What is the difference between custom duty and excise duty?

BY: Pankaj Bansal , founder at newspatrolling.com

The key difference between customs duty and excise duty lies in the type of goods they apply to and the stage at which they are levied:

1. Customs Duty:

• Definition: Customs duty is a tax imposed on goods when they are imported into or exported out of a country.
• Applicability: It applies to goods crossing international borders.
• Purpose: Its primary purposes are to regulate trade, protect domestic industries from foreign competition, and generate revenue for the government.
• Types: It includes various sub-categories like import duty, export duty, and anti-dumping duty.
• Example: If a company imports raw materials from another country, it may have to pay customs duty based on the value and category of the goods.

2. Excise Duty:

• Definition: Excise duty is a tax levied on goods produced or manufactured within a country.
• Applicability: It applies to goods produced for domestic consumption.
• Purpose: The main purpose of excise duty is to raise revenue for the government and sometimes to control the consumption of certain goods (like tobacco and alcohol).
• Types: It includes specific excise duties (on certain goods) and ad valorem excise duties (based on the value of goods).
• Example: If a company manufactures cigarettes or alcohol within a country, it may have to pay excise duty on the products.

In summary:

• Customs duty is applied to imported or exported goods.
• Excise duty is applied to goods manufactured domestically for consumption within the country.

 

Customs Duty:

• Legal Framework: Customs duties are governed by international trade agreements and the customs laws of the respective country. In India, for example, the Customs Act of 1962 and the Customs Tariff Act of 1975 regulate customs duties.
• Types of Customs Duty:
1. Basic Customs Duty (BCD): This is the standard duty charged on goods that are imported or exported.
2. Countervailing Duty (CVD): Imposed to offset subsidies provided to foreign exporters by their governments, ensuring a level playing field for domestic industries.
3. Anti-Dumping Duty: Charged when goods are imported at a price lower than their normal value in the exporting country, preventing dumping practices.
4. Safeguard Duty: Imposed to protect domestic industries from a sudden surge in imports that could cause injury to the local market.
5. Social Welfare Surcharge: Additional duty imposed for social welfare purposes in some countries, like India.
• Calculation of Customs Duty: Customs duty is calculated based on the assessable value or transaction value of goods, which includes the cost, insurance, and freight (CIF) of the goods. This is then multiplied by the applicable rate of customs duty to arrive at the final amount.
• Importance: Customs duty serves as a protective measure for local industries, regulates the flow of goods, and generates revenue. Additionally, it helps regulate the movement of goods, including prohibited or restricted items like narcotics and arms.

Excise Duty:

• Legal Framework: In most countries, excise duty is levied under the Central Excise Act. However, in India, since the introduction of the Goods and Services Tax (GST) in 2017, most excise duties were subsumed under GST. Excise duty still applies to certain goods, such as petroleum, alcohol, and tobacco.
• Types of Excise Duty:
1. Basic Excise Duty: This is the standard excise duty imposed on all manufactured goods.
2. Special Excise Duty: Imposed in addition to basic excise duty on specific goods.
3. Additional Excise Duty: Charged in place of sales tax on certain commodities like tobacco products and textiles.
• Calculation of Excise Duty: Excise duty can be calculated based on:

• Specific duty: A fixed amount is charged per unit of goods (e.g., per liter, per kilogram).
• Ad valorem duty: This is charged as a percentage of the value of the goods.

• Importance: Excise duty helps raise government revenue and control the production and consumption of goods considered harmful or luxury items (like tobacco and alcohol). It can also be used to encourage or discourage the production of certain goods within a country.

 

Key Differences at a Glance:

Aspect	Customs Duty	Excise Duty
Applies to	Goods imported/exported	Goods manufactured domestically
Stage of Levy	When goods cross international borders	During production or manufacture
Scope	International trade	Domestic goods
Purpose	Protect local industries, regulate trade	Generate revenue, regulate consumption
Example	Import duty on cars from another country	Excise duty on domestically produced alcohol

Global and Domestic Implications:

• Customs Duty: High customs duties can discourage imports, leading to protectionism. Lower customs duties, often a result of free trade agreements (FTAs), can promote international trade.
• Excise Duty: Excise duties on products like cigarettes and alcohol are often increased to reduce consumption due to their health impacts. In developing countries, excise duties can also be a significant source of revenue.

Both customs and excise duties play a critical role in a country’s fiscal policy and its approach to regulating trade and production.