Customs Duty in India

Customs duty is a tax the government charges on goods moving across India's borders, mostly on imports (goods coming in) but sometimes on exports (goods going out) too. It is collected at ports, airports and land check-posts by the Customs department, which works under the Central Board of Indirect Taxes and Customs (CBIC). When you read that "the government cut the import duty on edible oil", it means this tax was reduced.

Why does it exist?

Customs duty does three jobs at once. First, it is a source of revenue for the government. Second, it protects Indian producers: if a foreign good is far cheaper than what Indian farmers or factories can make, a duty raises its price so Indian producers can still compete. Third, it is a quick tool to manage prices at home.

If the price of something is rising too fast because supply is short, the government can cut the duty on its import so more of it can come in cheaply, and prices cool down. Think of the duty as a gate: raising it slows down imports, lowering it lets more in.

Where does the power come from?

Under the Constitution, only Parliament (the Union) can make laws on duties of customs; this is in the Union List (List I) of the Seventh Schedule. The main law is the Customs Act, 1962, and rates are fixed under the Customs Tariff Act, 1975. The Finance Ministry issues a notification each time a rate is changed, so a rate cut like this one takes effect the moment the notification is published, without needing a new law each time.

Import duties and export duties: two schedules

The exact entry is Entry 83 of the Union List, which covers "duties of customs including export duties". So a state government can never charge customs duty, even at a port inside its own territory. The Customs Tariff Act, 1975 keeps the two kinds of duty in two separate lists:

• The First Schedule lists the rates of import duty.
• The Second Schedule lists the rates of export duty. India uses export duty only on a few items, such as iron ore and some farm goods, to keep enough supply at home.
• Section 8 of the Act gives the Centre an emergency power. If it decides that an export duty must be raised or newly charged at once, it can do it by a notification. (Section 8A gives the same emergency power for import duties.)
• Such a notification works at once, but it must be laid before Parliament. The government must then seek Parliament's approval by a resolution moved within 15 days of laying it before the Lok Sabha. Parliament can change it or cancel it.

How can the government waive a duty?

Sometimes the government does not want to change the tariff rate itself. It only wants to switch the duty off, or lower it, for some goods or for a short time. For this it uses Section 25(1) of the Customs Act, 1962. Under it, the Central Government can exempt goods from customs duty, which simply means it lets them come in without paying all or part of the duty.

• The government must first be satisfied that the exemption is "necessary in the public interest".
• The exemption can be full or partial, and it can be absolute or with conditions (for example, only for a fixed period, or only for certain users).
• It is given by a notification issued by the Department of Revenue, Ministry of Finance, and CBIC applies it at the border.
• The Supreme Court has held that the power to exempt also includes the power to change or withdraw an exemption. But the government must use it reasonably and in the public interest, and courts can review it.

Think of the tariff rate as the printed price on a bus ticket, and an exemption as a free pass for a season. The printed price stays the same, so when the pass ends, the old duty comes back without any new law. For example, the government waived the full import duty on raw cotton (HS code 5201) from 19 August 2025, first until 30 September 2025 and then until 31 December 2025, to help textile mills and exporters.

How is the "effective" rate built up?

The rate you see quoted in the news, such as "16.5% effective duty", is usually more than just the Basic Customs Duty (BCD). On top of BCD, the government can add:

• The Agriculture Infrastructure and Development Cess (AIDC), introduced in the 2021 Budget (by Section 124 of the Finance Act, 2021) to fund farm infrastructure. It is charged as a percentage on top of the value of the goods, but it is designed so that when combined with the cut in BCD, the total tax the importer pays does not rise; it is meant to relabel part of the duty as a cess earmarked for agriculture spending, not to add a new burden. Because it is a cess, its money stays with the Centre and is not shared with the states (cesses and surcharges are kept out of the divisible pool under Article 270).
• A social welfare surcharge (SWS), a small additional charge used to fund social welfare schemes. It was created by Section 110 of the Finance Act, 2018. It is 10% of the total customs duties charged on the good (BCD plus AIDC), unless exempted. If an exemption brings these duties down to zero, the surcharge also becomes zero.

So the "effective duty" an importer actually pays is BCD plus these add-ons, and that is the number that changes when the government wants a bigger or smaller effect on the market. Raw cotton shows the maths simply: 5% BCD plus 5% AIDC is 10%, and the 10% surcharge on that adds 1%, so the effective duty is about 11%.

On edible oils, all three layers were cut together, but the gap between crude oil duty and refined oil duty was kept nearly the same, so refiners are not hurt while consumers still see lower prices.

Crude vs refined: why the gap matters

India imports both crude edible oil (which Indian refineries then process, package and sell) and refined edible oil (ready to use). If the duty gap between the two is small, importers would rather bring in cheap ready-made refined oil, and Indian refining units would run without enough raw material, hurting jobs and capacity utilisation in the domestic refining industry.

Keeping a wide gap, usually around 19 percentage points in recent years, gives refiners a price cushion so they keep importing crude and refining it in India (this is sometimes called effective rate of protection for the refining industry).

Commonly confused concepts

• Customs duty vs GST: Customs duty is charged only when goods cross the border, based on the Customs Tariff Act. GST (Goods and Services Tax) is charged on the sale of goods and services within India, including on imported goods once they clear customs. Both can apply to the same imported item, one after the other.
• Customs export duty vs excise levy on exports: A customs export duty is charged under the Second Schedule of the Customs Tariff Act, using Entry 83 of the Union List. Some levies that the news calls an "export duty" are legally excise duties. For example, the windfall tax on exports of petrol, diesel and aviation turbine fuel (ATF), first imposed on 1 July 2022, is a Special Additional Excise Duty (SAED) under the Central Excise Act, 1944. It is not a customs duty.
• BCD vs AIDC vs surcharge: BCD is the basic tax rate under the tariff schedule. AIDC and the social welfare surcharge are additional layers calculated on top, usually adjusted together with BCD so that the total effective duty moves in one clear direction (up or down), even though three different components are involved.
• Changing the tariff rate vs an exemption: A tariff change edits the rate in the Customs Tariff Act schedules (in the Budget, or at once under Section 8 or 8A). An exemption under Section 25(1) of the Customs Act leaves the tariff rate untouched and only switches off all or part of it, often for a fixed period.

Issues, criticism and the way forward

Cutting import duty helps consumers by lowering retail prices, but it can hurt domestic oilseed farmers by pulling down the price they get when cheaper imported oil enters the market, especially if the cut coincides with the farmers' own harvest season. Because India imports well over half of the edible oil it consumes (mostly palm oil from Indonesia and Malaysia, and soybean and sunflower oil from South America, Ukraine and Russia), the government constantly balances consumer relief against the need to make oilseed farming profitable enough that farmers don't shift away from oilseeds towards other crops.

Experts and government reports (including the Economic Survey) have repeatedly flagged India's high dependence on edible oil imports as a food-security risk, and recommend raising India's own oilseed output as the more durable fix, rather than relying only on duty changes.

Concepts to Know

• Basic Customs Duty (BCD): The main tax rate charged on an imported good, fixed under the Customs Tariff Act, 1975.
• Cess: A tax collected for a specific, named purpose (here, agriculture infrastructure), kept separate from the government's general funds.
• Divisible pool: The share of central taxes that the Centre must split with the states, as advised by the Finance Commission. Cesses and surcharges are kept out of it, so the Centre keeps all of that money.
• Effective duty: The real, total tax an importer pays after adding all cesses and surcharges to the basic duty.
• Exemption notification: A government order, issued under Section 25 of the Customs Act, that lets certain goods pay less duty or no duty, without changing the tariff rate itself.
• HS code: A number from the Harmonized System, a worldwide list that gives every traded good its own code (raw cotton is 5201), so all countries name goods the same way.
• Excise duty: A tax on goods made inside India, charged when they leave the factory or refinery. Customs duty, by contrast, is charged when goods cross the border.
• Mandi: A wholesale market, usually regulated by a state Agricultural Produce Market Committee (APMC), where farmers sell their harvest.