Man sitting at desk with pile of duties and taxes papers

Duties and Taxes in Customs Clearance

Concept of Customs Duties and Taxes

Customs duties and taxes are an inevitable part of international trade, imports, and customs regulations. While the terms are sometimes used interchangeably, there is a subtle difference between the two.

Though both are forms of taxation and serve to generate income for the government, they are used in different situations and contexts.

Duties or Customs duties are a form of taxation levied on goods and services that are the subject matter of international trade. Duties are levied by Customs authorities on products imported into the country.

Taxes, on the other hand, are levied on most commercial transactions, including the sale of both locally manufactured and imported goods and services, that take place in the country.

Therefore, in terms of applicability, customs duties are imposed on merchandise imports while taxes are placed on all goods that are sold in the country, thus making taxes a broader term. 

Purpose and Importance

The rationale behind the subject line- levying duties and taxes is different.

Customs duties intend to increase the cost of imported goods for international businesses. Since imported goods compete with locally manufactured goods in the domestic market, they intensify competitive pressure on domestic industries and business. Oftentime, goods are imported from countries where the cost of labor and capital is significantly lower than in the importing country, leaving domestic industries at a distinct disadvantage.

In other instances, countries endeavoring to capitalize on their surplus manufacturing capacity or aiming to aggressively promote exports subsidize their export-oriented industries in various ways, all of which are designed to lower the cost of production and thus make their products competitive in global markets. Both these tactics are a form of state-sponsored intervention designed to undermine free and fair competition to the detriment of industry and labor in the importing country. They are often a custom-duty drawback.

In such a scenario, the government of the importing country will take into cognizance the extent to which such foreign goods have the potential to impact their domestic industries and accordingly levy customs duties to increase the final landed cost of the product, thus creating a deterrent to their import and consumption in the local market.

The imposition of customs duties negates these undue advantages and creates a level playing field for local products.

Ergo, while customs duties do generate revenue for the government, the primary objective is to create a disincentive for import substitutes. And to help with customs and border protection.

Conversely, taxes are in essence a source of revenue for the government, with all commercial transactions being subject to various types of taxes.

 While all buyers and consumers of goods and services are liable to pay taxes in some form or the other, it is primarily importers and customs brokers who are concerned with customs duties. Though customs duties are factored into the final price of the product, and hence it is indeed the end user who ultimately bears the burden of customs duties, the immediate onus of paying the customs duty lies with importers and customs brokers. 

Factors determining Customs Duties and Taxes

Several factors are taken into consideration while evaluating the need to levy customs duties on any product, as well as the rate thereof.

Governments levy customs duties on products whose imports they deem it expedient to discourage, with the rates varying in accordance with the projected impact on domestic industries and the balance of trade and payments.

Luxury items are more likely to be subjected to customs duties, and often at higher rates, as are products for which local substitutes are available in abundance. Governments also seek to impose customs duties to protect sectors that are major sources of employment or are of strategic national importance.

Some common examples of products that are subject to high customs duties are wines, premium watches, and top-end automobiles.

Depending on each country’s circumstances and objectives, they will levy customs duties on different products, and at different rates.

The level of prosperity, protectionist tendencies, and commitment to free markets and globalization are other important determinants of customs duties. Less developed countries, with a pressing need to preserve foreign exchange and support domestic industries, impose more duties to curb imports, while apprehensions about imported products edging out local products could lead to the imposition of customs duties as a protectionist measure.

The necessity of abiding by the World Trade Organisation’s rules regarding adequate access to domestic markets also plays a role in setting customs duties.  

Customs Duties: Application and Exemption

Duties are levied on products depending on the information provided by importers or customs brokers, on the basis of which Customs officials will determine the applicable rate of duty.

Customs duties are payable when the product arrives at the shores of the country and need to be paid by the importer or customs broker before the consignment is cleared by customs.

Governments often attempt to promote trade with friendly nations or use trade as a means to foster bilateral relations across international borders. In these cases, they will either eliminate or reduce import duties from such countries. The former measure leads to the formation of free markets while the latter is achieved by signing treaties that grant the exporting country certain privileges and better access to international markets. 

Responsibilities and Obligations of Importers and Customs Brokers

The application and calculation of the apposite rate of customs duty depends on the nature of the commodity, contact, and origin, with the importer or the agent being responsible for providing accurate information and paying customs duties.

It is, therefore, imperative for importers and customs brokers to keep themselves abreast of the latest regulations and applicable rates of duty so they can ensure that duties are levied at the correct rate and also minimized by taking advantage of exemptions and relaxations permitted.

Failure to provide required or accurate information can result in customs holding cargo, resulting in delays in delivery and potential commercial losses. All of these will generally result in poor customer service.

It is thus obvious that in the broader customs clearance process, the calculation and payment of customs duties is a critical step, with non-compliance exposing importers and customs brokers to risks of penalties and delays in service.

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