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Customs regulations are stringent in India and, if not followed, may lead to substantial costs in terms of extra duty or imposition of penalties. On the other hand, the FTP and Customs regulations provide a variety of exemptions or concessions to importers for export promotion or specified end use.
Recently Indian Customs have introduced 'self assessment' scheme for import and/or export of goods into/ from India wherein, the importer/ exporter would be required to self assess the value, duty, etc.. Further, For securing international supply chain is India Customs is also in the process of rolling out Authorised Economic Operator scheme.
Import of goods into India and export of goods from India is regulated by the Foreign Trade Policy (FTP) issued by the Directorate General of Foreign Trade (DGFT).
The Ministry of Finance (Department of Revenue), through the Central Board of Excise and Customs (CBEC), implements and administers Customs regulations in India.
As a member of the World Trade Organization (WTO), India uses transaction value as the primary basis for the valuation of imported goods for Customs purposes. It is also a member of the World Customs Organization (WCO) and uses the Harmonized System for the tariff classification of its imports and exports.
The general rate of Customs duty is 26.85 percent on goods (non-agricultural products) and 23.89 percent on capital goods.
India has restricted the import of some products. These products are only allowed to be imported if the importer has received a license and include second hand goods and products containing Ozone Depleting Substances.
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Imported goods in India are subject to various types of Customs duty which are calculated cumulatively. However some duties, like the education cess are calculated as a percentage of other duties. Therefore, the general effective Customs duty rate is approximately 26.85 percent. It comprises following duties:
Basic Customs Duty - General rate is 10 percent, but for capital goods the rate is 7.5 percent.
Additional Customs Duty - Levied in lieu of excise duty leviable on goods manufactured in India. Presently, general rate applicable is 10.30 percent.
Additional Duty of Customs - This duty is levied in lieu of VAT / Sales tax leviable on local sale of goods in India. Presently, this duty rate is four percent.
Education Cess - Levied at the rate of two percent of the Customs duty.
Secondary & Higher Education Cess - Levied at the rate of one percent of the Customs duty.
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A number of commodities require special permits and licenses or authorizations from other Government agencies prior to their importation to India. Examples of these are Ozone Depleting Substances, and drugs, such as Penicillin.
Filing an import entry Every importer has to file an import declaration (known as a Bill of Entry) at the time of import into India. Incorrect filing can result in fines, penalties, forfeitures and even criminal punishment.
Fines, penalties and forfeitures can arise from any kind of customs error. Errors in customs declarations (such as origin, tariff classification, valuation, and quantity declarations), use of special trade programs or free trade agreements, and even post-entry submissions (such as end-use statements) can all be the basis for a penalty. Customs authorities can issue penalties to an importer even if the customs broker made the error.
Penalties can either be civil or criminal. Civil penalties usually are issued for accidental errors (errors due to carelessness or inadvertent mistakes) and criminal penalties for intentional violations. However, Customs may prosecute accidental errors as intentional violations, which forces the importer to prove that the mistake was an accident.
Current risks to companies Indian Customs rules are complex, frequently amended and subject to varying interpretations especially in relation to determination of transaction value and the claiming of duty exemptions.
The Customs authority is becoming more active and is closely scrutinizing import and export transactions. This scrutiny has resulted in the issuance of Show Cause Notices in the event of any non-compliance of Customs regulations.
Duty drawback and bonded warehousing - Duties paid on imported materials used in the production of product that is exported may be reclaimed, usually in the form of duty drawback. Furthermore, drawback may also be allowed on a specified percentage of duty paid on goods imported and used in India, upon re-export of such goods. However, the goods must be re-exported within a specified time frame.
Importers can also avail themselves of duty exemptions on imported raw materials and capital equipment used in the production of finished goods, provided they are manufactured in a bonded warehouse and exported from India.
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India is party to various FTAs which include the Asia-Pacific Trade Agreement with Bangladesh, Korea, Sri Lanka and China ('APTA'), the Global System of Trade Preferences with 48 countries ('GSTP'), the Comprehensive Economic Cooperation Agreement with Singapore ('CECA'), the Agreement on South Asian Free Trade Area with Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka, Maldives ('SAFTA'), the India-Thailand FTA, Preferential Trade Agreements with the Association of South East Asian Nations ('ASEAN') and South Korea. Recently, India has concluded comprehensive economic cooperation agreement with Malaysia and comprehensive economic partnership agreement with Japan.
FTA with European Union is expected to be signed by the end of current year. India has also started negotiations with Canada, New Zealand and Australia for comprehensive economic cooperation agreements.
In order to qualify for preferential duty rates, a company must comply with the rules of origin for that particular FTA. These rules have varied criteria (e.g. regional value content or shift in tariff classification) which apply differently to products depending on the FTA.
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SEZs are introduced to provide an internationally competitive and conducive environment for exports. SEZs and units set up in SEZs are allowed to import raw materials and capital equipment free of duty and taxes.
Export Promotion Schemes Export promotion schemes are provided under FTP (and are available subject to certain conditions) to increase exports from India, which include:
- Advance Authorization Scheme - Import of raw materials without payment of Customs duty
- Duty Entitlement Passbook Scheme - Post-export benefit available to exporters
- Export Promotion Capital Goods Scheme - Concessional basic customs duty at the rate of 3 percent (nil percent for specified industries) on capital goods, payable subject to fulfilment of specified export obligations
- Focus Market Scheme/Focus Product Scheme - Provides duty credit entitlement equivalent to 3 or 2 percent of Free on Board (FOB) value of exports, to specified countries, for specified products, for each licensing year
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