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 DutyAspectExcise DutyCustoms DutyDefinitionTax imposed on the production or sale of goods within a country.Tax levied on goods imported into a country.ScopeApplicable to goods manufactured and sold domestically.Applicable to goods entering the country through import.Point of LevyCharged at the manufacturing or production stage.Charged at the point of entry at customs checkpoints.PurposeTo generate revenue and regulate domestic industries.To generate revenue, protect local industries, and manage trade policies.Collection AuthorityCollected by government agencies from manufacturers or producers.Collected by customs authorities from importers.Calculation BasisIt 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 AffectedApplicable to domestically produced goods and services.Applicable only to imported goods.Rate DeterminantsRates depend on the type of goods or services.Rates depend on HSN codes, the origin of goods, and trade agreements.Additional ChargesMay include excise cess, surcharge, or other levies.It may include anti-dumping duties, countervailing duties, or safeguard measures.Exemptions/RebatesExemptions or rebates may apply to essential goods, exports, or specific industries.Exemptions may apply under free trade agreements or special economic zones.Compliance ResponsibilityManufacturers, producers, and service providers must comply with excise regulations.Importers must declare goods and comply with customs procedures.Impact on PricingInfluences the cost of domestically produced goods and services.Directly affects the cost of imported goods.Effect on International TradeDoes not usually impact international trade directly.Impacts trade by influencing import costs and promoting protectionist measures.Documentation RequiredExcise registration, invoices, and tax returns.Import/export documentation, bill of entry, and customs declarations.Refund ProvisionsRefunds 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 DutyWe 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. FactorImportance of Excise DutyImportance of Custom DutyRevenue GenerationRaises funds from goods produced domestically.Generates revenue from imported goods.Support for IndustriesIt helps local industries by regulating domestic production.Protects domestic industries by taxing imports.Control on GoodsRegulates harmful or luxury goods like tobacco and alcohol.Ensures quality and legality of imported goods.Economic StabilityIt helps manage inflation by taxing non-essential domestic goods.Balances trade by controlling import costs.Public Services FundingFunds government programs like education and healthcare.Supports border security and trade infrastructure.Environmental ImpactDiscourages production of harmful goods through higher taxes.Discourages import of environmentally damaging goods.Trade PolicyLimited direct impact but influences domestic markets.Implements trade policies like tariffs and free trade agreements.Types of Excise Duty & CalculationThere 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 DutyExcise 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 BasisExcise duty is calculated as a percentage of the assessable value of goods.Formula: Excise Duty = Assessable Value × Applicable Excise Duty RateExample: If the assessable value of a product is ₹1,000 and the excise duty rate is 10%, the duty is ₹100.Specific BasisA fixed amount is charged per unit of goods, regardless of their value.Formula: Excise Duty = Quantity Produced × Duty Per UnitExample: If the duty is ₹5 per litre and 1,000 litres are produced, the excise duty is ₹5,000.Compound BasisA combination of ad valorem and specific rates is applied.Formula: Excise Duty = (Assessable Value × Rate) + (Quantity × Fixed Duty)Types of Custom Duty & CalculationBasic 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 ValueThe 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 + InsuranceApply Basic Customs Duty (BCD)Calculate the duty using the assessable value and the BCD rate.Basic Customs Duty = Assessable Value × BCD RateAdd Additional DutiesInclude 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 RateAdd Other ChargesInclude charges like Education Cess or specific duties based on the nature of the goods.CalculationFOB Value: ₹1,00,000Freight: ₹10,000Insurance: ₹5,000BCD Rate: 10%IGST Rate: 18%Assessable Value = ₹1,00,000 + ₹10,000 + ₹5,000 = ₹1,15,000BCD = ₹1,15,000 × 10% = ₹11,500IGST = (₹1,15,000 + ₹11,500) × 18% = ₹22,770Total Customs Duty = ₹11,500 + ₹22,770 = ₹34,270Customs 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 BrandsWareIQ: Powering Fulfillment and Shipping for eCommerce GrowthWareIQ is a Y-Combinator-backed eCommerce full-stack platform offering multi-channel fulfilment for D2C, marketplaces, quick commerce, and B2B businesses.The Advantage of WareIQPan-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.ClosureExploring 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 ManagementFAQsWhat is the custom duty rate in India?The peak customs duty rate in India is currently around 10%, representing the highest basic duty applied to the majority of imported goods. Additionally, a Social Welfare Surcharge of 10% is levied on the value of goods. It further contributes to the overall import cost for businesses.What are the types of customs duty in GST?At present, under GST in India, some customs duties are included in IGST. They are Countervailing Duty (CVD) and Special Additional Duty (SAD). However, Basic Customs Duty (BCD), Anti-Dumping Duty, and Safeguard Duty remain separate and are still applied on imports.What is the primary difference between excise duty and customs duty?The primary difference is that excise duty is a tax on goods manufactured within a country, while customs duty is a tax on goods imported into a country from abroad.Is GST applicable on customs duty?Yes, GST is applicable on customs duty in the form of Integrated Goods and Services Tax (IGST).

February 03, 2025