reflect its evolution into a truly global institution. Headquartered in Brussels, the WCO operates two principal wings addressing valuation and classification [8].

With worldwide membership, the WCO is recognized as the voice of the global customs community. Its work encompasses development of international conventions, instruments, and tools addressing commodity classification, valuation, rules of origin, customs revenue collection, international trade facilitation, customs enforcement activities, and combating counterfeiting in support of Intellectual Property Rights. These standards significantly influence national customs regimes, including India’s.

The World Trade Organization assumes responsibility for substantial portions of work pertaining to customs. This organization monitors customs activities in individual countries to ensure they remain consistent with international interests. The WTO prevents countries from imposing excessively high protective customs duties or anti-dumping duties without proper justification, thereby preventing trade wars arising from customs duties or quantitative restrictions on imports or exports [9].

The European Customs Union, operating as part of the European Union, maintains consistent customs regulations within the EU. The existence of a dedicated organization exclusively for customs activities underlines the importance customs plays in international trade and economic relations within the EU and with the global economic community.

Objectives and Policy Considerations

The primary objective behind levying customs duties in India extends beyond revenue generation to encompass protection of each nation’s economy, employment, environment, and residents. This is achieved through careful regulation of goods movement in and out of the country. Customs duty serves to minimize smuggling of demerit goods such as cigarettes and alcoholic beverages, which typically face high taxation with rates varying significantly across borders.

The quantum of customs duty in India depends upon provisions within the Customs Act of 1962, Customs Tariff Act of 1975, and related customs rules, notifications, circulars, case law, and annual Union Finance Acts. This multifaceted framework enables the government to respond dynamically to changing economic conditions, international trade obligations, and domestic policy priorities while maintaining consistency with constitutional requirements and international commitments.

The customs regime serves multiple stakeholders and objectives simultaneously. For domestic industries, it provides protection against unfair foreign competition while encouraging competitiveness and efficiency. For consumers, it influences prices and product availability. For the government, it generates substantial revenue while serving as a tool for implementing trade policy. For international trade partners, India’s customs regime must remain consistent with bilateral and multilateral trade agreements while protecting legitimate national interests.

Conclusion

Customs duties have existed in India since ancient times, evolving continuously to meet changing economic and political circumstances. The contemporary framework reflects this historical evolution while incorporating modern international standards and best practices. The system comprises numerous laws, rules, regulations, notifications, and circulars that collectively govern customs duties in India. International organizations play an important role in oversight and coordination, monitoring countries with respect to customs duties and promoting the harmonization of customs practices globally.

The recent amendments demonstrate ongoing commitment to trade facilitation while maintaining necessary controls and revenue collection. As India’s economy continues to integrate with global markets, the customs regime will undoubtedly continue evolving, balancing the imperatives of trade facilitation, revenue generation, and protection of legitimate national interests. The judicial interpretation of customs provisions has provided important clarification on key concepts, establishing principles that guide customs administration and provide certainty to trade participants.

Understanding customs duties in India requires appreciation of their historical development, constitutional foundations, statutory framework, administrative implementation, and judicial interpretation. The system reflects broader policy objectives extending beyond simple revenue collection to encompass industrial protection, trade policy implementation, and international cooperation. As global trade patterns continue evolving and new challenges emerge, the customs regime will need to adapt while maintaining core principles of fairness, transparency, and consistency with international obligations.

References

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

[2] Customs Act, 1962. Available at: https://www.cbic.gov.in/resources//htdocs-cbec/customs/cs-act/formatted-html/cs-act-index 

[3] Sukhdev Singh v. Bhagatram Sardar Singh, AIR 1975 SC 1331. 

[4] Foreign Trade Policy 2023. Available at: https://www.dgft.gov.in/CP/ 

[5] CC v. Aban Loyd Chiles Offshore Ltd, 2008 (230) ELT 1 (SC). 

[6] Kiran Spinning Mills v. Commissioner of Customs, 2001 (132) ELT 3 (SC). 

[7] Union of India v. Apar Pvt Ltd, 1999 (112) ELT 641 (SC). 

[8] World Customs Organization. Available at: https://www.wcoomd.org/ 

[9] World Trade Organization. Available at: https://www.wto.org/