How import duty stacks, and why the order changes it

The most common way to misprice an import is to treat the duty stack as a list. Take basic customs duty, add the surcharge, add IGST, apply the total to the invoice value. That method produces a figure of roughly the right size, which is precisely what makes it dangerous: nothing about the answer announces that the base was wrong. The components are not parallel. They are nested, and the statutes that levy them say what each one is computed on.

Why is the duty stack a sequence and not a sum?

Because each levy names its own base, and the bases refer to each other. Section 12 of the Customs Act 1962 is the charging provision, under which duties of customs are levied at the rates specified under the Customs Tariff Act 1975 on goods imported into India. Everything after that is a separate enactment computing itself on some combination of the assessable value and the duties already charged. Move one component up or down the fold and the total moves, because you have changed what the layers above it are standing on.

This is also why a rate table is not a calculator, and why two importers quoting the same line from the same table can defensibly disagree on the total while agreeing on every rate. The only presentation that survives a challenge is component by component, in order, each named to the instrument that levies it, so that the arithmetic can be reconstructed line by line rather than trusted.

What is the base before any rate is applied?

Section 14(1) of the Customs Act 1962 sets it: the value of imported goods is the transaction value, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, subject to the conditions in the rules. That is not the invoice figure as it stands. The first proviso to Section 14(1) requires the transaction value to include, in addition to the price, amounts paid or payable for costs and services including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, and loading, unloading and handling charges, to the extent specified in the rules.

The currency conversion is fixed too, and not by the market. The third proviso to Section 14(1) requires the price to be calculated with reference to the rate of exchange in force on the date on which the bill of entry is presented under Section 46, and the Explanation defines that rate of exchange as one determined by the Board or ascertained as the Board directs. A quote converted at today's spot rate is already wrong at the first line, before a single percentage has been applied.

What sits directly on the assessable value?

Basic customs duty, at the rate specified for the line in the First Schedule to the Customs Tariff Act 1975 or as modified by an exemption notification, computed on the value determined under Section 14. Beside it, but computed on the same base rather than on the duty, sits the Agriculture Infrastructure and Development Cess. Section 115 of the Finance Act 2021 levies it as a duty of customs on goods specified in the First Schedule to the Customs Tariff Act, at a rate not exceeding the rate of customs duty specified in that Schedule.

Section 115(3) of the Finance Act 2021 is the sentence that decides where the cess sits: where the duty is leviable at a percentage of value, the value for calculating the cess is calculated in the same manner as the value of goods is calculated for the purpose of customs duty under Section 14 of the Customs Act 1962. So it is a value based layer, not a duty based one, and Section 115(4) confirms it is in addition to any other duties of customs chargeable under the Customs Act or any other law.

What is computed on the running total of duties?

The Social Welfare Surcharge, and this is the layer that makes the fold a fold. CBIC Circular No. 02/2020-Customs dated 10-01-2020 states that under Section 110 of the Finance Act 2018 the surcharge is levied and collected on goods imported into India as a duty of customs on the goods specified in the First Schedule to the Customs Tariff Act 1975, and that it is calculated at the rate of ten percent on the aggregate of duties, taxes and cesses which are levied and collected under Section 12 of the Customs Act 1962.

Ten percent of an aggregate of duties behaves nothing like ten percent of a value. It rises and falls with every component beneath it, which means an exemption two layers down changes the surcharge without anyone touching the surcharge. Whether a particular cess enters that aggregate is decided by the instrument that levies it and how it is collected, so on a line carrying several cesses that is a question to settle explicitly with your customs broker rather than to assume.

Why does IGST sit on a grossed-up base?

Because the Customs Tariff Act says so in terms, and this is the single most useful sentence in the whole calculation. Section 3(7) of the Customs Tariff Act 1975 provides that any article imported into India shall in addition be liable to integrated tax at such rate, not exceeding forty percent, as is leviable under Section 5 of the Integrated Goods and Services Tax Act 2017 on a like article on its supply in India, on the value of the imported article as determined under Section 3(8).

Section 3(8) then defines that value as the aggregate of the value determined under Section 14(1) of the Customs Act, or the tariff value fixed under Section 14(2), and any duty of customs chargeable on that article under Section 12 of the Customs Act, and any sum chargeable on that article under any law in force as an addition to, and in the same manner as, a duty of customs, expressly excluding only the integrated tax itself and the compensation cess under Section 3(9). Every duty layer beneath IGST is therefore inside the base IGST is charged on. That is the grossing up, and it is statutory rather than conventional.

Why does an exemption on one layer not clear the layer above it?

Because each levy is a separate enactment and an exemption has to name what it exempts. CBIC Circular No. 02/2020-Customs dated 10-01-2020 addressed exactly this on the Social Welfare Surcharge and relied on the judgment of the Supreme Court dated 06-12-2019 in Unicorn Industries against Union of India, quoting the holding that a notification has to be issued for providing exemption under the source of power, and that the proposition that simply because one kind of duty is exempted other kinds automatically fall cannot be accepted.

The practical consequence is that a duty benefit has to be traced layer by layer rather than assumed to cascade. A scheme or notification that clears basic customs duty may leave the surcharge standing, and because the surcharge stands, it also remains inside the IGST base under Section 3(8) of the Customs Tariff Act. A benefit that looks total on the first layer can leave two layers untouched, which is a sequencing error dressed as an exemption question.

What leaves the bank, and what comes back?

The fold produces one number, and a finance owner needs three. Basic customs duty, the Agriculture Infrastructure and Development Cess and the Social Welfare Surcharge are duties of customs, they are not creditable under the GST framework, and they sit permanently in the cost of the goods. The integrated tax charged under Section 3(7) of the Customs Tariff Act is a different animal: for a registered importer it is largely working capital out and working capital back, on a timing lag. The compensation cess under Section 3(9) follows its own credit rules under the Goods and Services Tax (Compensation to States) Act 2017, which we have not reproduced here.

Hold those separately or the comparison between two quotes is meaningless. The duty fold calculator computes the components in order and splits permanent cost from the recoverable amount. IGST on imports and the credit takes the recoverable half from the bill of entry through to the return, which is where the lag is actually measured.

Where to go from here

The fold is one of three arithmetics on the same consignment: what it costs, what comes back, and what it costs to get the declaration wrong.

• The credit half of the fold. IGST on imports and the credit follows the bill of entry into GSTR-2B and the return.
• Ranking suppliers on the result. Landed cost at your gate turns the fold into a comparison per saleable unit.
• The fields the fold depends on. The bill of entry, field by field covers classification, valuation and the rate of exchange date.
• The eligibility question underneath. What stops a container at the port covers trade remedy and origin, which move the fold more than any rate.

Frequently asked questions

How is import duty calculated in India, step by step?

Import duty is computed in sequence rather than added as a set of rates. The assessable value is determined under Section 14(1) of the Customs Act 1962 and converted at the rate of exchange in force on the date the bill of entry is presented. Basic customs duty and the Agriculture Infrastructure and Development Cess are computed on that value. The Social Welfare Surcharge is computed at ten percent on the aggregate of duties levied under Section 12. Integrated tax is then computed on the value defined by Section 3(8) of the Customs Tariff Act 1975, which includes the duties beneath it.

Why is IGST on imports charged on more than the invoice value?

Section 3(8) of the Customs Tariff Act 1975 defines the value for integrated tax as the aggregate of the value determined under Section 14(1) of the Customs Act 1962 and any duty of customs chargeable under Section 12 of that Act, plus any sum chargeable under any law as an addition to, and in the same manner as, a duty of customs, excluding only the integrated tax itself and the compensation cess. Every duty layer beneath the integrated tax is therefore inside its base.

What is the Social Welfare Surcharge computed on?

CBIC Circular No. 02/2020-Customs dated 10-01-2020 states that under Section 110 of the Finance Act 2018 the Social Welfare Surcharge is levied on imported goods as a duty of customs and is calculated at the rate of ten percent on the aggregate of duties, taxes and cesses which are levied and collected under Section 12 of the Customs Act 1962. It is a percentage of duties, not of value, so it moves whenever any component beneath it moves.

Does an exemption from basic customs duty also remove the surcharge?

Not automatically. CBIC Circular No. 02/2020-Customs dated 10-01-2020 relied on the Supreme Court judgment dated 06-12-2019 in Unicorn Industries against Union of India for the proposition that a notification has to be issued to provide an exemption under the relevant source of power, and that exempting one kind of duty does not make other kinds fall away. A benefit has to be traced layer by layer, and a surcharge that survives also stays inside the integrated tax base.

Which exchange rate applies when computing import duty?

The third proviso to Section 14(1) of the Customs Act 1962 requires the price to be calculated with reference to the rate of exchange in force on the date on which the bill of entry is presented under Section 46, and the Explanation to Section 14 defines that rate as the one determined by the Board or ascertained in the manner the Board directs. The spot rate on the day a quote arrived does not govern.