Introduction of Customs Duties in India

Historical Evolution and Legal Framework

India’s customs regime has evolved significantly since the colonial era, when the first customs tariff was recorded in the 1850s. The modern framework governing customs duties in India is primarily established through the Customs Act, 1962, which came into force on February 1, 1963. This legislation consolidated and amended existing laws relating to customs, creating a unified system for regulating imports and exports across the nation. The Act extends to the whole of India and applies to offences committed outside India by any person, demonstrating its extraterritorial application in matters of customs violations.

The Customs Act, 1962, serves as the procedural backbone for customs administration in India, outlining the powers of customs officers, procedures for clearance of goods, valuation methods, and penalties for violations. However, the actual rates at which duties are levied are specified in the Customs Tariff Act, 1975, which replaced the earlier Indian Tariff Act, 1934. Together, these two pieces of legislation form the cornerstone of India’s customs law, balancing the dual objectives of revenue generation and protection of domestic industries while facilitating legitimate international trade.

The genesis of the Customs Act, 1962, lay in the need to consolidate the Sea Customs Act of 1878, the Land Customs Act of 1924, and various provisions relating to air customs. Prior to 1962, India operated under a fragmented system where sea customs, land customs, and air customs were governed by separate legislative instruments. The consolidation brought much-needed uniformity to customs administration and aligned India’s customs practices with evolving international trade norms.

Types of Customs Duties in India

The customs duty in India structure comprises multiple types of duties, each serving distinct policy objectives. The Customs Tariff Act, 1975, which came into effect on August 2, 1976, contains two schedules. The First Schedule specifies rates of import duties, while the Second Schedule prescribes rates for export duties. The classification of goods follows the Harmonized System of Nomenclature developed by the World Customs Organization, which India adopted in 1986, replacing the earlier Brussels Tariff Nomenclature.

Basic Customs Duty is the primary levy on imported goods and is charged under the Customs Act, 1962, as per rates specified in the First Schedule of the Customs Tariff Act, 1975 [1]. The duty is calculated as a percentage of the assessable value determined under Section 14 of the Customs Act. Rates typically range from zero to one hundred percent, depending on the nature of goods and trade policy objectives. The Central Government possesses the authority to exempt certain goods from Basic Customs Duty through notifications issued under Section 25 of the Customs Act, 1962.

Additional Customs Duty, previously known as Countervailing Duty, is levied under Section 3(1) of the Customs Tariff Act, 1975 [2]. This duty equals the excise duty that would be leviable on like articles if produced or manufactured in India. The rationale behind this duty is to create a level playing field between imported goods and domestically produced goods that bear excise duty. However, with the implementation of the Goods and Services Tax from July 1, 2017, the Additional Customs Duty has been largely subsumed into the Integrated Goods and Services Tax levied on imports.

Anti-Dumping Duty is imposed under Section 9A of the Customs Tariff Act, 1975, when goods are exported to India at prices less than their normal value in the country of origin [3]. This duty aims to protect domestic industries from injury caused by dumped imports. The imposition of anti-dumping duty follows investigations by the Directorate General of Trade Remedies, which examines whether dumping has occurred, whether domestic industry has suffered material injury, and whether a causal link exists between the dumping and the injury. India, as a member of the World Trade Organization, implements anti-dumping measures in accordance with the WTO Agreement on Anti-Dumping.

Safeguard Duty is levied under Section 8B of the Customs Tariff Act, 1975, when increased imports of particular products cause or threaten to cause serious injury to domestic industries [4]. Unlike anti-dumping and countervailing duties which target unfair trade practices, safeguard measures are emergency actions against fair imports. The duty is temporary and product-specific, imposed after investigations establish that a surge in imports has caused or threatens serious injury to domestic producers.

Countervailing Duty on subsidized articles is imposed under Section 9 of the Customs Tariff Act, 1975, when imported goods have benefited from subsidies in the exporting country [5]. This duty neutralizes the price advantage that subsidized imports enjoy, ensuring fair competition. The quantum of countervailing duty is equivalent to the estimated amount of subsidy determined through investigations by the Directorate General of Trade Remedies.

Valuation of Goods for Customs Purposes

The valuation of imported goods for calculating customs duties in India is governed by Section 14 of the Customs Act, 1962, read with the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. These rules implement India’s obligations under the WTO Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade, 1994, commonly known as the WTO Customs Valuation Agreement [6].

India adopted the transaction value method as the primary basis for customs valuation with effect from August 16, 1988, when the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, were notified. Prior to this, India used the Brussels Definition of Value, which was based on a notional concept. The shift to transaction value represented a fundamental change toward a positive valuation system based on the price actually paid or payable for goods.

Under the transaction value method prescribed in Rule 3 of the Customs Valuation Rules, 2007, the value of imported goods is the transaction value, which is the price actually paid or payable when sold for export to India. However, the transaction value is acceptable only when the buyer and seller are not related, or if related, the relationship has not influenced the price. The transaction value must also include certain additions such as commissions, brokerage, cost of containers, packing costs, royalties and license fees, and the value of goods and services supplied by the buyer to the seller for use in production of imported goods.

When the transaction value cannot be determined or is not acceptable, the Customs Valuation Rules prescribe five alternative methods to be applied sequentially. These include the transaction value of identical goods, transaction value of similar goods, deductive value based on selling price in India, computed value based on production costs, and finally a residual or fallback method using reasonable means consistent with valuation principles.

Administrative Framework and Enforcement

The Central Board of Indirect Taxes and Customs, functioning under the Department of Revenue in the Ministry of Finance, is the apex administrative body for customs in India. Established in 1855 as the Customs and Central Excise department, it is one of the oldest government departments in India. The CBIC formulates policies concerning levy and collection of customs duties, prevents smuggling, and oversees administration of customs laws through its field formations across the country [7].

The organizational structure includes Commissioners of Customs heading various customs commissionerates at major ports, airports, and land customs stations. Below them function Additional Commissioners, Joint Commissioners, Deputy Commissioners, Assistant Commissioners, and other officers invested with powers under Sections 4 and 5 of the Customs Act, 1962. Section 5 empowers the Central Board of Indirect Taxes and Customs to assign functions to customs officers through notifications, thereby designating them as proper officers for specific purposes.

The Directorate of Revenue Intelligence plays a crucial role in intelligence gathering and investigation of customs-related offences, particularly smuggling and commercial fraud. However, recent judicial pronouncements have clarified the scope of powers exercised by officers of the Directorate of Revenue Intelligence. In the landmark judgment of Commissioner of Customs v. Canon India Pvt. Ltd., the Supreme Court examined whether officers of the Directorate of Revenue Intelligence could be considered proper officers for issuing show cause notices under Section 28 of the Customs Act, 1962 [8].

The Court held that only customs officers who were involved in the original assessment or who were explicitly assigned reassessment functions through valid notifications could issue show cause notices for recovery of duties not levied or short-levied. This judgment emphasized the importance of proper assignment of functions and has significant implications for the functioning of the Directorate of Revenue Intelligence in customs matters. The decision was rendered on November 7, 2024, and has led to reconsideration of numerous pending cases where show cause notices were issued by officers whose jurisdiction was questionable.

Key Provisions Governing Customs Administration

Section 12 of the Customs Act, 1962, constitutes the charging section, stipulating that except as otherwise provided, duties of customs shall be levied at rates specified in the Customs Tariff Act, 1975, or any other law in force, on goods imported into or exported from India. Importantly, subsection (2) clarifies that customs duties apply equally to goods belonging to the government and goods not belonging to the government, eliminating any sovereign immunity from customs duties in india.

Section 46 mandates that importers must file a bill of entry for clearance of imported goods. The bill of entry must be presented before the arrival of the vessel or aircraft or within such time as prescribed by regulations. Similarly, Section 50 requires exporters to file a shipping bill or bill of export for goods intended for export. These provisions establish the documentary framework for customs clearance and enable customs officers to assess duties payable.

Section 28 empowers customs officers to issue show cause notices for recovery of duties not levied, short-levied, or erroneously refunded. The proper officer may serve notice on the person chargeable with duty requiring them to show cause why the amount specified should not be paid. The time limit for issuing such notices is generally one year from the relevant date, but extends to five years in cases involving collusion, wilful misstatement, or suppression of facts.

Sections 111 and 113 of the Customs Act, 1962, provide for confiscation of improperly imported or exported goods. Section 111 lists circumstances under which imported goods become liable to confiscation, including goods imported contrary to any prohibition, goods on which customs duty has not been paid, and goods not included in the declaration for importation. Section 113 similarly provides for confiscation of export goods in specified circumstances. However, Section 125 allows goods liable to confiscation to be redeemed on payment of a fine in lieu of confiscation.

Section 135 prescribes penalties for various offences under the Customs Act. Any person who evades payment of duty, improperly imports or exports goods, or abets commission of such offences may be punished with imprisonment for a term up to seven years and shall also be liable to fine. The section distinguishes between offences relating to goods the import or export of which is prohibited, and offences relating to other goods, with more stringent penalties prescribed for the former category.

Section 104 classifies offences under the Customs Act into cognizable and non-cognizable, and bailable and non-bailable categories. Only four categories of offences specified in subsection (4) are cognizable, while all other offences are non-cognizable. This classification impacts the power of arrest vested in customs officers. The Supreme Court in recent pronouncements has clarified that customs officers exercising arrest powers must comply with safeguards analogous to those applicable to police officers under the Code of Criminal Procedure [9].

International Trade Agreements and Customs Duties

India’s customs duty structure operates within the framework of international commitments undertaken as a member of the World Trade Organization since January 1, 1995. The WTO agreements impose both binding tariff commitments and various obligations regarding administration of customs laws. India’s tariff schedule annexed to the General Agreement on Tariffs and Trade specifies maximum rates of customs duty that India has bound itself not to exceed for listed products. Applied rates of duty may be lower than bound rates, giving India flexibility in setting actual duty rates through the annual Finance Act.

The WTO Agreement on Customs Valuation, formally the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994, establishes standards for customs valuation to prevent arbitrary or fictitious valuations. India implemented this agreement by amending Section 14 of the Customs Act, 1962, and notifying the Customs Valuation Rules in 1988, subsequently replaced by the 2007 Rules. The agreement mandates transaction value as the primary basis, with alternative methods to be used sequentially only when transaction value cannot be determined.

The Trade Facilitation Agreement, which entered into force on February 22, 2017, commits members to expedite movement, release, and clearance of goods. India has undertaken reforms including implementation of a risk management system for clearances, establishment of a Single Window Interface for trade facilitation, and introduction of authorized economic operator programs. These initiatives aim to reduce transaction costs and time for customs clearance while maintaining effective controls.

India has also entered into various free trade agreements and preferential trade agreements with countries and regional groupings. These agreements provide for tariff concessions on imports from partner countries, implemented through notifications under Section 25 of the Customs Act, 1962. Major agreements include the South Asian Free Trade Area, India-ASEAN Trade in Goods Agreement, and bilateral agreements with countries including Japan, Korea, Singapore, and Mauritius. Goods claiming preferential rates must satisfy rules of origin prescribed in respective agreements to qualify for concessional duties.

Recent Developments and Reforms

The customs administration in India has undergone significant modernization in recent years. The Indian Customs Electronic Data Interchange System, operational since the 1990s, enables electronic filing of import and export documents, assessment of bills of entry and shipping bills, and generation of duty payment challans. This system has substantially reduced paperwork and processing time.

In 2020, India introduced faceless assessment and appeals in customs matters to enhance transparency and reduce interface between importers or exporters and customs officers. Under the faceless assessment system, a national assessment center assigns bills of entry to assessing officers located anywhere in the country through an automated process. The assessing officer conducts assessment electronically without meeting the importer. Similarly, appeals are heard through video conferencing without physical appearance.

The integration of customs duty with the Goods and Services Tax regime from July 1, 2017, represented a major reform. While basic customs duty continues to be levied under the Customs Tariff Act, the Additional Customs Duty and Special Additional Duty have been replaced by Integrated Goods and Services Tax and GST Compensation Cess on imports. Importers can claim credit of Integrated Goods and Services Tax paid on imports against their output GST liability, integrating imports into the seamless credit chain.

The Customs Act was amended in 2018 to introduce provisions for electronic sealing of containers and use of non-intrusive inspection technology such as scanners for examination of goods. These amendments aim to expedite clearances while ensuring effective verification. The Act now also provides for paperless processing of refund claims and for notifying certain provisions through electronic means.

Conclusion

Customs duties in India reflects a careful balance between multiple objectives including revenue generation, protection of domestic industries, compliance with international trade obligations, and facilitation of legitimate trade. The legal framework established through the Customs Act, 1962, and Customs Tariff Act, 1975, provides detailed procedures for levy and collection of duties while incorporating international best practices on valuation and administration. Recent reforms focused on digitalization and risk-based clearances indicate India’s commitment to trade facilitation while maintaining effective border controls. As international trade continues to evolve, India’s customs laws and administration will need to adapt to emerging challenges including e-commerce, valuation of intangible goods, and prevention of trade-based money laundering, while remaining consistent with WTO commitments and domestic policy objectives.

References

[1] Customs Act, 1962 (Act No. 52 of 1962), Section 12 read with Customs Tariff Act, 1975 (Act No. 51 of 1975), Section 2. Available at: https://www.indiacode.nic.in/handle/123456789/2475 

[2] Customs Tariff Act, 1975, Section 3(1). Available at: https://taxinformation.cbic.gov.in/ 

[3] Customs Tariff Act, 1975, Section 9A. Available at:https://www.indiacode.nic.in/bitstream/123456789/8774/1/a197551.pdf 

[4] Customs Tariff Act, 1975, Section 8B. Available at: https://www.indiacode.nic.in/bitstream/123456789/8774/1/a197551.pdf 

[5] Customs Tariff Act, 1975, Section 9. Available at: https://www.indiacode.nic.in/bitstream/123456789/8774/1/a197551.pdf 

[6] WTO Agreement on Implementation of Article VII of GATT 1994. Available at: https://www.wto.org/english/tratop_e/cusval_e/cusval_e.htm 

[7] Central Board of Indirect Taxes and Customs. Official website available at: https://www.cbic.gov.in 

[8] Canon India Pvt. Ltd. v. Commissioner of Customs, Supreme Court of India, Review Petition No. 400 of 2021, decided on November 7, 2024. Available at: https://www.grantthornton.in/insights/articles/the-supreme-courts-landmark-verdict-in-canon-india-redefining-the-role-of-dri-under-customs-law/ 

[9] Supreme Court verdict on constitutional validity of arrest provisions under Customs Act. Available at: https://www.scconline.com/blog/post/2025/03/03/supreme-court-verdict-constitutional-validity-arrest-provisions-customs-gst-acts/