Navigating customs clearance and regulations in India
This white paper outlines a number of areas of Indian customs regulations and practice which are useful for anyone involved in import or export to know.
As it is a major growth market, more and more businesses need to get familiar with India’s regulations.
Customs clearance is often a task left to specialists, but it is useful for logistics personnel to have an overview of some of the challenges and pitfalls. This white paper outlines a number of areas of Indian customs regulations and practice which are useful for anyone involved in import or export to know. It is not a substitute for specialist professional advice tailored to your circumstances.
Overview of Indian Customs
The Central Board of Indirect Taxes and Customs (formerly the Central Board of Excise & Customs) is a part of the Department of Revenue under the Indian Ministry of Finance. The board deals with the tasks of formulation of policy concerning levying, administration and collection of Customs Duty & Goods and Service Tax (GST), smuggling prevention and also some matters related to narcotics. Customs also supports other government agencies by ensuring the correct application of their regulations. These include:
- The Directorate General of Foreign Trade (DGFT), which has the responsibility for implementing the government’s foreign trade policy.
- The Bureau of Indian Standards (BIS), which has the responsibility as National Standards Body to develop standardisation, marking and quality certification of certain goods.
- The Wireless Planning Commission (WPC), which is a wing of the Ministry of Communications and has the responsibility as regulatory authority for frequency spectrum management. All wireless equipment needs approval from the WPC.
- The Food Safety and Standards Authority of India (FSSAI) is a regulatory authority for Food related products.
- Plant Quarantine (PQ) is regulatory authority for imports of Plant and Agriculture related products.
- The Central Drugs Standard Control Organization (CDSCO) is the Central Drug Authority for discharging functions assigned to the Central Government under the Drugs and Cosmetics Act. Approval is required for all Pharmaceuticals and Bulk Drug.
- Animal Quarantine (AQ) is the regulatory authority for imports of animals and animal-related products.
- Extended Producer’s Responsibility (EPR) for Electrical and Electronic Equipment listed in Schedule I of e-Waste Management Rules.
- Extended Producers Responsibility (EPR) for Plastic packaging listed in Plastic Waste Management Rules.
Import Export Code (IEC)
It is essential when importing or exporting goods that you obtain an Import Export Code (IEC) from the Directorate General of Foreign Trade (DGFT). An IEC can be applied for online by the Importer or Exporter on the DGFT website. Normal processing time is 72 hours, provided the application contains all the necessary details and is completed correctly.
Goods and Services Tax Identification Number (GSITN)
This is a 15-digit Number. All the business entities registering under GST will be provided a unique identification number known as GSTIN or GST Identification Number. Mandatory for all Importer and Exporter on record.
See the customs manual for details.
Customs Tariff Heading (CTH) / Harmonized System Nomenclature (HSN)
Indian Customs is a member of the World Customs Organization (WCO) and follows the Harmonized System (HS) which is a goods nomenclature that is developed and maintained by the WCO, and which is governed by an international convention.
Product classification under a proper HSN or CTH is very crucial part of customs processing because they not only determine the tariff or duty rate, but also the end use of the product.
The classification of goods for import and export purposes has always been a challenge for businesses due to the very nature of the classification process and different interpretations by customs and businesses. Classification requires in-depth understanding of the product description and use as well as knowledge of the classification system process.
The goods are classified by ‘product families’ and are under an 8 Digit Code. The Customs tariff Heading covers 21 sections and 98 chapters.
The eight-digit code shows the HSN at eight-digit level under the name "Tariff Item".
- The first two digits of the code provide the chapter number,
- The next two digits give the Customs Tariff Head (CTH) grouping.
- The third set of two digits in the code gives the Customs Tariff Sub-heading.
- The resulting six-digit code is aligned with the Harmonized System of Nomenclature adopted by the World Customs Organization.
- The last two digits indicate the Customs Tariff sub-head for the classification.
See checking unit code (UQC) and Basic Customs Duty.
It is mandatory that the Unit Price is appropriately declared in the Customs Bills of Entry hence the supplier invoice needs information as per UQC.
Customs Valuation Regulations (CVR)
It is essential that valuations given for customs purposes are real and genuine.
Article VII of the General Agreement on Tariffs and Trade (GATT) from 1994 lays down the main principles of customs valuation. Be aware that the customs value should not be arbitrary, fictitious or based on the value of indigenous goods. It should be real and based on the actual value of goods under import, or of similar goods. It should also derive from a sale or offer of sale in the ordinary course of business under fully competitive conditions. If the actual value cannot be determined, the customs value should be based on the nearest ascertainable equivalent of such value. The agreement on customs valuation contains provisions to implement these principles. If Customs suspects that the declaration of value is not correct, there can be delays in obtaining customs clearance, not to mention heavy penalties for misdeclaration.
The basis of customs value should be the transaction value. However, Indian regulations provide six methods of valuation:
- The Transaction Value Method;
- Comparative Value Method based on Transaction Value of identical goods;
- Comparative Value Method based on Transaction Value of similar goods;
- Deductive Value Method based on subsequent sale price in the importing country;
- Computed Value Method based on cost of materials, fabrication and profit in the country of production;
- Fallback Method based on previous methods with greater flexibility.
A method may only be applied if the previous method or methods in the list cannot be applied. They are thus listed in order of priority. For example, method 1 must be applied unless it cannot be. Then method 2 must be considered. It is not permitted to simply select a preferred method among the six.
The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CVR) defines all the methods.
Assessable Value
Customs Assessed Value or Customs Value means the value of goods for the purposes of levying Duties & Taxes.
Cost of Goods + Insurance + Freight & other charges incurred up to the consignment made available at customs location is the assessable value of the consignment.
Based on the Incoterms as per supplier’s Invoice, if the Freight from pickup location to arrival at destination plus Insurance is not included in the supplier’s invoice the respective cost would be added up to the supplier’s invoice value to consider the Assessable value. Refer below table, “Yes” in the column means relevant cost to be added to the Value on commercial invoice.
| Terms | Value on commercial invoice | Origin inland handling charges | Freight charges | Insurance premium |
|---|---|---|---|---|
| CIF/DDP/DAP | Yes | |||
| EXW/FCA | Yes | Yes | Yes | Yes |
| FOB | Yes | Yes | Yes | |
| C&I | Yes | Yes | Yes | |
| C&F | Yes | Yes |
Note: Cost and Insurance and Cost and Freight are non-standard terms which are used in India.
* If no Insurance premium receipt is provided, customs calculates it as 1.125% of FOB value.
Any goods which are supplied free of charge, such as commercial samples, should still have the value shown on the invoice but with the additional mention “Value declared for customs purpose only”.
Repaired and returned goods need a complete set of documents when exported from India for repairs. The Assessable Value for return would be cost of repair + cost of freight in both directions. Even if the repair is free of charge for the importer, the cost of repair must still be declared for duty purposes.
Used or Refurbished or Secondhand goods are subject to import restrictions into India. The assessable value method may only be used if authorised chartered engineers are used to determine the valuation. Do not dispatch second hand or used goods without confirmation from destination office in India.
Some HSN or CTH are restricted and prohibited for import into India. The importer must verify the DGFT list of restricted and prohibited items prior to importation.
Related Parties
It is important to be aware of the checks and investigations which may be carried out by the Special Valuation Branch (SVB) of Indian Customs. It is specialised in investigating transactions where there is a relationship between the supplier and the importer, and certain other special features such as “Technical Collaboration” between the parties.
Special Valuation Branch examines the influence of any relationship on the invoice value of the imported goods in respect of transactions between the related parties. This is in order to determine whether the existence of any such relationship or agreement has influenced the invoice value of the imports.
Importers who are related to the supplier in terms of Rule 2(2) of the Customs Valuation Rules 1988 are required to register with the SVB.
Rule 2(2) of the Customs Valuation Rules 1988:
For the purpose of these rules, persons shall be deemed to be "related" only if:
i) They are officers or directors of one another's businesses
ii) They are legally recognised partners in business
iii) They are employer and employee
iv) Any person directly or indirectly owns, controls or holds 5 per cent or more of the outstanding voting stock or shares of both of them
v) One of them directly or indirectly controls the other
vi) Both of them are directly or indirectly controlled by a third person
vii) Together they directly or indirectly control a third person
viii) They are members of the same family
Note that "person" also includes legal entities.
Persons who are associated with the business of one another in that one is the sole agent, sole distributor or sole concessionaire of the other (however described) are deemed to be related for the purpose of these rules if they fall within the criteria of this sub-rule.
In addition, any person having a collaboration agreement, technical assistance agreement or any other agreement / contract with the foreign supplier is also required to register with the SVB.
If you are such an importer, you will be required to submit additional information by replying to a questionnaire, and also provide all the documents requested.
ATA Carnet
In India, the Federation of Indian Chambers of Commerce and Industry (FICCI) has been appointed as National Guaranteeing & Issuing Association for ATA Carnets. They also provide the Endorsement letter to customs for imports under ATA Carnet.
The main categories of goods temporarily imported under cover of ATA Carnets are the following:
Antiques, machinery, machine-tools, catering equipment, canned food, footwear, toys, computers, office equipment, transformers, electric generators, electrical/electronic and scientific equipment, surgical and dental equipment, jewellery and articles of precious metal/stones, "hi-fi", audio-visual, photographic and filming equipment, lasers, musical instruments and records, display material, aircraft, films, motor vehicles and accessories, racing engine machinery, heating and lighting equipment, agricultural machinery, furniture, crockery, paintings and other works of art, umbrellas, race-horses, suitcases, perfume, theatrical effects and sets, concert and musical instruments, leather and sports goods, clothing, yachts and boats, display stands.
An ATA Carnet is the best way of managing temporary imports into India for a specific demonstration, promotional event etc. The maximum permitted period for such temporary imports is six months. Restricted and Prohibited items not allowed freely under ATA Carnet.
Free Trade Warehousing Zones (FTWZ)
FTWZs are governed by the Special Economic Zone (SEZ) Act, 2005 and SEZ Rules, 2006 and instructions for FTWZ. An FTWZ is a warehousing facility physically in India but considered outside the Indian Customs territory for Authorised Operations.
A Free Trade Warehousing Zone (FTWZ) is a special solution where imported goods can be stored for up to two years without payment of customs duty by overseas companies, with no obligation of Permanent Establishment (PE) in India nor requirement of having a buyer in India for holding or selling goods from an FTWZ in India. So, for overseas suppliers to store goods in an FTWZ, a buyer or importer in India need not provide any documents nor the customs duty is payable until the goods are sold to an Indian Domestic Tariff Area’s (DTA) Indian entity from the FTWZ. For a buyer in India purchasing from FTWZ is same customs process as applicable for purchasing from overseas supplier and customs procedures on arrival in India.
Within an FTWZ, re-packing, labelling, assembling, kitting or similar activities are permitted. Assembling and quality inspection, consolidation and de-consolidation are also permitted by Indian customs regulations. However, it is important to note that no activity which would alter the HS code of the product may be undertaken, such as anything which would be considered manufacturing.
However, shipping in large quantity packaging and selling in retail packaging is permitted from within an FTWZ. Trading companies buying from multiple countries may also consolidate in the FTWZ and sell under one invoice to a buyer in India.
For exporting from India, using an FTWZ can be an ideal solution for companies procuring from multiple manufacturers within India and shipping to any location across the globe as a consolidated shipment. Moving the goods into the FTWZ is treated as an export, so the shipping documents from the Indian manufacturer are closed once the cargo is exported to the FTWZ. Onward movement from the FTWZ to outside the country is then on overseas client invoices and shipping documents.
Appendix
Free Trade Agreements, Preferential Tariff Agreements, Comprehensive Economic Cooperation Agreement
India has signed agreements with the countries and country groupings below. Imports into India from these countries entitle the importer to special duty exemptions.
Free Trade Agreements
- South Asian Free Trade Area (SAFTA)
- Least Developed Countries (LDC)
- Sri Lanka – India
- Thailand – India
Preferential Tariff Agreements
- Korea – India
- Mercosur India
- Asia Pacific Trade Agreement (APTA)
- Malaysia – India
- SAARC agreement
- Bangladesh agreement
- Chile – India
- Mauritius, Seychelles, Tonga – India Preferential Tariff Area
Comprehensive Economic Cooperation Agreement
- Association of Southeast Asian Countries (ASEAN)
- Japan – India
- Singapore – India
- United Arab Emirates – India
- Australia – India
Each agreement covers specific Customs Tariff Headings (CTHs) (HSN) in the respective agreement as amended and updated.
Conclusions
The Indian customs concepts outlined in this white paper are of necessity generic and brief and are intended to highlight areas you may not be aware in order to prompt further investigation and professional advice. Special Valuation Branch compliance can be a major hindrance for multinational businesses in addition to the restrictions on moving used or second-hand items. Understanding India’s Foreign Trade Policy is crucial for all stakeholders including exporters and importers. However, the Indian customs authorities’ steps to ease the bureaucratic burdens for doing business continue to help improve the processes as well as overall transparency.
About the authors
Tushar Deshmukh is Sr. Director, Customs Brokerage & Free Trade Warehouse Zones at DSV in India. He has over 30 years of diverse experience in the transport and logistics industry, including customs clearance for imports & exports in India. He is also an active member of the Indian customs brokers association and is well versed with India’s foreign trade policy and Customs Compliance.
Dharmesh Shah is Head Compliance, Customs Brokerage at DSV India. He has over 30 years of experience in customs compliance and allied acts management. His on-field experience provides the customers a proper guidance as a consultant.
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