Difference Between Excise Duty and Custom Duty: A Comprehensive Comparison

Excise and customs duties are two important forms of taxation in a country. One is related to internal trade, while the latter is associated with international trade. They play a key role in regulating trade and revenue generation for a country. However, the distinction between them is often misunderstood.

Knowing the difference between excise duty and custom duty is imperative. It helps businesses remain compliant with tax laws, manage costs effectively, and align their operations with regulatory requirements.

What is Excise Duty?

Excise duty is a tax applicable to manufacturing, selling, or consuming specific products and services within a country. Excise duty is in the purview of end consumers. Instead, manufacturers and respective service providers are bound to pay it. However, it can impact end consumers through product price increases.

Alcoholic products, fuel, tobacco, wine, and gambling services typically come under excise duty. The government uses the tax accrued to fund various public services and projects, underscoring the importance of excise duty. When it comes to the rules and regulations, each country can have its own. 

What is Custom Duty?

You might be familiar with tariffs or import duties. That’s exactly the customs duty, which relates to foreign trade mostly. It is the tax levied on goods or services imported into a country by an industry or an individual. Every country will have its own rules for customs duty designed to regulate international trade, protect domestic industries, and generate revenue for the government. Ultimately, the importance of custom duty also lies in funding the government to develop public projects and services in a country. 

Difference Between Excise Duty and Custom Duty

Aspect	Excise Duty	Customs Duty
Definition	Tax imposed on the production or sale of goods within a country.	Tax levied on goods imported into a country.
Scope	Applicable to goods manufactured and sold domestically.	Applicable to goods entering the country through import.
Point of Levy	Charged at the manufacturing or production stage.	Charged at the point of entry at customs checkpoints.
Purpose	To generate revenue and regulate domestic industries.	To generate revenue, protect local industries, and manage trade policies.
Collection Authority	Collected by government agencies from manufacturers or producers.	Collected by customs authorities from importers.
Calculation Basis	It can be ad valorem (percentage of value), specific (fixed amount per unit), or compound.	Based on customs valuation, duty rates, and international trade agreements.
Goods Affected	Applicable to domestically produced goods and services.	Applicable only to imported goods.
Rate Determinants	Rates depend on the type of goods or services.	Rates depend on HSN codes, the origin of goods, and trade agreements.
Additional Charges	May include excise cess, surcharge, or other levies.	It may include anti-dumping duties, countervailing duties, or safeguard measures.
Exemptions/Rebates	Exemptions or rebates may apply to essential goods, exports, or specific industries.	Exemptions may apply under free trade agreements or special economic zones.
Compliance Responsibility	Manufacturers, producers, and service providers must comply with excise regulations.	Importers must declare goods and comply with customs procedures.
Impact on Pricing	Influences the cost of domestically produced goods and services.	Directly affects the cost of imported goods.
Effect on International Trade	Does not usually impact international trade directly.	Impacts trade by influencing import costs and promoting protectionist measures.
Documentation Required	Excise registration, invoices, and tax returns.	Import/export documentation, bill of entry, and customs declarations.
Refund Provisions	Refunds may be available for exports or under special schemes.	Refunds may be available for overpaid duties or under certain trade agreements.

Importance of Excise Duty vs Custom Duty

We must understand that the objectives of custom duty and excise duty are not just about taxation. They have a lot to contribute towards a country’s economic and social development. 

Factor	Importance of Excise Duty	Importance of Custom Duty
Revenue Generation	Raises funds from goods produced domestically.	Generates revenue from imported goods.
Support for Industries	It helps local industries by regulating domestic production.	Protects domestic industries by taxing imports.
Control on Goods	Regulates harmful or luxury goods like tobacco and alcohol.	Ensures quality and legality of imported goods.
Economic Stability	It helps manage inflation by taxing non-essential domestic goods.	Balances trade by controlling import costs.
Public Services Funding	Funds government programs like education and healthcare.	Supports border security and trade infrastructure.
Environmental Impact	Discourages production of harmful goods through higher taxes.	Discourages import of environmentally damaging goods.
Trade Policy	Limited direct impact but influences domestic markets.	Implements trade policies like tariffs and free trade agreements.

Types of Excise Duty & Calculation

There are different types of Excise duties based on their application and purpose. 

Basic Excise Duty: A standard duty applied to most goods manufactured within the country. For example, excise duty on the production of smartphones.

Special Excise Duty: An additional duty imposed on specific goods, often for regulatory or revenue purposes. For example, on tobacco products.

Additional Excise Duty: Charged on items such as luxury goods or non-essential commodities. For example, additional excise duty on high-end cars.

Education Cess on Excise Duty: A small percentage of the excise duty is added to fund educational programs and initiatives, for example, on electronics.

National Calamity Contingent Duty (NCCD): A duty levied to support disaster relief and rehabilitation efforts. NCCD imposed for funding rehabilitation in disaster-affected regions.

Calculating Excise Duty

Excise duty is calculated based on the value or quantity of goods manufactured within a country. It involves specific formulas and depends on the type of goods, their classification, and applicable tax rates.

Ad Valorem Basis

Excise duty is calculated as a percentage of the assessable value of goods.

Formula: Excise Duty = Assessable Value × Applicable Excise Duty Rate

Example: If the assessable value of a product is ₹1,000 and the excise duty rate is 10%, the duty is ₹100.

Specific Basis

A fixed amount is charged per unit of goods, regardless of their value.

Formula: Excise Duty = Quantity Produced × Duty Per Unit

Example: If the duty is ₹5 per litre and 1,000 litres are produced, the excise duty is ₹5,000.

Compound Basis

A combination of ad valorem and specific rates is applied.

Formula: Excise Duty = (Assessable Value × Rate) + (Quantity × Fixed Duty)

Types of Custom Duty & Calculation

Basic Customs Duty: The standard tax imposed on goods imported into a country, calculated based on their value. Example: Duty on imported electronic devices.

Countervailing Duty (CVD): Aimed at neutralising subsidies provided by the exporting country, this duty ensures fair competition for domestic industries. Example: CVD on imported subsidised steel.

Special Additional Duty (SAD): An extra layer of tax added to specific imported goods to maintain balance in domestic markets. Example: SAD on luxury items like premium watches.

Anti-Dumping Duty: Enforced to prevent imported goods from being sold at unfairly low prices that undercut local businesses. Example: Anti-dumping duty on underpriced imported steel.

Safeguard Duty: A temporary measure to protect domestic industries from a sudden surge in imports. Example: Safeguard duty on agricultural imports during high domestic production.

Preferential Duty: Lower or waived duties applied to imports from countries under special trade agreements. Example: Reduced tariffs on goods from free trade partners.

Protective Duty: Designed to support emerging domestic industries by discouraging foreign competition. Example: Duty on imported solar panels to boost local manufacturing.

Education Cess: An additional charge on customs duties allocated to funding educational initiatives. Example: Cess applied to imported educational materials.

Integrated Goods and Services Tax (IGST): A unified tax replacing multiple levies, applicable on imported goods. Example: IGST on machinery brought into the country.

How to Calculate Custom Duty?

Customs duty is calculated based on the assessable value of imported goods and the applicable duty rates. Here’s the process:

Determine the Assessable Value

The assessable value includes:

• Cost of Goods (FOB Value): Price paid for the goods.
• Freight Charges: Cost to transport goods to the importing country.
• Insurance Charges: Cost of insuring the goods during transit.

Assessable Value = FOB Value + Freight + Insurance

Apply Basic Customs Duty (BCD)

• Calculate the duty using the assessable value and the BCD rate.

Basic Customs Duty = Assessable Value × BCD Rate

Add Additional Duties

Include applicable duties such as:

• Countervailing Duty (CVD): Levied to offset subsidies.
• Special Additional Duty (SAD): Imposed on specific goods.
• Anti-Dumping or Safeguard Duty: Applied in specific scenarios.

Calculate Integrated Goods and Services Tax (IGST)

IGST is calculated on the total of assessable value, BCD, and other duties.
IGST = (Assessable Value + BCD + Other Duties) × IGST Rate

Add Other Charges

Include charges like Education Cess or specific duties based on the nature of the goods.

Calculation

• FOB Value: ₹1,00,000
• Freight: ₹10,000
• Insurance: ₹5,000
• BCD Rate: 10%
• IGST Rate: 18%

Assessable Value = ₹1,00,000 + ₹10,000 + ₹5,000 = ₹1,15,000
BCD = ₹1,15,000 × 10% = ₹11,500
IGST = (₹1,15,000 + ₹11,500) × 18% = ₹22,770
Total Customs Duty = ₹11,500 + ₹22,770 = ₹34,270

Customs duty calculations can vary based on agreements, exemptions, and special duties. You must always refer to current tariffs and rules prevailing in a country.

Related read: Import Duties and Customs Clearance in India for International Brands

WareIQ: Powering Fulfillment and Shipping for eCommerce Growth

WareIQ is a Y-Combinator-backed eCommerce full-stack platform offering multi-channel fulfilment for D2C, marketplaces, quick commerce, and B2B businesses.

The Advantage of WareIQ

• Pan-India Fulfillment Network: Seller Flex and FAssured compliant centres across 12+ cities with last-mile delivery to 27,000+ pin codes.
• Tech-Enabled Solutions: AI-led inventory planning, plug-and-play integrations for multi-channel fulfilment, and returns QC to eliminate marketplace claims rejections.
• Quick Commerce Support: Regional inventory placement and timely dispatch to platforms like Blinkit, Zepto, and Instamart.
• Premium Seller Enablement: Rapid marketplace launches with operational and compliance support for cataloguing, GST registration, and APOB approvals.
• Smart Shipping: Minimized RTOs, precise delivery options, and branded tracking for an enhanced customer experience.

With WareIQ, businesses can streamline operations, reduce costs, and scale efficiently in the competitive eCommerce landscape.

Closure

Exploring the difference between excise duty and custom duty is non-negotiable for businesses. But managing them efficiently is equally important. B2B companies, particularly manufacturers and importers, should invest in robust compliance tools and partner with reliable logistics providers to streamline tax processes. 

Allow for regular audits and stay updated on regulatory changes to prevent penalties and optimise cost management. Onboarding expert advice promises your operations to align with tax laws. After all, sustainable growth in a competitive marketplace is the need of hour.

Suggested read: Vendor vs Supplier Key Differences and Their Impact on Supply Chain Management

FAQs

Supercharge your fulfilment with WareIQ now, contact our team.

Contact Us