Consider customs duty as the key gatekeeper at the border of international trade, a tax applied to goods cross borders which constitutes an important revenue source for governments and protection for the local economy. To navigate this undertaking, governments have a multifunctional toolkit of customs duty types. The Basic Customs Duty is the first, or basic, tax on an item’s value. The Countervailing Duty (CVD) or IGST counteracts foreign subsidies to keep competition fair. Anti-Dumping Duty is to counteract predatory pricing, and a Safeguard Duty protects local industries from sudden import surges in times of emergency. A Social Welfare Surcharge is applied for public health schemes and education, and while not as often used, Export Duty can be applied to restrict the outflow of certain raw materials or other resources. Collectively, these mechanisms provide a country the opportunity to manage its marketplace, protect its industry, and protect its economic interests.

What is Customs Duty?

Customs duty (which is also referred to as a tariff or import duty) is a type of tax that a government imposes on goods or services coming into or going out of a country. Customs duties are collected at the border of a country by a government customs authority (U.S. Customs and Border Protection in the USA, HM Revenue & Customs in the UK, and the Central Board of Indirect Taxes and Customs in India). Customs duties for imports are collected at the point of entry (the border), and customs duties for exports are collected at the port or point of exit. The main function of a customs duty is to:

• Safeguard domestic industries: By raising the cost of imports, it offers protection to domestic firms from foreign competition.
• Create revenue: This generates an income stream for the government.
• Control trade: It can help limit imports of some goods (for example, luxury goods or goods that are harmful to the environment) or encourage exports by offering reduced duties.
• Support trade policies: Including retaliatory measures taken against unfair trading practices such as dumping or subsidies.

Customs duties are regulated by international agreements similar to the World Trade Organization (WTO) agreements, which intend to reduce barriers to trade and encourage fair competition. Rates will vary by country, product, and trade agreement (for example, free trade agreements like NAFTA/USMCA reduce or eliminate duties between the parties).

Types of Customs Duties

Anti-Dumping Duty:

An Anti-Dumping Duty is a tax that a nation adds to certain imported goods sold at an unfairly low price. The unfair practice, referred to as “dumping,” occurs when a foreign entity exports a product at a price materially lower than the price charged for the same product when sold in its home market. The purpose of dumping is to drive the same product sold in the importing country out of business by underpricing it. As soon as the competition is extinguished, the player may increase its price to a profitable level. To avoid a negative outcome, the importing nation’s government will investigate the situation and then impose an Anti-Dumping Duty. The additional tax simply provides a fair price for the commodity that is being imported. It protects the local business and local jobs from predatory and harmful competition.

Basic Customs Duty (BCD):

Basic Customs Duty (BCD) is the primary and most generic tax that the government levies on goods being imported into the country. It is a means of establish a price an importer must pay to have a product brought into the local market from a foreign market. BCD is assessed as a fixed percentage of the product’s value, as determined by the customs officers. The government has in place a tariff schedule that details a set BCD rate for different categories of products. For example, essential items that typically have little or no BCD such as medicines are assessed at a 0% BCD, while luxury items such as high-end cars or electronics will be assessed significantly higher. BCD is essentially the first and only cost that will be charged against an import and is the base used to calculate all subsequent taxes and duties.

Special Additional Customs Duty (SAD) or Additional Duty of Customs:

The Special Additional Customs Duty (SAD) is a supplement to the Basic Customs Duty levied on imported goods in India. It is intended to mitigate the advantage enjoyed by goods produced outside of India as compared to goods bought in India. Because local manufacturers pay taxes, like VAT, that add to their cost to the product, SAD ensures that an imported product does not have a lower cost simply because it has not paid the same taxes when imported. The purpose of this duty is to protect Indian industries by eliminating a disparity to the cost of products resulting from taxes paid locally and avoids imports from being at an unfairly priced. In 2017, the introduction of GST largely replaced SAD and therefore understanding the purpose is important if we are to better understand how government uses duties to help level the playing field between the goods made within the

Export Duty:

Export duty is a government fee charged on specified goods that leave a country. Export duties are aimed at preventing exports of essential goods or raw goods to maintain an adequate supply for domestic industries and their citizens. It also serves the government as a means of obtaining revenue from unique natural resources that have highly sought after value globally, allowing countries to obtain money for its natural resources. Export duties assist the government in the stewardship and allocation of resources while managing the economy.

Countervailing Duty (CVD):

Countervailing Duty is a specific tariff on imported goods subsidized by foreign governments. If the foreign government finances its producers to allow them to sell their products at unfairly low prices, the CVD is used to counter-vail the distortions in price resulting from subsidization. The importing country investigates and assesses the level of subsidy involved, then imposes a tariff to eliminate the subsidy differential to improve the competitiveness of the imported products and to maintain some level of price for the domestic industries competing at that lower price. Ultimately, the goal of CVD is to protect domestic industries from the effects of unfair competition, grounding the ability of local companies to survive and engage in

Additional Customs Duty (ACD) or Countervailing Duty in Lieu of Excise:

Additional Customs Duty is an additional charge available on some imported goods to bring the tax burden level with the locally-produced goods. Before the GST system, local manufacturers were required to pay the Excise Duty when the products were produced. Hence, imported goods would be at a tax advantage over local goods. Therefore, the ACD was put in place, which is the same amount of Excise Duty, which would have been paid had the product been manufactured in India. ACD was introduced both to equalize the tax burden and protect.

Protective Duty:

A Protective Duty, also known as a Protective Tariff, is an import tax that supports a nascent or struggling industry from overseas competition. Such a duty increases the price of imported goods, offering a price advantage to local production, including services. Orders meant for local goods can encourage local growth, business development, and, eventually, competition. This duty would protect local factories, local jobs, the local economy, giving them time to grow and mature.

Safeguard Duty:

Safeguard Duty is an interim tax instituted by the government to protect domestic industry from harmful pressures caused by increased imports. For example, imagine that imports of a product like steel suddenly increase to such an unreasonable level that it harms local producers. The government can impose a safeguard duty to increase the expense associated with imports of this product. The purpose of the duty is to give local industry time to recover, innovate, and become competitive again against any potential harm. The safeguard duty acts as a buffer when these industries are overwhelmed.

Preferential Duty:

Preferential Duty is a reduced customs duty rate extended by one country to certain designated or specified partner countries. It is a treated or privileged discount offered to the partner country through a trade agreement or to help developing countries. The increase in trade, and ultimately, was endorsed via a duty reduction, makes goods from partner countries cheaper and more competitive, which facilitates trade and encourages enhanced national relationships.

How is Customs Duty Calculated?

The calculation depends on the type of duty, but generally involves:

• Assessable Value: Typically the CIF (Cost, Insurance & Freight) value of goods for imports.
• Rate Application: The assessable value is then multiplied by the duty rate (e.g., duty rate is 10% of assessable value).
• Other Possible Factors: There may also be a surcharge, anti-dumping fee or exemptions to approaching the rate if provided under trade agreements (e.g., free trade zone or preferential tariffs for agreements such as NAFTA/USMCA or terms under European Union single market).

Key Aspects of Customs Duties

Global Trends and Reforms:

• Impact of the World Trade Organization: Globally, average tariffs fell from 40% in the 1940s to under 10% today with the introduction and continuation of rounds of general agreement on tariffs and trade (GATT) WTO negotiations.
• Technological advancements: Risk assessment tools such as AI and secure supply chain technologies like blockchain make the fear of evasion less probable.
• After COVID-19: As protectionism rises (US-China trade war tariffs), green tariffs are gaining attention to restrict carbon-intensive imports (EU’s Carbon Border Adjustment Mechanism).
• Developing Countries: Many of these countries rely on tariffs for 20-30% of their revenue. Some developing countries, however, find themselves under pressure to liberalize in exchange for International Monetary Fund (IMF)/World Bank (WB) funds.

Classification and Valuation:

• Products are categorized by internationally recognized classifications such as the Harmonized System (HS) Code. It is a universal standard applied to more than 5,000 products using a 6-digit code system.
• As for valuation, it is conducted in accordance with the World Trade Organization’s (WTO) Agreement on Customs Valuation, which uses transaction value first (invoice price) and computed or deductive value second.

Impact on Economy and Trade:

• Advantageous: Increases local jobs, provides growth for infant industries.
• Disadvantageous: Raises prices for consumers, can lead to trade wars, dislocates global supply chains.
• Example: India’s rise in import duties on edible oils in 2023 to protect farmers, resulting in increased food inflation.

Exemptions and Reliefs:

• Exceptions for Duty-Free Duty-Free: Personal imports (i.e., U.S. travelers can personally import up to $800 worth of goods duty-free).
• Free Trade Agreements: Trade agreements (such as CPTPP or RCEP) that allow for duties to be zero rate for qualifying goods.
• Bonded Warehouses/Foreign Trade Zones: Goods may be stored or processed, but no duty to be paid right away.
• Refund/Drawback: Duties can be claimed on export goods re-exported and/or items that become input materials for export goods.

Enforcement and Compliance:

• Declarations: Importers must submit manifests and perform payment through electronic systems (e.g., Single Window in many countries).
• Audits and Penalties: Random inspections are made, with penalties for undervaluation (to 100% of evaded duty) or smuggling.
• Dispute Resolution: Appeals can be made to customs tribunals or the WTO Dispute Settlement Body.

Conclusion

Customs duty is a type of tax that is assessed on goods entering or leaving a country. The purpose is to generate government revenue, protect local businesses from foreign competition, and act as a means of controlling international trade. Customs duties can be a percentage on the value of goods or a fixed amount. The revenue generates benefits for local industries and jobs; however, customs duties can also increase costs of goods to consumers and possibly lead to disputes in trade. A customs duty is meant to keep global trade fair and balanced, but customs duties can vary in rate and terms so contacting your local customs office is advised.

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