Customs Duty and GST: Legal Framework and Regulatory Mechanisms in India

 

Introduction

India’s taxation system has undergone significant transformation since independence, particularly with the implementation of the Goods and Services Tax regime in 2017. Customs duty represents one of the oldest forms of taxation in the country, serving multiple objectives beyond revenue generation. The intersection between customs duty and GST creates a complex regulatory framework that governs international trade while protecting domestic industries. Understanding this framework requires examining the constitutional foundations, statutory provisions, and judicial interpretations that shape India’s indirect tax landscape.

Constitutional Framework for Taxation

The Constitution of India establishes clear boundaries for taxation through Article 265, which provides that “no tax shall be levied or collected except by authority of law” [1]. This fundamental provision prevents arbitrary taxation and ensures that all tax impositions must have legislative backing. The constitutional mandate requires that both the levy and collection of taxes must be authorized through valid legislation passed by the competent authority. The distribution of taxation powers between the Union and States is outlined through the Seventh Schedule, which categorizes subjects into Union, State, and Concurrent Lists, thereby defining which level of government can impose specific taxes.

The Customs Act, 1962: Foundational Legislation

The Customs Act, 1962 serves as the principal legislation governing the import and export of goods in India [2]. This Act extends to the whole of India and provides the legal framework for levying and collecting customs duties. The Act defines “import” as bringing goods into India from a place outside India, and “export” as taking goods out of India to a place outside India. The legislation encompasses multiple objectives including the levy and collection of duties, regulation of imports and exports, prevention of smuggling and illegal activities, protection of domestic industries, and conservation of foreign exchange.

Under Section 12 of the Customs Act, 1962, duties of customs shall be levied at rates specified under the Customs Tariff Act, 1975, on goods imported into or exported from India [2]. The Act applies equally to goods belonging to the government and private entities, ensuring uniform treatment across all categories of importers and exporters. The legislation establishes various customs stations including customs ports, customs airports, and land customs stations where goods must be presented for clearance.

Customs Tariff Act, 1975: Rate Structure

The Customs Tariff Act, 1975 complements the Customs Act by specifying the rates at which customs duties are levied [3]. This Act consolidates and amends the law relating to customs duties and provides two schedules: the First Schedule for import tariffs and the Second Schedule for export tariffs. Section 2 of the Act mandates that the rates at which duties of customs shall be levied under the Customs Act, 1962 are specified in these schedules.

The Act provides for additional duties beyond basic customs duty. Section 3 previously levied additional duty equal to excise duty, commonly known as Countervailing Duty, which has now been subsumed under the GST framework. The valuation of imported goods for duty calculation purposes is determined under Section 14 of the Customs Act, which generally follows the transaction value principle while incorporating various adjustments for freight, insurance, and other charges.

Integration of GST with Customs Law

The implementation of GST in July 2017 brought fundamental changes to the customs duty structure. The constitutional basis for this integration lies in Article 269A, which treats imports as inter-state supplies [4]. The Integrated Goods and Services Tax Act, 2017 defines import of goods as bringing goods into India from a place outside India. Section 5 of the IGST Act, read with Section 3(7) of the Customs Tariff Act, 1975, provides for the levy of IGST on imported goods.

The IGST on imported goods is levied and collected in accordance with the provisions of the Customs Tariff Act on the value determined under that Act at the point when customs duties are levied [4]. This integration ensures that imported goods are subject to the same tax treatment as domestically supplied goods, thereby creating a level playing field. The value for calculating IGST comprises the assessable value determined under the Customs Act plus basic customs duty and any other duties chargeable on the goods.

Components of Customs Duty in the GST Era

Post-GST implementation, the customs duty structure consists of two primary components: Basic Customs Duty and IGST. Basic Customs Duty remains a non-creditable cost component for importers, meaning it cannot be claimed as input tax credit against output GST liability. The BCD rates are notified by the Central Government and vary across different categories of goods based on policy objectives including protection of domestic industry and revenue considerations.

IGST, on the other hand, is creditable and can be utilized by registered importers against their output tax liability on domestic supplies [5]. This fundamental distinction between BCD and IGST has significant implications for import cost structures and business planning. While BCD becomes a permanent cost burden, IGST functions as a cash flow consideration that can be recovered through the input tax credit mechanism. The effective customs duty burden has increased in the post-GST era, with median rates potentially reaching approximately 37 percent compared to pre-GST rates of around 26 percent, depending on the applicable IGST rates.

Three Categories of GST and Interstate Supplies

The GST framework operates through three distinct categories: Central Goods and Services Tax levied by the Central Government, State Goods and Services Tax levied by State Governments, and Integrated Goods and Services Tax applicable to interstate transactions. The CGST and SGST apply to intra-state supplies, where the location of the supplier and the place of supply are within the same state. IGST applies when the location of the supplier and the place of supply are in different states, or when goods are imported into India.

Section 7 of the IGST Act treats all imports as interstate supplies, thereby bringing them within the ambit of IGST [4]. This classification ensures uniformity in tax treatment and prevents cascading effects. The place of supply for imported goods is deemed to be the location of the importer, which determines which state receives the tax revenue. This mechanism ensures proper revenue distribution while maintaining the integrity of the GST chain.

Documentation and Clearance Procedures

The Customs Act prescribes specific documentation requirements for import and export transactions. For imports, the importer must file a Bill of Entry under Section 46 of the Customs Act, which serves as the primary document for customs clearance. The Bill of Entry contains details about the imported goods including description, quantity, value, and applicable tariff classification. This document also facilitates the calculation and payment of applicable duties including BCD and IGST.

For exports, Section 50 mandates the filing of a shipping bill for goods to be exported by vessel or aircraft, or a bill of export for goods to be exported by land. These documents serve multiple purposes including assessment of export duties if applicable, compliance with export regulations, and claiming benefits such as duty drawback or IGST refunds. The integration of the GST Network with the Customs Electronic Data Interchange system ensures seamless flow of information and enables validation of input tax credit claims.

Input Tax Credit Mechanism for Imports

One of the significant advantages of the GST regime is the availability of input tax credit on imported goods. The IGST paid at the time of import can be utilized by registered importers to set off their output tax liability on domestic supplies [5]. The Bill of Entry serves as a valid document for claiming input tax credit, similar to how tax invoices function for domestic purchases. This mechanism prevents the cascading effect of taxes and ensures that the final tax incidence falls only on the end consumer.

However, certain conditions must be satisfied for claiming input tax credit. The importer must be registered under GST, the imported goods must be used for business purposes, and the IGST paid must be reflected in the GST returns. The restriction on input tax credit under Section 17(5) of the CGST Act applies equally to imported goods, meaning that credit cannot be claimed on goods used for personal consumption or for purposes specifically blocked under the Act. Additionally, while IGST and compensation cess paid on imports are available as credit, Basic Customs Duty and education cess remain non-creditable, creating a permanent cost component.

Valuation of Imported Goods

The valuation of imported goods forms the basis for calculating both customs duty and IGST. Section 14 of the Customs Act prescribes that the value of imported goods shall be the transaction value, which is the price actually paid or payable for the goods when sold for export to India. This transaction value must be adjusted to include various elements such as cost of transportation to the place of importation, loading and handling charges, insurance costs, and certain post-importation costs if borne by the buyer.

The Customs Valuation Rules, 2007 provide detailed guidelines for determining transaction value and prescribe alternative methods when transaction value cannot be determined. These methods include transaction value of identical goods, transaction value of similar goods, deductive value method, and computed value method. The valuation determined under these provisions becomes the base for calculating IGST under Section 3(8) of the Customs Tariff Act, which provides that the value shall be the assessable value plus basic customs duty and any other duty chargeable as an addition to customs duty.

Special Provisions for Warehousing and High Seas Sales

The Customs Act provides for warehousing facilities under Chapter IX, allowing importers to store goods without immediate payment of customs duty and IGST. When goods are deposited in a warehouse, only an into-bond bill of entry is filed, and duties are paid later when an ex-bond bill of entry is filed for clearance. This facility provides significant cash flow benefits to importers who can defer duty payment until the goods are actually cleared for home consumption.

High seas sales represent another specialized area where goods are sold by the original importer to another person before the goods cross the customs frontier of India. The customs authorities, through Circular No. 33/2017-Customs dated August 1, 2017, have clarified that IGST on high seas sales transactions shall be levied only at the time of importation when import declarations are filed, with value additions from high seas sales being included in the assessable value [6]. This ensures that all value additions occurring before customs clearance are captured for duty calculation purposes.

Export of Goods and Zero-Rating

The GST law treats exports of goods as zero-rated supplies under Section 16 of the IGST Act. Zero-rating means that while the supply is taxable, the rate of tax is zero, and the exporter can claim refund of input tax credit on inputs and input services used in the manufacture or supply of export goods. This ensures that exports leave India without any embedded tax burden, thereby making Indian goods competitive in international markets.

Exporters have two options under the GST framework: they can export goods under payment of IGST and claim refund subsequently, or they can export goods without payment of IGST by furnishing a Letter of Undertaking or bond. The latter option provides cash flow benefits as exporters need not block their funds in tax payment and subsequent refund claims. The shipping bill filed with customs authorities serves as the key document for claiming refunds or for exporting under bond.

Recent Judicial Developments

The Supreme Court of India has delivered several landmark judgments interpreting customs and GST provisions. In a recent ruling, the Court upheld the constitutional validity of arrest powers under the Customs Act and GST Acts while establishing safeguards to protect assessees [7]. The Court clarified that arrests cannot be arbitrary and must be based on clear material evidence, with officers required to maintain proper records and provide grounds of arrest.

Another significant development relates to the denial of input tax credit due to supplier errors. The Supreme Court held that taxpayers should be allowed to rectify bonafide errors even after prescribed timelines, and that purchasers should not suffer double taxation when they have paid the tax amount [8]. These judicial pronouncements provide important safeguards for taxpayers while ensuring that the enforcement mechanisms under customs and GST laws are exercised fairly and within constitutional bounds.

Conclusion

The regulatory framework governing customs duty and GST in India represents a sophisticated system that balances multiple objectives including revenue generation, protection of domestic industry, facilitation of international trade, and integration with the domestic tax system. The constitutional mandate under Article 265 ensures that all taxation has legislative backing, while the Customs Act, 1962 and Customs Tariff Act, 1975 provide the operational framework for levy and collection. The integration of GST with customs law through the IGST Act has created a seamless tax structure, though it has also increased the effective duty burden on imports. Understanding this framework requires careful attention to statutory provisions, valuation principles, procedural requirements, and evolving judicial interpretations that continue to shape this dynamic area of law.

References

[1] Government of India. “Article 265 of the Constitution of India.” India Code. Available at: https://www.indiacode.nic.in

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

[3] Government of India. “The Customs Tariff Act, 1975 (Act No. 51 of 1975).” India Code. Available at: https://www.indiacode.nic.in/handle/123456789/8774

[4] Government of India. “The Integrated Goods and Services Tax Act, 2017.” Central Board of Indirect Taxes and Customs. Available at: https://cbic-gst.gov.in

[5] Government of India. “Imports in GST Regime.” GST Council. Available at: https://gstcouncil.gov.in/sites/default/files/e-version-gst-flyers/Imports_in_GST_Regime.pdf

[6] Central Board of Indirect Taxes and Customs. “Circular No. 33/2017-Customs dated 01.08.2017 – Leviability of Integrated Tax on High Seas Sales Transactions.” CBIC. Available at: https://www.cbic.gov.in

[7] Supreme Court of India. “Union of India v. Various Petitioners (2025) – Constitutional Validity of Arrest Powers under Customs and GST Acts.” SC Online. Available at: https://www.scconline.com/blog/post/2025/03/03/supreme-court-verdict-constitutional-validity-arrest-provisions-customs-gst-acts/

[8] Supreme Court of India. “Central Board of Indirect Taxes and Customs v. M/s Aberdare Technologies Private Limited & Ors. (2025).” Tax TMI. Available at: https://www.taxtmi.com/article/detailed?id=14008