Customs clearance in India(1)

Understanding Indian Market


Indian market has expanded and it has become imperative for companies wanting to do business with India, to understand the India’s rules and regulations. While customs clearance is often handled by specialists, logistics personnel may benefit from understanding the potential issues and challenges involved.

The Indian Ministry of Finance’s Department of Revenue includes the Central Board of Indirect Taxes and Customs, which develops policies related to administering and collecting Customs Duty, Goods and Service Tax (GST), as well as preventing smuggling and managing narcotics. Additionally, Customs assists other government agencies with the proper implementation of their regulations.

Other regulatory bodies include the Directorate General of Foreign Trade (DGFT), responsible for implementing the government’s foreign trade policy; the Bureau of Indian Standards (BIS), the National Standards Body responsible for quality certification and development of standardization and marking of certain goods; the Plant Quarantine (PQ), responsible for overseeing the import of plant and agriculture-related products; the Central Drugs Standard Control Organization (CDSCO), responsible for regulating pharmaceuticals and bulk drugs; and the Wing of the Ministry of Communications, responsible for managing frequency spectrum through the Wireless Planning and Coordination (WPC).

Importing or exporting businesses should obtain an Import Export Code (IEC) from the DGFT. Proper classification of products using the Harmonized System Nomenclature (HSN) or Common Tariff Heading (CTH) is vital for customs processing, as it determines the applicable tariff or duty rate and intended use of the product. Businesses must provide genuine and accurate valuations for imported goods according to the six methods of valuation outlined in the Indian regulations, known as Customs Valuation Regulations (CVR).

Import Export Code

When engaging in import or export activities, it is crucial to obtain an Import Export Code (IEC) from the Directorate General of Foreign Trade (DGFT). An IEC can be conveniently applied for online through the DGFT website by the importer or exporter. To ensure a smooth and timely process, it is important to provide all necessary details accurately and completely, with a normal processing time of 72 hours.

Customs Tariff Heading (CTH)

The Indian Customs is a signatory of the World Customs Organization (WCO) and adheres to the Harmonized System (HS) which is a system of product classification developed and updated by the WCO under an international convention. Proper classification of products using the Harmonized System Nomenclature (HSN) or Common Tariff Heading (CTH) is a vital aspect of customs processing since it determines the applicable tariff or duty rate, as well as the intended use of the product.

Determining the correct classification of goods for import and export has been a persistent challenge for businesses. This is due to the complex and subjective nature of the classification process, which can lead to different interpretations by both customs officials and businesses. Accurate classification requires a thorough understanding of the product description and use, as well as familiarity with the classification system.

Goods are classified into “product families” and assigned an 8-digit code. The Customs Tariff Heading includes 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 represent the chapter number
  • The next two defines customs tariff head (CTH) grouping
  • The third set of two represents custom tariff sub heading
  • The six-digit coded is aligned with harmonized systems adopted by world customs organization (WCO)
  • The last two digits represent the Customs Tariff sub-head for the classification.

Customs Valuation Regulations (CVR)

To ensure smooth customs clearance and avoid penalties, it is crucial to provide genuine and accurate valuations for imported goods. The principles of customs valuation are laid down in Article VII of the General Agreement on Tariffs and Trade (GATT) from 1994, which requires that the customs value should not be arbitrary, fictitious, or based on the value of indigenous goods. It should instead be based on the actual value of the imported goods or similar goods, derived from a sale or offer of sale under fully competitive conditions. If the actual value cannot be determined, the customs value should be based on the nearest ascertainable equivalent. The agreement on customs valuation includes provisions to implement these principles. If Customs suspects that the declared value is incorrect, it can lead to delays in obtaining customs clearance and significant penalties for misdeclaration.

The Indian regulations provide six methods of valuation:

  •  The Transaction value method
  • Comparative value method based on the transaction value of identical goods
  • Comparative value method based on the 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
  • Fallback method based on previous methods with greater flexibility

Assessable Value

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.

When supplying goods free of charge, such as commercial samples, the value must still be shown on the invoice along with the additional mention “Value declared for customs purposes only”.

For repaired and returned goods, a complete set of documents is needed when exporting from India for repairs. The assessable value for return is the cost of repair plus the 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, refurbished, or secondhand goods are subject to import restrictions into India, and the assessable value method may only be used if authorized chartered engineers determine the valuation. Do not dispatch secondhand or used goods without confirmation from the destination office in India.

Some HSN or CTH are restricted and prohibited for import into India, so importers must verify the DGFT list of restricted and prohibited items before importation.

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

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