CUSTOMS DUTIES

INTRODUCTION
Customs duties are a form of indirect taxes. In the olden days, it was customary for
foreign merchants to offer presents to the king of the land where they went for trade.
Gradually, this custom became formal and compulsory and led to the present-day customs
duties.

OBJECTIVES OF CUSTOMS LAW

Traditionally, customs duties were levied as a source of revenue for the government.
Although, this is still an important objective, customs duties are being levied for achieving a
variety of objectives, including the following:
• Conserving foreign exchange by imposing restrictions on import of goods
• Protecting domestic industry from undue competition
• Prohibiting imports and exports of certain goods
• Regulating imports and exports
• Coordinating legal provisions with other laws

SOURCES OF CUSTOMS LAW

In India, the law relating to the levy and collection of customs duties on imports and
exports of goods is contained in the various acts of the Parliament, rules made by the
government and notifications issued by the customs department. The following are the
source of customs law in India.

1. Customs Act, 1962

This is the principal act that provides for the levy and collection of customs duty and
prescribes procedures for import and export of goods. The Customs Act does not contain
the rates at which customs duty will be charged.

2. Customs Tariff Act, 1975

The Customs Tariff Act, 1975, prescribes the rates of customs duty on import and export of
various goods. This act contains two schedules. Schedule I classifies the goods for import
and prescribes the rate of import duties. Schedule II classifies the goods for export and
prescribes the rate of export duties.
Further, this act provides for additional duties, preferential duties, anti-dumping duties
and protective duties etc.

3. Customs Rules
The Central Government has the power to make rules in order to carry out the various
objectives of the Customs Act. Some of the important rules framed by the Central
Government are: (i) Customs Valuation Rules 1988, for valuation of imported goods for
the purposes of calculating custom duty liability; and (ii) Customs and Central Excise
Duties Drawback Rule, 1971, for calculating export incentives in the form of drawback of
duty.
4. Customs Regulations
The Central Board of Excise and Customs (CBEC) has the power to make regulations to
carry out the provisions of the Customs Act. However, if there is any conflict between the
provisions of the rules (made by the Central Government) and regulations, the
provisions of the rules prevail. One of the important regulations is the Customs House
Agents Licensing Regulations, 1984, which regulates the functioning of custom house
agents (CHAs).
5. Customs Notifications
The Central Government is also empowered to issue notifications for the purposes of
attaining the objectives of the Customs Act. The government has issued several
notifications such as those dealing with partial or full exemption from customs duty,
prohibiting import and export of certain goods, etc.
6. CBEC Circulars
The CBEC is empowered to issue instructions and directions to officers of the customs
department for the purpose of uniformity in classification of goods and levy of customs
duties.

7. Public Notices
Commissioners of Customs sometimes issue public notices, generally, pertaining to local
requirements.

8. Customs Manual
The customs manual, released by the CBEC, gives an overview of customs law and
procedures. It is not clear whether the statements made therein are a part of the 'law'
because the Customs Act has not empowered the CBEC to issue such manual!
a

CONCEPT OF GOODS IN CUSTOMS LAW

Customs duty is charged on import and export of goods. The definition of goods has
been kept quite wide as the law is used not only to collect duty on goods but also to
restrict or prohibit import or export of goods of any description. Thus, in addition to the
usual meaning of the term goods have been defined to include: (a) vessels, aircrafts and
vehicles; (b) stores; (c) baggage; (d) currency and negotiable instruments; and (e) any
other kind of movable property.
The law defines three categories of goods: dutiable goods, imported goods and exported
goods.

1. Dutiable Goods
Dutiable goods are those that are chargeable to duty and on which duty has not yet been
paid. Thus, goods continue to be 'dutiable' till they are cleared from the custody of the
customs department. However, once the duty is paid they no longer remain 'dutiable
goods'.

2. Imported Goods
Imported goods are those'that are brought into India from any place outside India, but do
not include goods that have been cleared for home consumption. Thus, goods once
cleared by customs authorities are no longer imported goods. So the advertisements by
some shops claiming to sell imported goods are legally incorrect!

3. Export Goods
Export goods are those that are to be taken out of India to a place outside India.

CLASSIFICATION OF GOODS
A large number of goods are imported and exported daily. It is not possible to prescribe
rates of duty for each good. Therefore all goods are classified into groups and sub-
groups for the purpose of levy of duty. For each sub-group, a specific rate of duty has
been prescribed. The classification is contained in the Customs Tariff Act, 1975. This
classification is based on an internationally recognized system called the Harmonized
System of Nomenclature (HSN).

CHARGE OF CUSTOMS DUTY

Under our Constitution, the Central Government has been empowered to impose customs
duties on goods imported into or exported out of India.
The law provides that:
'Duties of customs shall be levied at such rates as may be specified under the Customs
Tariff Act, 1975, or any other law for the time being in force, on goods imported into, or
exported from, India.'
In India, customs duties are charged on three bases: physical, tariff value and ad valorem.

1. Physical Basis
Customs duties are sometimes charged on the basis of some physical feature of the
imported item, like weight, length, etc. The value of the imported goods is totally irrelevant in
this case. At present, very few items are charged to duty on this basis.

2. Tariff Value
In some cases, the government fixes the value on which customs duty will be charged.
This is called the tariff value. Once the tariff value is fixed for an item, duty is charged on
this value: the actual price paid by the importer is irrelevant. Tariff value is fixed for only a
few goods.

3. Ad Valorem Basis
When duties are charged on the basis of the value of goods, it is called ad valorem
duties. In a large majority of cases the duties are charged on this basis. This value is also
called as the assessable value or customs value.

TAXABLE EVENT

Customs duty becomes payable when there is import into, or export from, India. Taxable
event refers to the event which gives rise to liability to pay a tax. Under the customs law in
India, the taxable event for imports is different from that of exports.
Taxable Event for Import Duty

Import means bringing goods into India from a place outside India. The law defines
import as follows:
'Import with its grammatical variations and cognate expressions, means bringing into
India from a place outside India.'
The law defines 'India' as inclusive of its territorial waters. Territorial waters refer to
that portion of sea that is adjacent to the shores of a country. Further, the territorial
waters of India extend to twelve nautical miles from the base line on the coast of India
and include any bay, gulf, harbor, creek or tidal river.
The exclusive economic zone extends to 200 nautical miles from the base line. In this
zone, the coastal country has exclusive rights to exploit it for economic purposes like
constructing artificial islands (for oil exploration, power generation, etc.), fishing, mineral
resources and scientific research. However, other countries have the right of navigation
as well as over-flight rights.
Beyond 200 nautical miles, the area is the high seas where all countries have equal
rights. Any country can use it for navigation, over-flight, laying submarine cables and
pipes, fishing, construction of artificial islands permitted under international law and for
scientific research.
There was a raging controversy about when does import actually takes place. Is import
complete when the goods reach the territorial waters of India or should the goods touch
the landmass of India? There were conflicting judgements of different High Courts on
this issue.
Finally, in Kiran Spinning Mills v. CC, 2000, the Supreme Court held that import is
completed only when goods cross the customs barrier. Thus, the taxable event is the day
the goods cross the customs barrier and not the day when goods landed in India or had
entered territorial waters, but when the goods cross the customs barriers.
In Garden Silk Mills Ltd. v. UOI, 2000, the Supreme Court held that import of goods
into India commences when they enter into territorial waters but continues and is completed
when the goods become part of the mass of goods within the country. The taxable event is
reached at the time when the goods cross the customs barriers.
In Gramophone Company of India v. Birendra Bahadur Pandey, 1984, it was held
that import included goods imported for transit across to Nepal.

Taxable Event for Export Duty

Export means taking goods out of India from a place inside India. The law defines
export as follows:
'Export, with its grammatical variations and cognate expressions, means taking out of
India to a place outside India.'
Export is completed when it crosses territorial waters. However, mere removal of goods
beyond territorial watery is not enough; they must be removed after complying with the
provisions of the law. Thus, the taxable event for export duty occurs when goods cross
territorial waters after complying with the customs procedure.
TYPES OF CUSTOMS DUTIES
Many people think that customs duty is one duty. That is not the case: in India we have a
number of duties charged on imported goods. Under the custom laws the following
duties are leviable:
1. Basic Duty of Customs
This is the basic duty of customs levied under the law. Generally, the rate of duty varies for
different items and ranges from 5 per cent to 40 per cent. The basic duty on baggage
is 60 per cent. In order to discourage the import of certain goods a high rate of duty is
imposed. For example, the basic customs duty on import of second-hand cars is 105 per cent
and on whisky it is 210 per cent!

2. Additional Duty of Customs (Countervailing Duty)

Local manufacturers complain that they pay central excise duties when they manufacture an
excisable item in India. However, when a similar item is imported from abroad no stich duty
is charged. Thus, they claim, they suffer a competitive disadvantage vis-a-vis imported goods.
In order to redress this grievance, the additional duty of customs is levied on imported goods
at a rate at which excise duty is levied on a similar product manufactured or produced in
India.
If a similar product is not manufactured or produced in India, the additional duty of
customs that is payable is equal to the excise duty that would be leviable on that product had it
been manufactured or produced in India.
The additional duty of customs is leviable on the value of goods plus basic custom duty
payable.
The objective of imposing this duty is to place the 'imported goods' on the same level as
domestic goods. It is believed that this additional duty of customs would neutralise the
advantage enjoyed by the suppliers of imported goods.

3. Additional Duty of Customs

There is another complaint by the domestic manufacturers that they have to pay a high
amount of other taxes on the raw materials, components and other inputs they use in
manufacture, whereas the manufacturers of imported goods do not pay such duties on inputs.
In order to redress this grievance, another additional duty of customs is levied on imported goods
so that the suppliers of imported goods do not enjoy an unfair advantage over the
manufacturers of domestic goods.

4. Special Additional Duty of Customs (SAD)

The logic for the imposition of this duty is similar to that of the previous two duties. Indian
suppliers feel that since they are required to pay sales tax on the goods sold by them they are
at a competitive disadvantage vis-a-vis imported goods on which no such tax is payable.
The special additional duty of customs is imposed to place domestic goods on par with the
imported goods. The rate of duty is 4 per cent.
5. Anti-dumping Duty
Sometimes, foreign sellers may export goods into India at a price below the amount
chargethey
in their dom estic m arkets. This tactic m ay have a detrim ental effect
Indian
on the
industry.
This is known as dumping.
 In order to prevent dum ping, the Central Governm ent may levy an additional duty of
customs equal to the margin of dumping on such articles, if the goods have been less sold at
than normal value. Anti-dumping duty can be imposed even when goods areindirectly importedor
after changing the condition of goods.
There are however certain restrictions on imposing anti-dumping duties in case of countries which
are members of the World Trade Organization. Anti-dumping duty can be levied on imports
from such countries only if the Central Government proves that import of such goods in
India are at such low prices as to cause material injury to Indian industry.
6. Protective Duty
This duty may be levied if the Tariff Commission is of the opinion that the import of
certain goods is causing injury to the interests of the Indian industry. The Central
Government may levy this duty at the recommended rate on specified goods.
7. Duty on Bounty-fed Articles
In case a foreign country subsidizes its exporters for exporting goods to India, the Central
Government may impose additional import duty equal to the amount of such subsidy or
bounty. If the amount of subsidy or bounty cannot be clearly determined immediately,
additional duty may be collected on a provisional basis and after final determination;
difference may be collected or refunded, as the case may be.
8. Export Duty
Export duty is levied on export of goods. At present very few articles such as skins and
leather are subject to export duty. The main purpose of this duty is to restrict exports of
certain goods.

CUSTOMS FRONTIERS
In order to prevent smuggling, that is, unauthorized import or export of goods, the law
requires that the goods could be shipped, landed or cleared only at specified customs
frontiers. These frontiers comprise the following:
1.
Customs Ports
Any ship entering India from a place outside India must land only at a customs port.
Within the port, the Commissioner of Customs specifies the actual place for loading or
unloading goods.
2. Customs Airports
Any aircraft entering India from a place outside India must land only at Customs airport.
3. Land Customs Stations
Goods being imported through the land route must enter India only at a notified land
customs station.
4. Inland Container Depots (ICDs)
Goods entering into India in containers are required to be earned to the inland container
depots. These depots enjoy the status of a customs port. The places where the goods
are stuffed or un-stuffed in containers are called Container Freight Stations (CFCs).
The CFCs are generally enclosed within a customs port or inland container depots.
5. Warehousing Stations
Imported goods may be stored in warehouses without payment of duty. The duty is paid when
the goods are removed from these warehouses. These warehouses may be public
or private. The Chief Commissioner Customs appoints public warehouses and licences
private warehouses.

VALUATION OF IMPORTED GOODS

In most cases, customs duty is charged on the basis of the value of the imported goods.
However, just what is the value of the imported goods is difficult to determine. The
importers may be tempted to declare a lower value for the imported goods whereas the
customs department may want to place a higher value. This is because importer aims at
paying as less tax as possible and the customs department aims at collecting as much tax as
possible. These diametrically opposite goals give rise to disputes that ultimately land up in
the courts.
When the duty of customs is chargeable on the basis of value of goods, the law defines the
value of imported goods as follows:
'... the price at which such or like goods are ordinarily sold, or offered for sale, for
delivery at the time and place of importation or exportation, as the case may be, in the
course of international trade, where the seller and the buyer have no interest in the
business of each other and the price is the sole consideration for the sale or offer for
sale'.
The above stipulation of law follow the provisions contained in Article VII of General
Agreement on Tariffs and Trade (GATT), now the WTO. The Customs Valuation Rules
have been framed to give effect to the WTO Customs Valuation Agreement that
implements Article VII of GATT.
The Customs Valuation Rules 1988 provide for five methods for valuation of customs
goods. These methods of valuation are required to be applied in a hierarchical order.
The importer is required to furnish a declaration giving complete details of the imported
goods along with relevant documents and proof in support of his valuation. The Customs
Officer l\as the right to satisfy himself as to the truth and accuracy of statements and
documents furnished by the importer or his agent. Penal provisions are attracted in case or
wrongful declaration.
1. Transaction Value
Transaction value refers to the price actually paid by the importer to the foreign supplier.
Ideally, the transaction value must be the basis for charge of duty, but the customs
department is often reluctant in accepting this as a basis for valuation.
The transaction value, to be acceptable for customs valuation must satisfy the following
conditions:
(a) There should be no restriction on the buyer on use or disposal of goods. However,
restrictions imposed by the law in India or restrictions on geographical areas within
which goods may be resold or restriction which does not affect the value of goods
are not to be considered for this purpose.
(b) The sale should be unconditional.
(c) The seller must not be entitled to any additional consideration for the goods.
(d) The buyer and seller should not be related. However, if it is proved that the
relationship has not affected the selling price or that the price is similar to identical or
similar goods sold to unrelated buyers in India, then such relationship is to be
ignored.
 The transaction price declared can be rejected when the customs officer has
reasons to doubt the truth or accuracy of the value declared.
The transaction value, if accepted by the customs authorities, should be adjusted by
the valuation factors. Valuation factors are of two types: dutiable factors and non-
dutiable factors. Dutiable factors must be added to the transaction value. Non-
dutiable factors must be deducted from the transaction value.
The following dutiable factors must be added to the transaction value (if they do not
already form a part of it):
(a) Commission and brokerage except buying commission, is includable. Buying
commission means fees paid by an importer to his agent for the service of
representing him abroad in purchase of the goods being valued.
(b) Commission to the local agent. Foreign suppliers may appoint a local agent in
India for promoting their business activities. These agents are often paid a
commission in Indian rupees directly by the Indian importers. Such commission, if not
included, should be included for valuation.
(c) Packing cost. The cost of primary packing is includable for valuation purposes.
For example, the cost of containers is treated as a part of goods.
H ow ever, th e cost of reusable contain ers for pack ing goods fo r convenience
transport is o f
not to be considered for custom s valuation if the im porterbond executes
for re-exporting
a
such containers w ithin six m onths of im port.
(d) G oods supplied by the buyer. If the im porter has supplied certaincost goods
or atfree
a of
reduced cost for the purposes of production or export of goods, cost of such goods m ust be
included for custom valuation.
(e) Services rendered by the buyer. The expenses incurred by the buyer for
development work, art work, designing, and plans and sketches which are
necessary for production of imported goods is includible if such work is undertaken
outside India.
(f) Royalties and license fees. If the importer has paid royalties and license fees
separately in connection with the imported goods, they are includable unless they
are already included in the selling price.
Royalties include payments for patents, trademarks and copyrights. However,
they do not include charges for the right to reproduce goods in India should not be
added and payments made by importer for the right to distribute or resell imported
goods if such expenses are not a condition for export to India.
(g) The value of subsequent resale. If any part of the sales proceeds on resale of
imported goods is payable to the foreign exporter, directly or indirectly, such part of
the sale proceeds are includible in the transaction value.
(h) Other payments to the seller. If an importer has, directly or indirectly, made payments to
the seller as a condition of sale, such payments are included in the transaction
value for customs valuation.
(i) Cost of transport. Cost of transport or freight from the exporting country to India is
includible in determining customs value. However cost of transport within India is
not to be considered.
If the goods were transported to India through air, the amount of freight to be
included in the transaction value shall be restricted to an amount equal to 20 per
(j) Landing charges. Cost of unloading and handling charges in connection with the
imported goods is to be considered in determining customs value.
 If the amount cannot be clearly ascertained, then an ad hoc amount of one per
cent of the value of goods is to be added to the transaction value
(k) Insurance premia. Insurance charges on goods during transit are to be added. If
such expenses cannot be clearly ascertained, then an ad hoc amount of 1.125 per
cent of the value of the goods is to be added.
The following non-dutiable factors must be deducted from the transaction value if they
from a form a part of it:
(a) Interest charges. If the importer purchases an item from a foreign supplier on
installment basis, then the price will include interest charges. Such interest charges, if
included in the transaction cost should be excluded for the purpose of determining the
assessable value.
(b) Post-importation charges. Post-importation charges refer to expenses incurred
after the goods have been imported. These include expenditure on inland
transportation charges, installation or erection charges, etc. Such charges should be
deducted if they are included in the transaction value.
(c) Duties and taxes. Sometimes, an importer has to pay duties or taxes in the importing
country and such duties are included in the transaction value. Such duties and
taxes should be excluded for the purpose of determining assessable value.

2. Comparative Value of Identical Goods

If, for any reason, the customs authorities are of the view that the transaction value of the
imported goods cannot be determined, then the assessable should be ascertained by using
the 'comparison with transaction value of identical goods method'.
Identical goods are goods that satisfy the following criteria:
• The goods are same as the imported goods in all respects, including physical
characteristics, quality and reputation, except for minor differences that do not affect the
value of the goods.
• The same manufacturer must have manufactured the identical goods as the actual
imported goods.
• The identical goods must have been produced in the same country as the actual
imported goods.

3. Comparative Value of Similar Goods

This method must be adopted if the customs authorities are of the view that the assessable
value cannot be determined by the above two methods.
Similar goods are those goods that satisfy the following criteria:
• The goods are same as the imported goods, in all respects, have like characteristics
and perform the same functions.
• The same manufacturer must have manufactured the similar goods as the actual
imported goods.
• The identical goods must have been produced in the same country as the actual
imported goods.
4. Deductive Value Method
The deductive value method is used for valuation if none of the above methods are found
to be practicable in determining the assessable value.
If the imported item is generally available in India, then the price at which such an item is sold
in India is taken as a base and suitable additions and subtractions are made to arrive at the
assessable value.
For example, if someone imported brand X motorcycle and the customs authorities are unable
to ascertain its value by the first three methods, then the deductive value method will become
applicable. Further, suppose this brand of motorcycle is available in India, the price of the
motorcycle in India will be taken as a base. Certain adjustments will be made to this price to
deduce the assessable value.
5. Computed Value Method
This method should be adopted if the assessable value could not be determined by any of the
above methods. The computed value method involves determining the assessable value by
adding the following:
• Cost of materials, fabrication and profit in the country of production
• Amount for general expenses and profit
• Cost of loading, unloading, transportation, handling charges and insurance
On the request of the importer, the customs authorities may adopt this method prior to the
deductive value method
6. Residual Method or Best Judgement Method
If the assessable value of imported goods cannot be determined by any of the above
methods, the customs authorities are free to determine the value according to their best
judgement. Hence, this method is called as the best judgement method. This method is also
called the residual method and the fallback method.

CUSTOMS PROCEDURES
Customs duties are levied for a number of reasons, including raising revenue, preventing
import
of undesirable goods such as drugs and conserving foreign exchange. Inensure
order tothat
these objectives are met the law prescribes various procedures. If goods imported
are or
exported without following these procedures an offence of smuggling committed
is and the
smuggler is liable to severe punishment. In this paragraph we Ihe:
discuss
• Procedures to be adopted by persons in-charge of conveyance
• Procedures to be adopted by an importer
• Procedures involved in Assessment and Clearance
• Procedures to be adopted by an exporter

Procedure for the Person in charge of Conveyance

The person (s) in charge of the conveyance in which the imported goods are being
brought into India are required to comply with the following procedures.
1. Landing at a Customs Station
The person in charge of a vessel, ship or aircraft entering India must call or land only at a
Customs port or a Customs airport. He may call or land at any other place only if
compelled by accident, bad weather or due to some genuine unavoidable reason. In such a
case, he must report to the nearest police station or custom officer of such emergency
arrival.
In case of import of goods through the land route, the vehicle should follow the approved
route and arrive at the approved Land Customs Station only.
2. Import Manifest
The person in charge of a vessel, ship, aircraft or vehicle must submit, within 24 hours
after arrival at a customs area, an import manifest or import report in the prescribed
form, in duplicate. These documents give details of cargo to be unloaded, unaccompanied
baggage, goods to be transshipped, retention cargo, details such as general declaration
about the conveyance, stores on the conveyance, private property in possession of the
captain of the aircraft or master of the ship and other members of crews.
A separate declaration has to be given in respect of goods like arm s, explosives,
dangerous
narcotics,
drugs, gold and silver.
Som etim es, filing of the im port manifest is allow ed before the arrival of theSteam
vessel
er by the
A gents. T his enables the im porters to clear the im ported goods quickly.
3 . E n try In w a rd
If prima facie, everything is found to be in order and berthing accommodationtois the
available
ship,
the customs officer grants entry inwards. Unloading of cargo can afterstart such
only order is
made.
4. Unloading of Goods
The next step is to unload the goods from the vessel. However, only those goods that
have been mentioned in the import manifest can be unloaded. Such unloading can be
done only at approved places and under supervision of the customs officer on a working
day during working hours. However, unloading on holidays and after working hours may be
allowed after giving notice to the prescribed authorities and after paying the prescribed fees.
5. Custody of Goods
After the goods are unloaded, they shall remain in the custody of the prescribed authority
approved by the Collector of Customs until they are cleared. A tally sheet is prepared
after the goods are unloaded.
If the goods unloaded are lower than the reported quantity, the shipper is liable to pay
penalty up to twice the amount of duty payable on such shortfall in goods.
6. Departure of the Conveyance
The conveyance is allowed to leave only on receiving a written order from the Customs
Officer. Such order is given only after all formalities are completed and all duties and
other payments due are paid. Duties on stores consumed have to be paid.
Procedure for the Importer
The importer has to provide all the relevant information to the customs officers so as
facilitate assessment of duty and clearance of goods. The relevant information has to be
provided in a document called the bill of entry.
The importer must file a bill of entry giving the prescribed details, such as:
• Name and address of the importer
• Importer's Code Number
• Custom House Agent (CHA) details, such as his name address and licence number.
• Details about the ship, such as, name of vessel, rotation number and date, line number,
etc.
• Port of shipment
• Country of origin and country of consignment
• Number of Bill of Lading
9 Description and number of packages
• Description and quantity of goods
A declaration that the details are true and there is no other document showing contrary
information must also be given. The importer himself or his Custom House Agent must
sign the Bill of Entry.
The bill of entry is of three types:
• 'Bill of Entry for Home Consumption' is to be submitted when the imported goods
are to be cleared on payment of full duty for consumption of the goods in India. It is
white in colour.
• 'Bill of Entry For Warehouses' is to be submitted when the imported goods are not
required immediately by the importer but are to be stored in a warehouse without
payment of duty under a bond and cleared later, when required, on payment of duty.
This enables the importer to defer payment of Customs Duty until the goods are
actually required by him. It is yellow in colour. This document is also known as 'Bond
Bill of Entry' since bond is executed for transfer of goods in a warehouse without
payment of duty.
• 'Bill of Entry for Ex-Bond Clearance' is used for clearing goods from the warehouse
on payment of duty. The goods are classified and valued at the time of clearance
from the customs port. It is green in colour. The rate of duty payable is that rate
which is applicable onjthe date of removal of goods from the warehouse.
Procedure for Assessment and Clearance
The customs authorities assess the duty and clear the goods on the basis of the documents
filed by the importer. The following steps are involved in assessment and clearing:
1. Comparison of the Bill of Entry with the Import Manifest
The bill of entry submitted by importer is tallied with the Import Manifest submitted by
shipper. If any variance is found between the two, the customs authorities call for further
clarifications for the difference.
2. Determination of the Rate of Duty
The rate of duty payable is the rate that is prevalent on the date of presentation of bill of
entry. The importer or his agent may present bill of entry up to one week
before expected date of arrival of the vessel. In such a case duty is payable at the rate
applicable on the date of which inward entry is granted and not the date of presentation of
shipping bill.
4. Examination of Goods
On presenting the bill of entry, the date of presentment is noted. The bill of entry is then
sent to the appraising department of the customs for examination. The examiners carry
out physical examination of the goods. Packages are opened and examined on a test
check sample basis. Thereafter, an examination report is prepared.
The appraiser classifies the goods, determines the customs value, rate of duty applicable
and verifies that the imports do not violate any provision of law.
Sometimes, if all documents are in order and the authorities are convinced that there is
no violation of any law, the assessment may be done without physically examining the
goods.
 5. Payment of Duty
The importer is required to pay the amount of duty so determined in cash or by a bank
draft for clearance of goods. However, regular importers may pay the duty out of the
current account balance that they deposit with the customs authorities. Once the duty is
assessed, the Bill of Entry is returned to the importer for payment of duty, which must be
paid within 7 days after Bill of Entry is returned; otherwise interest at the rate of 20 per
cent pa will be payable.
6. Provisional Assessment
Provisional assessment may be done in the following circumstances:
• When the Customs Officer is satisfied that importer or exporter is unable to produce
the required document or information.
• It is necessary to carry out chemical or other test of goods.
• When the importer or exporter has produced all documents but the Customs Officer
still feels that further enquiry is required.
In case of provisional assessment the importer has to pay the duty assessed and may
clear the goods. However, he has to execute a bond or furnish warranty or security as
required by the custom officer for payment of difference, if any. The surplus amount
paid, if any, on final assessment is refunded to him and the shortfall, if any, is to be paid
by him.
If the imported goods are warehoused after provisional assessment, the Customs Officer
may require the importer to execute bond for twice the difference in duty, if the duty
finally assessed is higher.
7. Import Control
After assessment, the bill of entry is sent to the 'License Section' where it is checked 1
whether the import complies with the export and import policy of the Government. If
ally license is required for the import, it is verified whether the goods have been imported
against a proper import license.
8. 'Out of Customs' Order
After all the above formalities are completed, the Customs Officer issues an order
called the 'out-of customs' order. Goods can be removed only on receipt of such order.
9. Clearance of Goods
The importer is liable to pay heavy penalties, called demurrage, if the goods are not cleared
from the Customs Port within three days of unloading. But, sometimes the delay is due to some
fault on the part of the customs authorities. In such cases, the Customs authorities issue a
certificate stating that delay was due to bona fide customs formalities or due to bona fide
import control formalities. In such a case, the Port authorities may refund the demurrage.

Procedure for the Exporter

Certain procedures have to be followed for the purpose of clearing goods to be exported.
Briefly these procedures have been discussed below:
1. Submission of Shipping Bill
The exporter must submit the 'shipping bill' in case of export by sea or air and 'bill of
export' in case of export by road in the prescribed form containing the prescribed details such as
the name of the exporter, consignee, invoice number, details of packing, description of goods,
quantity, free on board (FOB) value, etc.
Along with the shipping bill, other documents such as copy of packing list, invoices, export
contract, letter of credit, etc. are also to be submitted. Goods have to be assessed for duty even
if no duty is payable.
There are four types of shipping bills:
• Shipping bill for export of goods under claim for duty drawback. This shipping bill
is green in colour.
• Shipping Bill for export of dutiable goods. This shipping bill is yellow in colour.
• Shipping Bill for export of duty free goods. This shipping bill is white in colour.
• Shipping bill for export of duty free goods ex-bond i.e. from bonded warehouse.
This shipping bill is pink in colour.
2. Declaration by the Exporter
The exporter must make a declaration in the prescribed form in the following
circumstances:
• Exports of goods under claims for drawbacks of duty.
• Exports of gqods under DEEC schemes.
• Exports of goods in anticipation of issue of advance license or DEEC.
• Exports of goods covered by AR-4A pending weighment at the docks. These forms are
excise forms against which a manufacturer-exporter may clear goods from his factory
for the purpose of exports without payment of any excise duty.
• Exporters having filed shipping bill without certificate from an inspection agency.
3. Exchange Control Formalities
The exporter must file copies of GR form prescribed by the Reserve Bank of India (RBI)
for the purposes of exchange control with his bankers. The purpose of GR form is to enable
RBI to ensure that export proceeds from the export are received in India through proper
banking channels only within reasonable time limits.
4. Inspection Report
Certain goods such as those that are prohibited for export under the Foreign Trade
(Development and Regulation) Act, antiques, arms, narcotics, etc can be exported only
after they have been inspected for export and appropriate permissions from the concerned
authorities have been obtained. In such case, inspection report must also be submitted.
The inspection may be done at the exporter's premises or at a Customs Area.
5. Let Export Order
After all the above formalities are over and the Customs Officer is satisfied that the
export does not contravene the provisions of any law and all duties and other dues have
been paid, a' 1 et export order' is made to permit the export.

Miscellaneous procedures
1. Boat Notes
Sometimes, a vessel instead of actually docking at a port may unload cargo into a smaller
boat which will bring the cargo to the shore. In such cases, the small boat must be
accompanied by a boat note. Such boat notes are issued by a Customs Officer in the
prescribed form in duplicate.
Similarly, in case of exports, a boat may carry the export cargo to a waiting ship at sea. In
such cases, a boat note is required. However, a boat note is not required if the cargo is
accompanied by a shipping list.
A boat note is also required for transshipment of cargo, that is, transfer from one ship to
another for reshipment.
2. Transit Goods
Any goods imported in a vessel or aircraft will be allowed to remain on board of the
vessel or aircraft and to be transited without payment of custom duty. However, all
these goods must be mentioned in import manifest submitted by the person in charge of
the conveyance.
3. Transshipment of Goods
Transshipment of goods means transfer of goods from one vessel to another for transport to
any port. Goods can be transshipped without payment of any customs duty provided they
are mentioned in the import manifest. In such cases, a 'bill of trans-shipment' must be
submitted to the Customs Officer. However, transshipment is not allowed in case of
prohibited goods.
4. Coastal goods
Coastal goods means goods transported from one port in India to another port in India
but do not include imported goods. Though no import or export is involved in case of
coastal goods, adequate control procedures are required in order to ensure that these
goods are not illegally exported. Trade and transport of coastal goods by sea can be
carried out only on approved coastal ports. The consignor must file a 'bill of coastal
goods' with the customs authorities in the prescribed form. The goods can be loaded by
master of vessel only after the 'bill of coastal goods' is approved by the customs
authorities. The master of vessel must carry an advice book where entries will be made by
the Customs Officer. This advice book can be inspected by a Customs Officer at a
coastal port. On completion of loading, entry outwards is granted by the Customs Officer
after which the vessel may leave port. The coastal goods can be unloaded on a Coastal
Port or a Custom Port. The relevant documents and goods will be inspected by the
Customs authorities. Unloading can be done only after obtaining permission from the
Customs Officer.
5. Green Channel for Imports
The customs law also provides for the self-assessment of the bill of entry (green channel for
imports). This is a special scheme allowed in certain cases for speedy clearance of
imports. As the name suggests, the duty is assessed by the importer himself and voluntarily
paid by him. Some of the situations where this scheme has been made applicable are
imports by public sector undertakings, government departments, approved 100 per cent
export oriented units and other importers with a proven identity and clean track record.

SUMMARY
Customs duties are a form of indirect taxes. Traditionally, customs duties were levied as a
source of revenue for the government. Although, this is still an important objective,
customs duties are levied for a variety of reasons. In India, the law relating to the levy
and collection of customs duties on the import and export of goods is explained in detail in
the various Acts of the Parliament, rules made by the government and notifications
issued by the customs department.
 CENTRAL EXCISE

INTRODUCTION
Central excise duty is a tax that is charged on the manufacture or production of excisable
goods in India. From an accounting point of view, central excise duty is a manufacturing
expense.

SOURCES OF CENTRAL EXCISE LAWS

The law of central excise duties is governed by the following:
1. Central Excise Act, 1994
This is the basic law relating to the levy and collection of duties of central excise.
However, this Act does not contain the rate at which duties are imposed.

2. Central Excise Tariff Act, 1985

This Act classifies various goods on which central excise duties are levied and prescribes
the rates at which the duty is payable.
3. Central Excise Rules, 1944
All manufacturers of excisable goods are required to register under these rules. The
registration is valid as long as production activity continues and no renewals are necessary.

TYPES OF EXCISE DUTIES

Many people think that there is only one duty called as central excise. This is not true. In
fact, there are a number of duties that are collectively called central excise duty. At
present, the following duties are payable:
1. Basic Duty of Central Excise
This duty is levied at the rates specified in the First Schedule to Central Excise Tariff
Act, 1985.
2. Special Duty of Excise
Some commodities like pan masala and cars have special excise duties levied on them.
These items are covered in Schedule II to the Central Excise Tariff.
Presently, special excise duty is charged at the rate of 16 per cent on tyres, aerated soft
drinks, polyester filament yarn, air conditioners and components and motor cars.
3. Education Cess on Excise Duty
Education cess is a duty of excise that has to be calculated on the aggregate of all duties of
excise, including special excise duty or any other duty of excise.
4. Excise Duty on Clearances By 100 Per Cent EOUs
100 per cent Export-oriented Units (EOUs) are expected to export all their production.
However, if they clear their final product in the domestic tariff area (DTA), the rate of
excise duty will be equal to that of the customs duty on like article if imported in India.
Note that even if rate of customs duty is considered for the payment of duty, the duty
paid by them is actually the central excise duty. The rate of customs duty is taken only as a
reference.
5. National Calamity Contingent Duty
A National Calamity Contingent Duty (NCCD) is imposed onpan masala, chewing
tobacco and cigarettes. The rate of this duty ranges between 10 per cent and 45 per cent.

TAXABLE EVENT FOR CENTRAL EXCISE DUTY

We have seen earlier that the occurrence of a taxable event makes a person liable to a
tax. The taxable event for the charge of duty of central excise is the manufacture or
production of goods in India.
In this context, the Supreme Court has observed:
'Excise duty is not directly on the goods, but manufacture thereof. Though both excise
duty and sales tax are levied with reference to goods, the two are very different imposts. In
one case, the imposition is on the act of manufacture or production, while in the other it is
on act of sale. In neither case, therefore, can it be said that the excise duty or sale tax is
directly on the goods, for in that event, they will really become the same tax.'
In another case, the Supreme Court held that the manufacture or production in India of an
excisable article is the taxable event for charge of the duty of central excise. However, duty
may be levied and collected at a later stage for administrative convenience. (Generally, duty is
collected at the time of removal of goods from the factory.)
What if the manufacturer is not able to sell the goods? The liability for paying central
excise duty arises as soon as the goods are manufactured. Whether these goods are
sold, scrapped or destroyed. In a case where the excisable goods were sold but the
manufacturer was not able to recover the duties from his customer, the court held that
central excise duties are still payable.

LIABILITY FOR CENTRAL EXCISE

The law provides that:
'There shall be levied and collected in such manner as may be prescribed duties on all
excisable goods (excluding goods produced or manufactured in special economic zones)
which are produced or manufactured in India...'
From the above definition, w e can see that four conditions m ust be present chargefor
of the
central excise duty:
• The duty is on goods
• The goods m ust be excisable
• The goods m ust be m anufactured or produced
• Such m anufacture or production m ust take place in India
U nless all these conditions are satisfied, the central excise duty cannot be conditions
levied. These
need close scrutiny.
Goods
The word 'goods' has not been defined under the Central Excise Act. As a result, a lot of
cases have been fought in the courts about whether a particular item is a good or not.
Whether the item is tangible or intangible is irrelevant. The courts have held electricity
and steam to be goods.
For an item to be considered goods for the purpose of the levy of central excise duty, it
must satisfy two requirements: it must be movable and marketable.
1. Movability
Goods must be movable. Duty cannot be levied on immovable property. Central excise
duty cannot be imposed on plants or machinery that are attached to the earth.
2. Marketability
Goods must be marketable. The goods must be known in the market and must be capable of
being bought or sold. Unless this test of marketability is satisfied, duty cannot be
levied as the items in question will not be goods.
It was held that to become 'goods' an article must be something that can ordinarily to
come
the market to be bought and sold.
Marketability only means' saleable' or' suitable for sale
'. It need not in fact be marketed.
The article should be capable of being sold to consumers, as it is - without any thing
more.

Excisable Goods
For the liability of duty of central excise to arise, the item in question should not only be goods
it should also be excisable goods. A good become excisable if and only if it is mentioned in
the Central Excise Tariff Act, 1985. However, merely because an item is mentioned in the
Central Excise Tariff Act, 1985, the liability does not arise. The item in question must be goods
in the first place!
Goods must be Manufactured or Produced
The third condition that must be satisfied for becoming liable to pay duties of central excise
is that the goods must be manufactured or produced.
What is manufacture? We can say that a particular process is a manufacturing process if a
new substance having a distinct name, character or use emerges as a final output.
Whether a particular process amounts to manufacture or not must be judged from a
practical point of view. Sometimes, the mere assembly of parts can be considered as
manufacture.
Manufacture or Production Must in India
Finally, for the liability to pay central excise duty to arise the goods must be manufactured or
produced in I
WHO IS LIABLE TO PAY CENTRAL EXCISE DUTY
The central excise duty is a tax on manufacture or production of goods. Hence, the
liability to pay excise duty lies on the manufacturer or the producer.
Who is a manufacturer? A manufacturer is a person who manufactures the goods on his own or
through hired labour.
Is a Raw Material Supplier a Manufacturer?
Even when a person gets the goods manufactured from others by supplying raw material, the
liability to pay central excise will be that of the person who actually carried out the
manufacturing activity and not on the person who supplied the material.
Merely because somebody supplied the raw material he does not become a manufacturer.
Ownership of raw material is not relevant for duty liability.
Is a Job Worker a Manufacturer?
Sometimes, large companies outsource the manufacturing activity to job workers. Even in such
cases, the liability to pay central excise duty is that of the job worker who actually
manufactures the goods.
However, an exception has been made in the case of textile and textile articles
manufactured on job work basis. In case of yarns and fabrics the duty liability will be that of
the raw material supplier. The raw material supplier will have to pay duty while clearing final
product as if he is considered as the assessee. However, the job workei may, at his option,
agree to pay duty.
Although central excise duty is ordinarily payable by the manufacturer or the
producer, it may be collected from persons who are neither manufacturers no
producers. If the manufacturer is a mere dummy of the supplier of raw material then
the goods are said to be manufactured on behalf of such supplier and theliable supplier
to is
duty.

COLLECTION OF CENTRAL EXCISE DUTY

Once duty liability is fixed, the duty can be collected from a person at the time and place found
administratively most convenient for collection.
The rate of duty as applicable on date of removal is relevant. Though taxable event is
'manufacture', duty payable is as applicable on date of clearance from factory.
In a famous case, goods were fully manufactured and packed when goods were exempt from
duty. These were cleared after the exemption was withdrawn and goods became liable to
duty. It was held that duty is payable as applicable on date of removal.

BASES FOR VALUATION OF GOODS

Once it is determined that the goods are liable for the payment of central excise duty, the goods
need to be valued so that the amount of duty payment can be ascertained.
The duty of central excise is charged on four bases: (i) specific duty; (ii) tariff value; (iii)
maximum retail price; and (iv) ad valorem basis.
1. Specific Duty
It is the duty payable on the basis of some physical feature of the product unit like
weight, length, volume, thickness, etc.
Some of the goods on which duty is charged on this basis are as follows:
Item Basis
Cigarette Matches Length Box of 100
Sugar Cement Clinkers Quintal Per tonne

Marble Slabs Square metre

Calculation of specific duty is comparatively easy and for this reason, many goods were earlier
covered under' specific duty'. However, the disadvantage is that even if selling price of the
product increases, revenue earned by government does not increase.

2. Tariff Value v
The government has the power to declare a value on the basis of which duty of central excise
will be charged. When the government so declares the value, then duty is charged on this value
and the actual value of the goods is ignored.
At present, the government has not declared a tariff value for any good.
3. MRP-based Valuation
Some manufacturers had started the practice of avoiding duties of central excise by
resorting to some questionable practices. In order to check these malpractices, a new basis of
valuation was introduced, that is, the maximum retail price (MRP)-based valuation.
It must be remembered that only a few goods are covered under this basis of valuation. Some
of the goods covered are: (i) television sets; (ii) DVD players; (iii) cosmetics and toilet
preparations and (iv) chocolates.
This basis of valuation is applicable only for those goods that are required to print the
maximum retail price under some law.

4. Ad Valorem Duty
The first three bases of valuation are applied for only a few goods. In a large majority of
cases the duty of central excise is payable on the basis of the value of the goods, called the
assessable value.

VALUATION OF GOODS FOR CENTRAL EXCISE

Generally, by value, we understand the price as mentioned in the invoice. This 'value' is
known as the transaction value.
The transaction value is acceptable as the basis for valuation only if three conditions are
satisfied:
(a) The goods are sold at the place of removal.
(b) The buyers and sellers are not related.
(c) Price is the sole consideration.
If any of these requirem ents is not satisfied, the transaction value w ill as
nota be
basis
acceptable
of
valuation. In such a case the valuation w ill have to be done in accordance w ith the rules m ade in this
regard.
If fo r an y reaso n th e tra nsa ctio n v alu e is n o t acc ep tab le, th e v alu eaciscordan
d e te rmceinwedithin
th e C en tral E x cise V a luatio n (D e term ina tio n o f P ric eGooods)
f E xcRisab
ules,
le 2000.

1. Goods Sold at a Place other than the Place of Removal

Normally, the assessable value is the price of goods at the factory gate. However,
sometimes goods are not sold at the factory gate but at a different place.
In such a case the assessable value is the price charged by the manufacturer minus the
actual cost of transportation from the factory gate to such other place.
2. Price is Not the Sole Consideration
If, in any transaction, the buyer provides to the seller something over and above the
price, we say that the price is not the sole consideration. In such a case, the assessable
value is price paid plus the value of everything else that flowed from the buyer to the
seller.
For example, the price paid for an item was Rs 1,00,000 but the buyer had supplied the
design and drawing for the item. Here, the assessable value will be Rs 1,00,000 plus the
value of design and drawing.
3. Goods Consumed Captively
Sometimes, the finished goods are not sold but are consumed within the factory as an
input for the manufacture of another item. This is called as captive consumption.
In such cases the assessable value is 110 per cent of the cost of production of the
finished goods.
4. Buyer and Seller are Related
When the buyers and sellers are related the transaction value is not acceptable. The
assessable value depends upon what the related buyer does with the goods: the related buyer
may sell it to an unrelated person or he may captively consume the goods.
If the related buyer sells the goods to an unrelated person, then the assessable value is the
price at which the goods were so sold to the unrelated person.
If, on the other hand, the related buyer captively consumes the goods, the assessable value
shall be 110 per cent of the cost of production of the goods.

SUMMARY
Central excise duty is a tax on the manufacture or production of excisable goods in India.
Hence, the liability to pay excise duty lies with the manufacturer or producer. Central
excise duty is charged on four bases: (i) specific duty; (ii) tariff value; (iii) maximum
retail price; and (iv) ad valorem basis..

CENTRAL SALES TAX

INTRODUCTION
Sales tax is levied on the sale of movable goods. It is a consumption tax and is charged at the
point of purchase for certain goods and services. The tax is usually calculated as a percentage
by the value of the product. It is usually the responsibility of the merchant
to collect sales tax
and deposit the same with the government. The amount of taxislevied stated separately (or
implicitly added at the time of sale) to consumers. Usually, consumers
only are charged the
tax; resellers are exempted if they do not make use goods.
of the
Basically, the Constitution of India has vested the power to levy sales tax with state
governments. However, problems may arise when the sale of goods takes placestates, between
or sales originate in one state and are completed in another. The Central TaxSales
Act,
1956 (hereafter referred as CSTA) was enacted to iron out these and difficulties.
other
It must be noted that m ost states have replaced sales tax with a new value added tax
(VAT) from 1 April 2005.
OBJECTIVES OF THE CENTRAL SALES TAX ACT
The preamble of the CSTA states the objectives of enacting the same. These objectives are:
• To formulate principles for determining when a sale or purchase of goods takes place
in the course of inter-state trade or commerce or outside a state or in the course of
import into or export from India.
• To provide for the levy, collection and distribution of taxes on the sale of goods in the
course of inter-state trade or commerce.
• To declare certain goods to be of special importance in inter-state trade or commerce and
specify the restrictions and conditions to which state laws imposing taxes on the sale or
 purchase of such goods of special importance shall be subject.

DEFINITIONS
We need to be clear about certain terms used in the CSTA. In this section, we discuss the
terms business, dealer place of business, goods, declared goods, sale and sale price.

Business
Ordinarily, we understand business as engaging in commercial activity as a means of
livelihood or profit, or an entity which engages in such activities. It is believed that one of the
distinguishing features of a business is profit motive. However, in the context of CSTA, it
is not essential that the person carrying on a business should desire or wish to make a profit.
Section 2(aa) of CSTA defines the term 'business' to include the following:
(i) Any trade, commerce or manufacture, or any adventure or concern in the nature of
trade, commerce or manufacture, whether or not such trade, commerce,
manufacture, adventure or concern is carried on with a motive to make gain or profit
and whether or not any gain or profit accrues from such trade, commerce,
manufacture, adventure or concern
(ii) Any transaction in connection with, or incidental or ancillary to such trade,
commerce, manufacture, adventure or concern

Dealer
Ordinarily, the term 'dealer' refers to a person who purchases and maintains an inventory of the
merchandise to be sold and, therefore, shares the costs of marketing and distribution with the
manufacturer and wholesaler. Dealers differ from manufacturers' representatives
and brokers, who never take title to the merchandise. The definition of dealer is important
because under CSTA it is the dealer who is responsible to pay the tax.
Under CSTA, the term is given a much wider meaning. Section 2(b) of CSTA defines the
term 'dealer' as follows:
Dealer means any person who carries on (whether regularly or otherwise) the business of
buying, selling, supplying or distributing goods, directly or indirectly, for cash or for deferred
payment, or for commission, remuneration or other valuable consideration,includes and the
following:
(i) a local authority, a body corporate, a company, any cooperative society or other
society, club, firm, Hindu Undivided Family or other associations of persons which
carries on such business
(if) A factor, broker, commission agent, del credere agent, or any other mercantile
agent, by whatever name called, and whether of the same description as
hereinbefore mentioned or not, who carries on the business of buying, selling,
supplying or distributing goods belonging to any principal whether disclosed or not
(iii) An auctioneer who carries on the business of selling or auctioning goods belonging
to any
principal, whether disclosed or not and whether the offer of the intending
purchaser is
accepted by him or by the principal or a nominee of the principal.
It is further explained that every person who acts as an agent, in any State, of a dealer
residing outside that State and buys, sells, supplies, or distributes, goods in the State
acts or
on
behalf of such dealer as: (i) a mercantile agent; (ii) an agent for the handling of goods or
documents of title relating to goods, or (iii) an agent for the collection orpayment
the of the
sale price of goods or as a guarantor for such collection or payment,every and local branch or
office in a State of a firm registered outside that State or a company
or other body corporate, the
principal office or headquarters whereof is outside State, that shall be deemed to be a dealer
for the purposes of this Act.
Even a government is deemed as a dealer under certain circumstances. Explanation 2 to
Section 2(b) states: a government which, whether or not in the course of business,sells,
buys,
supplies or distributes, goods, directly or otherwise, for cash or for deferred payment
or for
commission, remuneration or other valuable consideration, shall, except in relation
to any sale,
supply or distribution of surplus, un-serviceable or old stores or materials
waste
or products or
obsolete or discarded machinery or parts or accessories thereof, deemed
be to be a dealer.

Place of Business
The levy and collection of central sales tax depends upon the place of business of the
r"
dealer. Ordinarily, a place'of business would mean the location from where the bulk of
business is carried out, or where the dealer has a shop or office. However, CSTAuses the
term 'place of business' in an inclusive manner. Thus, in addition to the ordinary meaning
of the term, other places, which would not ordinarily be covered, are covered by the definition.
Section 2(dd) of CSTA defines place of business to include the following:
(i) Place of business of agent where the dealer carries on business through an agent
(ii) Warehouse, godown or other place where a dealer stores his goods
(iii) Place where a dealer keeps his books of account
A dealer can have more than one place of business within a state, or he can have places of
business in more than one state. If a dealer has more that one place of business in one state, he
has to make a single application in respect of all the places, but designate one of the places as
the 'principal place of business'. If a dealer has places of business in more than one state, he
will have to register in each of these states.
Goods
Ordinarily, the term 'goods' means products or possessions. Section 2(d) of CSTA defines the
term 'goods' to include 'all materials, articles, commodities and all other kinds of movable
property, but does not include newspapers, actionable claims, stocks, shares and securities'.
Although newspapers are excluded from the definition of goods, newspapers sold as
scrap are goods.
Declared Goods
One of the objectives for the enactment of CSTA is 'to declare certain goods to be of
special importance of inter-State trade or commerce and specify the restrictions and
conditions to which State laws imposing taxes on the sale or purchase of suchspecial
goods of
importance shall be subject'. Section 14 of CSTA has specified a largeofnumber
goods as
'declared goods'. Some of these goods include:
• Cereals, including paddy, rice, wheat,
jowar,milo,bajra,maize,ragi, kodon, kutki
and
barley
• Coal, including coke in all its forms, but excluding charcoal
• All kinds of cotton (indigenous or imported) in its un-manufactured state,ginned
whether
or unginned, baled, pressed or otherwise, but not including cotton waste
• Crude Oil
• Oilseeds, including groundnut, peanut, sesame (til), cotton seed, soybean, rapeseed and
mustard
• Pulses
• Sugar
The significance of the definition of declared goods is that certain restrictions are
on the
placed
power of state governments to levy tax on declared goods.
Sale
Ordinarily, the term sale means 'exchange of something for money'. The sale of a good, or an
item of value, is a transaction designed to benefit both buyer and seller. However, sales
transactions can be complex, and they do not always proceed smoothly. The meaning of the term
'sale' is crucial in the context of the central sales tax law because the tax is on the sale of
goods, and not on goods themselves (Re: Sea Customs Act AIR (1963) STC 437= (1964) 3
SCR 827 [SC 9 member bench]).
Section 2(g) of CSTAhas defined the term 'sale' as follows:
Sale, with its grammatical variations and cognate expressions, means any transfer of
property in goods by one person to another for cash or deferred payment or for any other
valuable consideration, and includes:
• A transfer, otherwise than in pursuance of contract, of property in any goods for cash,
deferred payment or other valuable consideration
• A transfer of property in goods (whether as goods or in some other form) involved in the
execution of works contract
• A delivery of goods on hire-purchase or any system of payment by instalments
• A transfer of the right to use any goods for any purpose (whether or not for a
specified period) for cash, deferred payment or other valuable consideration
• A supply of goods by any unincorporated association or body of persons to a member
thereof for cash, deferred payment or other valuable consideration
• A supply, by way of or part of any service or in any other manner whatsoever, of goods,
being food or any other article for human consumption or any drink (whether or not
intoxicating), where such supply or service, is for cash, deferred payment or other
valuable consideration, but does not include a mortgage or hypothecation of or a charge or
pledge on goods

Sale Price
The amount of central sales tax is based on the price at which goods are sold in the course
of inter-state trade and commerce. This is why the determination of sale-price becomes
important. Section 2(h) of CSTA defines sale price to mean: 'the amount payable to a
dealer as consideration for the sale of any goods, less any sum allowed as cash discount
according to the practice normally prevailing in the trade, but inclusive of any sum charged for
anything done by the dealer in respect of the goods at the time of or before the delivery
thereof other than the cost of freight or delivery or the cost of installation in cases where
such cost is separately charged'.

TYPES OF SALE
Broadly, there are three types of sale: inter-state sale, import-export sale, and intra-state.
In Murli Manohar and Co. v. State of Haryana (1990) the Supreme Court observed
that they cannot conceive fourth category of sale.
A sale is termed inter-state sale if it occasions the movement of goods from one state to
another; or is effectuated by a transfer of documents of title to the goods during their
movement from one state to another (see paragraph 13.5). A sale is called import sale if it
involves bringing goods into India from a place outside India. Export sale involves taking
goods out of India from a place inside India. Intra-state sale is the residual category, that is, sale
that does not fall in the above two categories is intra-state sale.

INTER-STATE SALE
Section 3 of CSTA defines inter-state sale or purchase as: a sale, if the sale or purchase
occasions the movement of goods from one state to another; or is effectuated by a
transfer of documents *of title to the goods during their movement from one state to
another. Thus, a sale can be categorized as inter-state on the fulfillment of any one of the
two mutually exclusive mechanisms (Tata Iron and Steel Co. [TISCO] v. S. R. [I960]).
Sale Occasioning Movement of Goods
One mechanism of the sale or purchase of goods is deemed to take place in the of course
inter-state trade or comm erce if the sale or purchase occasions the movement goods of
from one state to another state (Section 3(a) of CSTA).
A sale is said to have occasioned the movement from one state to another if the following
conditions are fulfilled:
• There should be physical movement of goods from one state to another and movement must
be inextricably connected with sale(Balabhdas Hulaschandv. State ofOrissa [1976]).
• The contract for sale may or may not explicitly provide for movement of goods. It is
sufficient if the movement of goods is implied in the contract (UOIv. KGKhosla
and Co. (P.) Limited [1979]).
• The movement of goods from one state to another may be in pursuance of, and
incidental, to the contract of sale (English Electric Co. of India Ltd. v. Dy CTO -
[1976]). The movement of goods may precede or follow the contract of sale; the
important issue is that movement of goods and sale must be inseparably connected
(CST, UPv. Bakhtawarlal KailashchandArhti [1992]).
It is explained that temporary movement of goods through another state is not inter-state
sale if the movement of goods starts from one state and ends in the same state, even if
during transit goods pass through other state (Explanation 2 to Section 3 of CSTA).
Sale by Exchange of Documents
For a transaction to be called a sale, it is necessary that the property (ownership) in
goods is transferred from the seller to the buyer (Section 4(3) of the Sale of Goods Act
1932). For transfer of ownership of goods to take place it is not necessary that the goods
must be delivered to the buyer. Ownership may be transferred with or without delivery of
goods (Woodv. Manley [1839]).
Another mechanism through which a sale or purchase of goods is deemed to take place in
the course of inter-state trade or commerce if the sale is by transfer of documents of title
to goods during the movement of goods from one state to another (Section 3(b) of
CSTA).
To get a better understanding of this mechanism we need to be clear about the meaning of
what are documents to title of goods and how these documents are transferred.
1. Document to Title of Goods
One way in which ownership in goods is transferred is by the transfer of document of
title to goods. Document of title to goods is a document, or a set of documents, that
evidence ownership of goods. When a seller hands over goods to a transporter for
dispatch to the buyer, the transporter issues a receipt for the same. This receipt is
usually the document that evidences ownership of the goods. But how would the
transporter know whom to handover the goods? For this, the seller separately sends this
document to the buyer through courier in such a manner that the buyer receives the
document before the goods reach him. The buyer has to handover the document to the
transporter to receive delivery of goods. Examples of document to title to goods are as
follows:

Mode of Transport Document to Title

Road Transport Rail Transport Sea Lorry Receipt (LR) Railway Receipt (RR)
Transport Air Transport Bill of Lading (BL) Air Way Bill

2. Transfer of Document of Title to Goods

A document of title may be in favour of the buyer, or it may in favour of an agent of the
seller, or a banker or even self. When the document is in favour of an agent, a banker or
self, the agent, banker or seller has to transfer the document in favour of the buyer. Such a
transfer is normally by way of an endorsement on the document of title. The endorsement
is made by writing 'deliver to, or, to the order of...' The endorsement has to be signed by
the endorser. The person in whose favour the document is endorsed can further
endorse the same in favour of another person.
Legally, a document can be transferred by mere delivery; without endorsement. However,
endorsement is a convenient mode of transfer as it gives proof that the transfer is in due
course of trade. The delivery of a document of title is equivalent to the delivery of goods
themselves (J V. Gokal and Co. (P.) Ltd. v. Assistant CST[I960])

SALE WITHIN A STATE

A sale is deemed to be inside a state if the goods are within the state: (a) in the case of
ascertained goods, at the time the contract of sale was made; and (b) in the case of
unascertained or future goods, at the time of their appropriation to the contract by the
seller or the buyer, whether assent of the other party is obtained before or after such an
appropriation.
Ascertained goods are those that are identified and agreed on at the time of a contract
for sale of goods is made. Property for ascertained goods passes when the parties
intend it to pass (Section 19 of the Sale of Goods Act 1932). To ascertain the intention of
the parties, regard shall be had to the terms of the contract, the conduct of the parties
and the circumstances of the case.
Unascertained goods are those goods that are not identified and agreed on at the time of
making of the contract for sale of goods. An order for ten units of coal to be delivered in
three days' time involves unascertained goods, because it is impossible to identify which
specific lumps of coal lying in the coal merchant's godown will make up the order. As
soon as the ten units of coal are set aside to fulfill this order, the goods are said to be
ascertained.
In a sale of unascertained goods, the property in the goods passes to the buyer only
when the goods are ascertained (Section 18 of the Sale of Goods Act, 1932). Thus,
where there is a contract for sale of a portion from the entire stock, no property passes till
the portion is identified and appropriated to the contract (Chettiar and Company v.
Express Newspaper [1968]).

LIABILITY FOR CST

Section 6( 1) of CSTA is the charging section. It states:'... every dealer shall be liable to
pay tax under (CSTA) on all sale of goods (except electrical energy) effected by him in
the course of inter-state trade or commerce'.

Primary Liability
Central sales tax is an origin-based tax on the inter-state sale of goods. In case a sale
qualifies as an inter-state sale then, under Section 9(1) of CSTA, tax is payable by the
dealer who makes the inter-state sale. Although central sales tax is levied by the Central
government, it is collected by the State government from where the movement of goods
commenced. Thus, if goods are sold by a dealer whose place of business is Maharashtra, to
a buyer in Gujarat and the goods are dispatched from Maharashtra, then central sales tax
will be collected by the state of Maharashtra.

Liability in Case of Subsequent Sale

Subsequent sale refers to all sales of a good after the first time it has been sold. Under the
CSTA, tax is levied at a single point only (first sale) and no sales tax is payable on
subsequent sales. Subsequent sales are exempted from the levy of tax if the following
conditions are satisfied:
• The subsequent sale should be either to the government or a registered dealer.
• The subsequent sale should be of the same goods during their movement from one state
to another, that is, the goods should not undergo a change in the course .of transport.
• Subsequent sale should be effectuated by transfer of documents of title to the goods which
are freely transferable from one dealer to another by endorsement.
• The dealer is required to obtain necessary certificates in the prescribed form from their
vendors (form 'C' from non-government dealers and form 'D' from government).
• Where subsequent sale is to a registered dealer other than the government, the sale should
be only of those goods, which are mentioned in the certificate of the registration of dealer.
If the above conditions are not met central sales tax is payable by the subsequent seller
irrespective of whether the dealer is registered as such or not.

RATE OF CENTRAL SALES TAX

The rate of central sales tax is mandated by Section 8(1) of CSTA. The liability to pay central
sales tax is on every dealer, who in the course of inter-state trade or commerce, (a) sells to the
government any goods; or (b) sells to a registered dealer other than the government. From
April 1,2007 the rate of central sales tax is 3 per cent.

Rate of Local Rate of Central Sales Tax (%)

Sales Tax (%) Government Unregistered Unregistered
Dealer Dealer
1.00 1.00 1.00 1.00
4.00 4.00 4.00 3.00
12.50 12.50 12.50 3.00
20.00 20.00 20.00 3.00

TAX ON DECLARED GOODS

CSTA imposes several restrictions on State governments in respect of the levy of sales tax (or
VAT) on declared goods (Section 15 of CSTA). The following restrictions and conditions
are imposed on the powers of the state governments:
• The tax payable under a state law in respect of any sale or purchase of
declared goods inside the state shall not exceed four per cent of its sale or purchase price.
• Where a tax has been levied under a state law in respect of the sale or purchase inside
the State of any declared goods and such goods are sold in the course of Interstate trade or
commerce, and tax has been paid under CSTA in respect of the sale of such goods in the
course of inter-state trade or commerce, the tax levied under such
law shall be reimbursed to the person making such sale in the course of inter-state trade
or commerce.
• Where a tax has been levied under a state law in respect of the sale or purchase inside
the state of any paddy (a declared good) the tax leviable on rice procured out of such
paddy shall be reduced by the amount of tax levied on such paddy.
Section 8(2) of CSTA provides that if declared goods are sold to an unregistered dealer, the
sales tax rate is equal to VAT rate as applicable within the state.

PHASING OUT OF CSTA

The Indian Parliament has passed the Taxation Laws (Amendment) Bill, 2007 to amend the
CSTA so as to enable a phased abolition of the levy by 1 April 2010. The central sales tax
would then be replaced by a nationwide goods and service tax (GST).

SUMMARY
Sales tax is levied on the sale of movable goods. It is a consumption tax charged at the point
of purchase for certain goods and services. The Constitution of India has vested the power
to levy sales tax with the state governments. However, problems may arise when the sale of
goods takes place between states, or a sale originates in one state and is completed in another.
The Central Sales Tax Act, 1956 was enacted to iron out these and other difficulties.