Definition and Types of Customs Law and Trade Barriers

In global commerce, customs law and trade barriers play significantl roles in regulating the flow of goods across borders. 

Customs law establishes the legal framework for importing and exporting goods, ensuring compliance with national policies and security measures. 

It covers tariff classifications, import quotas, and restrictions to protect economic interests. Trade barriers, categorized as tariff and non-tariff barriers, are strategic measures that control the volume and nature of international trade. 

Understanding these elements is essential for navigating international trade, ensuring compliance, and maximizing opportunities in a competitive global market. 

In this guide, we explore the definitions and types of customs law and trade barriers.

Understanding Customs Law: Concept and Historical Significance

Customs law is the body of regulations and procedures that govern the importation and exportation of goods across international borders. It ensures that goods comply with national and international standards protects revenue, and safeguards against illegal activities such as smuggling and trafficking. 

The concept of customs law dates back to ancient times when trade routes like the Silk Road required regulation and taxation of goods. 

Over centuries, customs laws have evolved to address the complexities of modern trade, incorporating technological advancements and international agreements. 

In today's globalized economy, customs law is essential for facilitating smooth and secure trade, preventing fraud, and protecting national interests.

Types of Customs Duties

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Let’s take a look at the types of customs duties:

1. Basic Customs Duty

Basic Customs Duty (BCD) is the main tax imposed on products that are imported into a nation. It is intended to produce income for the government and shield home industries from overseas competition.

Calculation Method:

• Ad Valorem Duty: It is Calculated as a percentage of the of the imported items' assessed worth. For example, if the BCD rate is 10% and the value of the goods is INR 1,00,000, the BCD would be INR 10,000.
• Specific Duty: Charged per unit of quantity, weight, volume, etc. For instance, INR 5,000 per ton of steel.
• Mixed Duty: A combination of both ad valorem and specific duties.

Example Calculation:

If the ad valorem BCD rate is 15% and the assessed value of the imported goods is INR 2,00,000, the BCD would be:

BCD=15%×INR2,00,000=INR30,000

BCD=15%×INR2,00,000=INR30,000

2. Integrated Goods and Services Tax (IGST) on Goods at the Time of Import

IGST is a component of the Goods and Services Tax (GST) regime in India, applicable to inter-state transactions and imports. It ensures that imported goods are taxed at the same rate as domestically produced goods, maintaining a level playing field.

Implications:

• IGST is calculated on the value of the imported goods plus BCD and any other duties.
• It is paid at the time of import and one can clam it as input tax credit by businesses, reducing the overall tax liability.

Example Calculation:

If the value of the goods is INR 1,00,000, BCD is INR 10,000, and the IGST rate is 18%, the IGST would be:

IGST=18%×(INR1,00,000+INR10,000)=18%×INR1,10,000=INR19,800

IGST=18%×(INR1,00,000+INR10,000)=18%×INR1,10,000=INR19,800

3. Refund of IGST Paid on Goods Exported Out of India

Procedures for Claiming Refunds:

• Filing of Shipping Bill: Exporters must file a shipping bill along with necessary export documents.
• Validation of Export: The customs department validates the export through the Electronic Data Interchange (EDI) system.
• Refund Application: Exporters file for refund through the GST portal.
• Approval and Refund: Once the export and IGST payment are validated, the refund is processed and credited to the exporter's account.

Example Steps:

1. File shipping bill at the customs office.
2. Submit export documents and obtain validation.
3. Apply for IGST refund on the GST portal.
4. Receive refund upon validation of export and IGST payment.

4. GST Compensation Cess, Social Welfare Surcharge, and other cesses

• GST Compensation Cess: A tax imposed to make up for states' lost revenue as a result of the GST's introduction. applicable to specific sinful and upscale products. 
• Social Welfare Surcharge: Levied on the aggregate of customs duties, aimed at funding social welfare schemes.
• Other Cesses: Include additional levies like the Krishi Kalyan Cess, primarily focused on specific purposes such as agricultural development.

Calculation Methods:

• GST Compensation Cess: A set amount per unit or a percentage of the items' value. 10% on high-end vehicles, for instance. 
• Social Welfare Surcharge: A percentage of the total customs duties (including BCD and IGST). For example, 10% of the customs duties.

Example Calculation:

If the customs duties (BCD + IGST) amount to INR 50,000 and the Social Welfare Surcharge rate is 10%, the surcharge would be:

Surcharge=10%×INR50,000=INR5,000

Surcharge=10%×INR50,000=INR5,000

5. Special Types of Duties

Anti-Dumping Duty:

• Purpose: Protects domestic industries from foreign companies selling goods at below fair market value.
• Calculation: Imposed as a fixed amount or a percentage of the value of the goods.

Safeguard Measures:

• Purpose: Provides temporary relief to domestic industries from a surge in imports.
• Calculation: Can be ad valorem or specific duty.

Agricultural Infrastructure and Development Cess (AIDC):

• Purpose: Fund agricultural infrastructure and development projects.
• Calculation: Levied as a percentage of the value of the goods, in addition to other duties.

Example Calculation for Anti-Dumping Duty:

If the anti-dumping duty is INR 1,000 per ton and 10 tons are imported, the total duty would be:

Total Duty=10×INR1,000=INR10,000

Total Duty=10×INR1,000=INR10,000

Trade Barriers Beyond Customs Duties

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While customs duties are the most visible form of trade barriers, numerous other obstacles can impede international trade, creating complex challenges for businesses. 

These include arbitrary customs procedures, non-tariff barriers, inconsistencies in trade rules, and more. 

Understanding these barriers and the efforts to overcome them is crucial for businesses involved in global commerce.

Arbitrary Customs Procedures

Arbitrary customs procedures can significantly hinder international trade by introducing unpredictability and delays. These procedures often involve excessive documentation requirements, inconsistent application of rules, and bureaucratic red tape.

Challenges:

• Excessive Document Requirements: Importers may be required to submit numerous documents, including invoices, packing lists, certificates of origin, and various licenses. This increases the administrative burden and can lead to delays if any documents are missing or incorrect.
• Inconsistent Procedures: Customs procedures can vary widely between countries and even within different ports of the same country, leading to uncertainty and inefficiency.
• Prolonged Inspections: Arbitrary and prolonged inspections can cause delays, increasing costs for businesses and affecting supply chain reliability.

Example:

An importer shipping electronics to a developing country might face inconsistent demands for additional certifications, extended inspections, and frequent changes in documentation requirements, causing delays and increased costs.

Non-Tariff Barriers

Role in Trade:

Non-tariff barriers (NTBs) are regulatory measures other than tariffs that countries use to control the amount of trade across their borders. They can be just as restrictive as tariffs, if not more so, by creating obstacles that are difficult for foreign exporters to overcome.

Examples:

1. Sanitary and Phytosanitary (SPS) Measures: These are laws designed to prevent diseases and pests from entering the environment and harming people, animals, or plants. Although these steps are vital for safety, they might be overused to impose import restrictions.

• Example: A country may impose strict health standards on imported meat, requiring extensive testing and certification that is costly and time-consuming.

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2. Technical Barriers to Trade (TBT): Standards and regulations regarding product characteristics, such as labeling, packaging, and quality requirements.

• Example: A country might require all imported electronics to meet specific safety standards and certifications, making it difficult for foreign manufacturers to comply without extensive modifications.

Challenges in International Trade

Inconsistencies in Application:

The inconsistent application of trade rules and procedures across countries can create significant challenges for businesses. These inconsistencies can stem from differences in legal frameworks, enforcement practices, and administrative capacities.

Key Challenges:

• Varying Standards: Different countries have different standards for product safety, quality, and environmental impact, making it difficult for exporters to meet all requirements.
• Unpredictable Enforcement: The enforcement of trade regulations can be unpredictable, with sudden changes in rules or stricter enforcement without prior notice.
• Lack of Transparency: Customs officers may make arbitrary decisions due to unclear rule application procedures.

Example:

An exporter of pharmaceutical products might face different regulatory requirements in each target market, requiring multiple certifications and adjustments to meet local standards, thereby increasing costs and complexity.

Government Efforts and International Cooperation to Overcome Trade Barriers

Reforms and Cooperation:

Governments and international organizations are continually working to reduce trade barriers and facilitate smoother international trade through reforms and cooperation.

Examples of Efforts:

1. Trade Facilitation Agreements (TFAs): Agreements under the World Trade Organization (WTO) aim to simplify, harmonize, and standardize customs procedures. These agreements help reduce delays and lower the cost of trading.

• Example: The 2017 WTO Trade Facilitation Agreement prioritizes accelerating the flow, release, and clearance of commodities across borders.

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2. Regional Trade Agreements (RTAs): Countries enter into RTAs to reduce trade barriers among member countries, promoting easier and faster trade.

• Example: The European Union (EU) has numerous RTAs with countries and regions around the world, reducing tariffs and harmonizing standards.

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3. Bilateral Agreements: Individual countries negotiate agreements to address specific trade issues and reduce barriers.

• Example: The Comprehensive Economic Partnership Agreement (CEPA) between India and Japan aims to reduce tariffs, simplify customs procedures, and enhance cooperation in trade-related areas.

Impact of Reforms:

• Reduced Documentation: Streamlining documentation requirements and introducing electronic systems for submission can reduce delays and administrative burdens.
• Standardization: Harmonizing standards and procedures across countries can reduce inconsistencies and make it easier for businesses to comply with trade regulations.
• Capacity Building: Providing technical assistance and capacity-building initiatives to developing countries can help them implement more efficient and transparent trade procedures.

Classification of Goods

The classification of goods is an important aspect of international trade, influencing the duties and taxes levied on imported and exported products. Proper classification ensures compliance with legal standards, streamlines customs procedures, and impacts the overall cost and efficiency of trade. 

Customs Tariff Act (CTA) to classify goods

The Customs Tariff Act provides a structured framework for categorizing goods, which is essential for determining the correct customs duties and taxes. Accurate classification is vital for several reasons:

• Duty Determination: Correct classification ensures the appropriate customs duty rates are applied, affecting the overall cost of goods.
• Legal Compliance: Ensures adherence to national and international trade regulations, avoiding penalties and delays.
• Trade Data Accuracy: Contributes to the accurate collection of trade statistics, which are crucial for economic analysis and policy-making.
• Facilitates Trade: Streamlines the customs clearance process, reducing delays and associated costs.

Process of Correct Classification:

• Product Identification: Thoroughly identify the product, including its material composition, function, and use.
• Reference Tariff Schedule: Consult the Customs Tariff Act to find the appropriate tariff code.
• Apply Interpretative Rules: Use the General Interpretative Rules (GIR) to determine the correct heading and subheading.

Rules for Interpretation of Tariff: General Interpretative Rules (GIR) and their application

The General Interpretative Rules (GIR) are a set of guidelines used to classify goods under the Harmonized System (HS). These rules ensure a standardized approach to classification.

The Six General Interpretative Rules:

1. Rule 1: Classification is determined according to the terms of the headings and any relevant section or chapter notes.
2. Rule 2(a): Incomplete or unfinished goods are classified as if they are complete or finished.
3. Rule 2(b): Mixtures or combinations of materials or substances are classified according to the material or substance that gives them their essential character.
4. Rule 3(a): If goods are prima facie classifiable under two or more headings, the heading that provides the most specific description is preferred.
5. Rule 3(b): Mixtures, composite goods, or sets of goods are classified according to the material or component that gives them their essential character.
6. Rule 3(c): If goods cannot be classified by applying Rules 3(a) or 3(b), they are classified under the heading that occurs last in numerical order.
7. Rule 4: Goods that cannot be classified by applying the previous rules are classified under the heading appropriate to the goods to which they are most akin.
8. Rule 5: Cases and packing materials are classified with the goods they contain if they are normally sold with those goods.
9. Rule 6: Classification of goods within subheadings of a heading shall be determined according to the terms of those subheadings and any related subheading notes.

Application of GIR:

These rules are applied in a sequential order to ensure the correct classification of goods. For example, if a product falls under multiple headings, Rule 3(a) is used first to determine the most specific heading.

Steps in the classification of a product: Guide to classify products under the Customs Tariff

1. Identify the Product: Gather detailed information about the product, including its material composition, function, and intended use.
2. Consult the Customs Tariff Schedule: Use the tariff schedule to find potential headings and subheadings for the product.
3. Apply the General Interpretative Rules (GIR): The rules should be used to narrow down the classification to the most appropriate heading and subheading.
4. Check Section and Chapter Notes: Review any relevant notes in the Customs Tariff Act that might affect the classification.
5. Verify with Customs Authorities: If uncertain, consult customs authorities or a customs broker to confirm the classification.

Example Process:

For a multi-functional printer that scans, copies, and prints:

1. Identify the Product: Multi-functional printer with scanning, copying, and printing capabilities.
2. Consult Tariff Schedule: Look for headings related to printers and multifunction devices.
3. Apply GIR: Determine which function gives the product its essential character (likely printing).
4. Check Notes: Review any notes that might provide additional guidance on classification.
5. Verify Classification: Confirm with customs authorities if needed.

Classification Challenges: Common issues and disputes related to the classification of goods

• Ambiguity in Product Description: Incomplete or vague product descriptions can lead to misclassification.
• Technological Advancements: New products or technologies may not fit neatly into existing tariff headings, causing disputes.
• Differing Interpretations: Customs authorities in different countries may interpret the classification rules differently, leading to inconsistencies.
• Composite Goods: Products made from multiple materials or components can be challenging to classify due to the need to determine the essential character.

Examples of Classification Disputes:

• Electronics: Classifying a device that functions as a computer and a communication device can lead to disputes over which heading is more appropriate.
• Pharmaceuticals: Differentiating between medicinal products and supplements can be contentious, affecting the applicable duty rates.

Legal Framework and Changes in Customs Law

The legal framework governing customs law is vital for regulating international trade, ensuring compliance, and facilitating efficient customs procedures. 

Recent changes introduced by finance acts and updates to the Foreign Trade Policy reflect evolving global trade dynamics and aim to address emerging challenges.

Scope and Coverage of Customs Law

The purpose of customs legislation is to control the import and export of commodities and guarantee that trade conforms with both domestic and international regulations. 

Its scope and coverage are extensive, encompassing various territorial applications and delineating the liability of customs duties among different stakeholders.

Territorial Application:

• Ports of Entry and Exit: Customs law is enforced at all official points where goods enter or leave a country, including seaports, airports, and land border crossings. These points are crucial for controlling and monitoring the flow of goods, ensuring that all imports and exports are recorded and properly taxed.
• Exclusive Economic Zones (EEZ): Customs laws apply to areas outside of national borders, where certain nations are granted exclusive rights for the exploration and use of marine resources. These zones are subject to monitoring in order to stop the unauthorized import and export of products.
• Free Trade Zones (FTZ): These zones are established to promote trade by offering a more relaxed regulatory environment. Goods can be imported, processed, and re-exported without the usual customs restrictions, although they are subject to customs laws if they enter the domestic market.

Liability of Customs Duty:

• Importers and Exporters: The primary responsibility for customs duties falls on the importers and exporters who move goods across borders. They must ensure that all declarations are accurate and that the appropriate duties are paid.
• Customs Brokers: Customs brokers facilitate customs clearance on behalf of importers and exporters. They must be well-versed in customs regulations to ensure compliance and avoid penalties.
• Transport Operators: Companies involved in the transportation of goods may also be held accountable for customs duties, especially in cases of non-compliance or fraud. They ensure all transported goods are correctly declared and comply with customs laws.

Detailed Changes Introduced by Finance Acts

Finance acts are legislative tools that introduce changes to customs law, reflecting the government's economic policies and strategies. 

The Finance Act 2023, in particular, has brought significant updates aimed at streamlining customs procedures and addressing contemporary trade issues.

Key Changes in Finance Act 2023:

• Tariff Revisions: The act has revised tariffs on several goods to protect domestic industries and manage inflation. For instance, higher duties have been imposed on certain electronics to encourage local manufacturing and reduce reliance on imports.
• Simplification of Procedures: The act has introduced measures to simplify customs procedures to enhance trade efficiency. This includes implementing electronic documentation and automated clearance systems, which reduce the time and effort required for customs processing.
• Anti-evasion Measures: The act has strengthened measures to detect and prevent customs duty evasion. This includes stricter penalties for misdeclaration of goods and under-invoicing, ensuring that all due duties are collected.
• Incentives for Exporters: New schemes and incentives, such as expanded duty drawback schemes, have been introduced to support exporters. These allow exporters to reclaim duties paid on imported inputs, making their products more competitive in global markets.

Foreign Trade Policy (2023) Highlights

The Foreign Trade Policy (FTP) 2023 is designed to boost the country's trade performance by simplifying procedures, providing sector-specific incentives, and investing in trade infrastructure. The policy aims to integrate the country's economy more closely with global markets.

Noteworthy Aspects:

1. Ease of Doing Business: The policy includes measures to simplify export and import procedures, reduce documentation, and streamline regulatory requirements. This is intended to facilitate businesses' engagement in international trade.

• Example: Implementation of single-window clearance systems allows faster processing of trade transactions by consolidating various regulatory approvals into a single platform.

2. Sector-specific Incentives: Targeted incentives are provided for key sectors such as textiles, electronics, and pharmaceuticals. These incentives are designed to enhance their competitiveness in the global market.

• Example: Duty exemptions on raw materials used in export-oriented manufacturing reduce production costs and encourage higher exports.

3. Export Promotion Schemes: The continuation and expansion of schemes like the MEIS (Merchandise Exports from India Scheme) and the Services Exports from India Scheme (SEIS) offer enhanced benefits to exporters.

• Example: Under MEIS, high-potential export sectors receive increased benefits, boosting their presence in international markets.

4. Trade Infrastructure: Significant investments are being made in trade-related infrastructure, including ports, logistics hubs, and customs facilities. This infrastructure development aims to handle increased trade volumes efficiently.

• Example: New ports are being developed, and existing ones are being upgraded to accommodate larger ships and more cargo, reducing bottlenecks and improving turnaround times.

Impact on Customs Procedures:

• Streamlined Operations: Reduced documentation and single-window systems facilitate faster customs clearance, reducing business delays and costs.
• Enhanced Compliance: Clearer regulations and automated systems help improve compliance with customs laws, reducing the risk of errors and penalties.
• Boost to Exports: Sector-specific incentives and expanded export promotion schemes enhance the competitiveness of domestic industries in global markets, driving economic growth.

Read More: Understanding Custom Clearance Charges

Addressing and Overcoming Customs and Trade Barriers

Customs and trade barriers can significantly impede international commerce, increasing costs and delays. 

However, various efforts are being made to address and overcome these obstacles through reforms in customs procedures, international agreements, and forward-looking policies. 

Reforms in Customs Procedures: Efforts made by governments to simplify and streamline customs processes

Governments worldwide are actively working to simplify and streamline customs processes to facilitate trade, reduce delays, and lower business costs. These reforms aim to enhance efficiency, transparency, and compliance.

Key Reforms:

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1. Electronic Documentation and Automation: Many countries have adopted electronic documentation and customs clearance systems. These systems reduce paperwork, minimize human errors, and speed up processing times.

• Example: The introduction of the Automated System for Customs Data (ASYCUDA) by the United Nations Conference on Trade and Development (UNCTAD) has helped many developing countries streamline their customs procedures.

2. Single-Window Systems: Implementing single-window systems allows traders to submit all required documentation through a single entry point, simplifying customs.

• Example: The Indian government’s Single Window Interface for Facilitating Trade (SWIFT) system integrates multiple regulatory agencies, reducing the time and cost involved in obtaining clearances.

3. Risk Management Systems: Modern customs administrations use risk management techniques to focus inspection efforts on high-risk consignments, allowing low-risk goods to clear customs more quickly.

• Example: The European Union's Customs Risk Management Framework targets high-risk shipments for detailed inspections, facilitating smoother trade for compliant businesses.

4. Authorized Economic Operator (AEO) Programs: These programs recognize and certify businesses with strong security practices, granting them expedited processing and reduced inspections.

• Example: The World Customs Organization’s AEO program has been adopted by many countries, including the United States (C-TPAT) and the European Union (AEO).

International Agreements and Their Impact: Role of the EU-Mexico Free Trade Agreement and other international treaties

International trade agreements play an important role in reducing customs and trade barriers, fostering economic cooperation, and promoting market access.

Key Agreements:

1. EU-Mexico Free Trade Agreement: This agreement, updated in 2020, aims to eliminate most tariffs on goods traded between the EU and Mexico and simplifies customs procedures to promote smoother trade flows.

• Impact: The agreement has boosted bilateral trade by reducing tariffs and streamlining customs procedures, making it easier for businesses to operate across borders.

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2. North American Free Trade Agreement (NAFTA) / United States-Mexico-Canada Agreement (USMCA): These agreements have significantly reduced trade barriers between the U.S., Canada, and Mexico.

• Impact: NAFTA and its successor, USMCA, have facilitated a substantial increase in trade and investment among the three countries by eliminating tariffs and simplifying customs regulations.

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3. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP): This agreement among 11 Pacific Rim countries reduces tariffs and non-tariff barriers, promoting regional economic integration.

• Impact: CPTPP has created a larger free trade area, reducing barriers and opening new markets for member countries.

Benefits of International Agreements:

• Market Access: Agreements provide access to new markets, which further allows businesses to expand their reach and increase exports.
• Standardization: They often lead to the harmonization of customs procedures and standards, making it easier for businesses to comply with regulations in different countries.
• Dispute Resolution: Trade agreements establish mechanisms for resolving disputes, providing businesses with a predictable legal environment.

Future Directions in Customs Law and Trade Barrier Reduction: Expectations and Ongoing Challenges

As global trade continues to evolve, future directions in customs law and trade barrier reduction will focus on leveraging technology, enhancing cooperation, and addressing emerging challenges.

Future Directions:

1. Digital Trade and E-commerce: The rise of digital trade and e-commerce will necessitate new customs frameworks to manage digital transactions and cross-border data flows.

• Example: Developing regulations for digital goods and services, and improving cybersecurity measures to protect online transactions.

2. Blockchain Technology: Blockchain can give access to a secure and transparent way to track goods, reducing fraud and improving compliance.

• Example: Blockchain-based systems for tracking the origin and movement of goods can streamline customs processes and enhance trust between trading partners.

3. Sustainable Trade Practices: Integrating sustainability into customs procedures, such as ensuring compliance with environmental standards and promoting green trade.

• Example: Customs regulations that incentivize the import and export of environmentally friendly products.

4. International Cooperation: Continued emphasis on international cooperation and mutual recognition agreements to harmonize customs procedures and reduce trade barriers.

• Example: Expanding the number of mutual recognition agreements (MRAs) for AEO programs to facilitate smoother trade between countries.

Ongoing Challenges:

• Regulatory Divergence: Different countries have varying customs regulations, which can complicate compliance for international businesses.
• Trade Protectionism: The rise of protectionist policies can lead to increased tariffs and trade barriers, disrupting global supply chains.
• Technological Adaptation: Rapid technological advancements require continuous updates to customs procedures and regulations to keep pace with new trade practices.

Conclusion

Navigating the complexities of customs law and trade barriers can feel overwhelming, but it's essential to doing business in today's global marketplace. Staying informed is crucial for understanding the intricacies of the Customs Tariff Act and adapting to the latest changes in trade policies. 

The continuous endeavors to optimize customs protocols and minimize trade obstacles demonstrate a dedication to enabling more seamless and effective global trade. As technology advances, new opportunities and difficulties will present themselves, necessitating that businesses remain proactive and flexible.

At Pazago, we're dedicated to assisting companies in overcoming trade and customs obstacles since we recognize the complexities involved in international commerce. Our all-inclusive solutions are made to guarantee compliance, expedite customs procedures, and enhance international commerce operations. Contact us today to find out how we can help your business.