Directorate General of Valuation Central Board of Excise & Customs Government of India

Valuation History

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Customs Valuation Historical Background

In the past, the Customs duties were mainly specific. However in recent times almost all countries have changed from specific rate of customs duties to ad valorem rates due to inherent advantage of buoyancy in an ad-valorem tax system. Save a few items, the effective Customs duty rates for import of most of the items, in India, are ad-valorem or ad-valorem cum specific. Therefore for purpose of calculation of duty leviable, it is necessary to ascertain the Customs_value on which ad-valorem rate can be applied.

Value under Sea Customs Act, 1878.

Value under Sea Customs Act. 1878 was based on "real value". Real value was defined as the wholesale price for which like goods are capable of being sold at the time and place of importation (excluding duties payable). The Sea Customs Act also contained provisions for taking over the imported goods by Government on payment of an amount equal to declared real value (Section 32).

Brussels Definition of Value (Customs Cooperation Council, now WCO)

After Second World War, some countries of Europe formed Customs Cooperation Council in 1952 with headquarters at Brussels. The Council has now grown into a full-fledged international organization World Customs Organization with more than 150 country members. Among the various aspects looked by the Council, uniform valuation code was one of the important assignments, The Council developed a valuation method commonly called Brussels Definition of Value and abbreviated as BDV.

BDV is based on a notional concept, which treats Customs value as the price at which, the goods would be sold (the price which goods would fetch) in the course of international trade, the essential elements being price, time, place, quantity and commercial level. The emphasis was on the intrinsic value of the goods.

By about the beginning of 1970, over 100 countries were applying BDV. However USA, Canada, Australia and New Zealand refused to join the BDV and advocated a “positive concept” requiring Customs to determine the value on the basis of actual price paid for the goods. In their view the positive concept considerably reduced the discretion available to the Customs and thus facilitated trade. However, in practice, the perceived difference between the notional concept (BDV) and positive concept were not significant, as explanatory notes to BDV had considerably reduced the discretion.

Article VII of the GATT

Fixation of Customs Value is the most important role of Customs department. Fixation of arbitrary values can act as trade barrier and realizing this, the subject matter of Customs Valuation was discussed under GATT, and an international policy for Customs valuation was evolved in the form of Article VII of the GATT, 1947 since renamed GATT, 1994. Article VII of GATT only outlines the policy relating to Customs Valuation.

Article VII of the GATT, brought forward revolutionary concepts of Customs Valuation. In brief, in calls for the standardization, as far as practicable, of definitions of value and of procedures of determining value, and lays down certain principles in this connection. The value for Customs purposes could no longer be based on arbitrary or fictitious values; it has to be based on the actual value of the imported merchandise (goods) or of like merchandise. Even the value of goods of notional origin was ruled out. “Actual value” should be the price at which, at a designated time and place, such or like goods are sold or offered for sale in the ordinary course of trade under fully competitive conditions, and when it is not available as above, it should be based on the nearest ascertainable equivalent of such value.

Valuation under Customs Act, 1962, prior to 1988.

Valuation under Customs Act, 1962 before 1988 was based on concept of normal price at which such or like goods are sold or offered for sale where buyer and seller are not related. The law also provides for framing of rules under which nearest equivalent could be ascertained. Customs Valuation Rules, 1963 were framed for this purpose.

Tokyo Round and Uruguay Round (WTO agreement on Valuation)

Efforts to limit further the discretion available to customs were made during the preparatory and the first phase of the Tokyo Round of negotiations (1970 – 1977) by developing in GATT "draft principles and interpretative notes" to BDV. It was expected that the resulting precise criteria would induce the four major countries namely USA, Canada, Australia and New Zealand to change their systems and join the BDV. The elaboration of these texts did not have however, any perceptible influence on their negotiating approach and stand.

In November 1977, however, the European Union (EU) suddenly and unexpectedly announced dramatic change in its position. It declared that the Community countries had agreed to make a fundamental change in the valuation system by opting out for a positive approach and that the proposals it was making were based on what it “believed to be good features of the United States Valuation System”. The draft Agreement which it presented, provided that in almost all cases customs should determine dutiable value on the basis of "price paid or payable" for imported goods in the particular transaction. The customs could reject transaction value only in a limited number of exceptional cases. In all such cases however, the customs were expected to determine it by using the five prescribed methods by applying them in the hierarchical order in which they were listed.

In the international negotiations, countries often change their position by redefining their objectives. But in this case, the decision of the European Union almost amounted to agreeing with the adversary, in the mid-term of the negotiations, that the position that the adversary was taking was right and its own stand was worng.

The reactions of developing countries to the EU proposal were of complete surprise and disbelief. Many of them were only recently persuaded by CCC to join BDV or to apply on de facto basis. The CCC, while was working towards BDV, a global system considered itself badly let down by the EU on whose support they had relied till then.

One of the major concerns of developing countries was that the system proposed by EU, which required customs to accept transaction value declared by the importers, would not enable them to deal with the practice resorted by traders of under valuation of goods and with other customs related malpractices. They therefore wanted a certain degree of flexibility in the rules to enable their customs authorities to reject transaction value when they has reasons to doubt its truth or accuracy.

This EU and USA refused to concede once they were able to secure support to the basic ideas in the proposal from the other developed countries. In the Tokyo Round the only concession which developing countries were able to achieve, despite the arduous efforts made by them was the acceptance that a developing country acceding to the Agreement could delay its implementation by five years.

Uruguay Round : Adoption of a decision giving authority to customs to reject in case doubts the transaction value declared by the importer

The Tokyo round ended in 1979. The developing countries had to wait till the end of the Uruguay Round to get acceptance of their contention that the difference in economic situation and trading realities would require provision in the rules that would enable them to reject the transaction value when they have reasons to believe that goods have been deliberately under or over-valued by importers in collusive deals with exporters. The “Decision regarding cases where customs administration have reasons to doubt the truth or accuracy of the declared value”, which has been adopted in the Uruguay Round, provides now subject to certain conditions the right to customs to reject the transaction value in cases, inter alia, of deliberate under-valuation and proceed to determine value on the basis of other methods provided in the Agreement.

Adoption in the Uruguay round of the "Single undertaking concepts" and its implications

The negotiations at technical level for improvement in the provision of the Agreement, which resulted in the adoption of the Decision described above, took place on the understanding that even after its adoption, it would be open to the countries to decide on whether or not to join the Agreement. In other words, a developing country could have an option of not joining the Agreement. Towards the end of the Uruguay round negotiations however, this situation changed, as a result of the decisions taken at political level while establishing WTO. The Marrakesh Agreement establishing the organization, visualizes that the WTO legal system is a "Single undertaking". Consequently all countries, which are members of WTO, are bound by the obligations, which the multilateral agreements constituting the WTO system impose.

The single undertaking rule has thus made it obligatory on all countries, including those which are developing or least developed, to apply the rules of the Agreement on Customs Valuation, after the expiry of the transaction period that is available to them in accordance with its provision.

Valuation under Customs Act, 1962 after 1988.

The new Customs Valuation System has been introduced in India with the amendment of Section 14 of Customs Act, 1962 and bringing into force of the Customs Valuation (Determination of Price of Imported Goods) Rules,1988 with effect from 16-8-1988. As a signatory to the “Agreement on implementation of Article VII of the GATT”, the new valuation system has obviously been based on the Agreement.

The Valuation Rules of 1988 are an adopting of the Agreement, with minor changes in structure and layout and with reservations on application on certain articles. The rules are applicable only to imported goods (and not export goods), where a duty of customs is chargeable by reference to their value, and not to duty-free imported goods or imported goods liable to specific rates of duty.

Comparative Table

S.No. Valuation under Customs Act, 1962 period to 16-8-88 Valuation under Customs Act,1962 after 16-8-88
1. Deemed value / normal value concept Deemed value concept retained in Section 14 (1)
2. Where value is not ascertainable under section, nearest equivalent be ascertained under Rules. Value to be ascertained under Valuation Rules subject to provision of Section 14 (1)
3. Customs valuation Rules 1963 were applicable to both import and export Customs valuation Rules 1988 are applicable to only imports.
4. Simple Rules Elaborate rules with explanatory notes based on WTO Valuation Agreement.