Month: July 2020

Quantitative Analysis in Budgeting analyses fixed and variable cost elements from total cost date using high/ low method; explains how to estimate the learning rate and learning effect; applies the learning curve to a budgetary problem; discusses the reservation with the learning curve; applies expected values and explains the problems and benefits and explains the benefits and dangers of using spreadsheets in budgeting.

Quantitative Analysis in Budgeting

1. Analyse fixed and variable cost elements from total cost data using high/low method.

The high-low method is a “quantitative technique for analyzing costs into their fixed cost and variable cost elements.” It is used to separate the total cost into fixed and variable costs.

Here are the steps to be followed when using the high-low method:

Step 1: Review records of costs in previous periods

• Select the period with the highest activity level
• Select the period with the lowest activity level

Step 2: Adjust by indexing up or down

Step 3: Determine the following:

• Total costs at high activity level
• Total costs at low activity level
• Total units at high activity level
• Total units at low activity level

Step 4: Find the variable cost per unit (v)

• Formula: (Total cost at high activity level – Total cost at low activity level) ÷ (Total units at high activity level – Total units at low activity level)

Step 5: Find the fixed cost

• Formula: (Total cost at high activity level) – (Total units at high activity level x variable cost per unit)
• Estimate the learning rate and learning effect

Learning curve theory is used in situations where the workforce improves in efficiency when they gain more experience. Where there is a learning curve, there is a learning rate and a learning effect.

The learning rate is “expressed as a percentage value.”

The learning effect is that “as the workforce learns from experience how to make the new product, there is a big reduction in the time to make additional units.”

Apply the learning curve to a budgetary problem, including calculations on steady states.

There are two main approaches that are used to calculate the learning curve:

• The Tabular approach: uses a table to calculate the cumulative average time per unit and the total time to produce all the units produced so far
• The Algebraic approach

To calculate the learning curve using the algebraic approach, the following formula is used:

Formula: Y = axᵇ

• Y is the cumulative average time per unit to product x units
• x is the cumulative number of units
• a is the time taken for the first unit of output
• b is the index of learning (logLR/log2)
• LR is the learning rate as a decimal

Importance of Budget

Before we get into adding a new system, let’s review some of the basics of goals and uses of a budget.

1. Financial Resource Allocation

Money is the lifeblood of a company. Having enough of it to support operations, new business initiatives and acquisitions is vitally important. The budgeting process is essentially matching what is possible with the resources that exist.

Strategic Plan Support: The budgeting process should focus on the important steps you must take during the year to support your strategic plan. It should lay out the coordination of the departments and set the benchmarks to signal if the plan is succeeding.

Initiative Tracking: New initiatives are often the basis for growth. As they are an unknown territory, the assumptions made for revenues and costs usually have a wider range of possibilities. Once the year begins, the budget serves the purpose of tracking chosen initiatives to gauge their success or failure.

Expense Control: Budgets provide feedback to managers as to their performance and should incentivize them to take corrective actions when necessary, and identify overperformance and possible opportunities.

Some Basic Budgeting Best Practices

Before we get into an example of adding a quantitative methodology, I want to go over some best practices for budgeting in general. While certainly not exhaustive, I have found that these steps will save time and resources by reducing budget iterations and improving department coordination.

Set a Timeline: While obvious, the timeline should be detailed enough to allow for individual department budgeting, cross-departmental reviews and consolidated working budget reviews. I have seen companies doing budget consolidation reviews only days before a board meeting.

Convey Topline Guidance Early: Having a budgeting process commence by clarifying all top and bottom line goals and distributing the information to managers can save a lot of time later in the process. As a recent example, a COO told me about having done a budget with 8% growth, but the firm’s PE investor wanted to see 20%, so they had to go through the whole process again.

Team Collaboration: Siloed budgeting runs counter to the goal of a budget rigorously vetting the operational goals of supporting the strategic plan. Marketing, Sales, Product, HR, and Operations all rely on each other’s functions. Cross-team meetings early on with defined agendas and shared assumptions are helpful in this regard.

Budgetary systems which are tools of planning and control occur at various levels in the performance hierarchy and to different degrees. Plans made at the higher level provide a guideline for the plans at the lower levels. Plans made at the lower level essentially carry out the plans made at the higher level.

Strategic Level (Corporate Plans/ Strategic Plans)

• Focus on the overall performance
• Sets plans and targets for each department
• Can be qualitative

Lower Management Level (Tactical Plans)

• Less than 12 months
• Individual departmental plans with guidelines set by senior management
• Many include non-financial budgets
• Overall budget is expressed in financial terms with accompanying financial statements
• Links strategic plans at senior level and operational level
• Budget target should be in line with strategic objectives
• Approved by senior management

Junior Level (Operational Plans)

• Based on objectives about what to achieve
• Specific
• Targets are listed quantitatively
• Detailed specs of targets and standards
• Short term
• Operational plans are prepared with goal of reaching budget targets

Budget

A budget is a written projection of a particular department’s financial performance, a specific project, a business unit, or an organization for the period under consideration. Usually, budgets for businesses or departments created for an accounting period, i.e., for one year. However, the period could be less or more than a year. Complete flexibility is there as the method remains the same, and the business can make or plan a budget for the period they want.

There are different types of budgets and, thus, budgeting methodologies.

Budgeting

Primarily, the activity of preparing a budget is called budgeting. In many organizations, it is a separate department taking care of only the preparation and implementation of budgets.

Importance of Budgeting

In the business world, we can not afford to overstate the importance of a budget. At every stage of decision making, planning, and coordination budgets or plans are the essential tools for Management Control.

It gives a direction to the entire organization internally where it needs to run and reach on the one hand and will help management in communication and guiding the team with full clarity. On the other hand, this document is useful to the outside world also. It shows what the business is trying to achieve and whether the path and direction are right or has a flaw. Whether the objective and targets or aligned with the market realities. Whether the budget is only a dream on paper or it has a clear cut and well-defined plan of action to achieve those dreams.

Types of Budgets

1. Incremental budgeting

Incremental budgeting takes last year’s actual figures and adds or subtracts a percentage to obtain the current year’s budget.  It is the most common method of budgeting because it is simple and easy to understand.  Incremental budgeting is appropriate to use if the primary cost drivers do not change from year to year.  However, there are some problems with using the method:

It is likely to perpetuate inefficiencies. For example, if a manager knows that there is an opportunity to grow his budget by 10% every year, he will simply take that opportunity to attain a bigger budget, while not putting effort into seeking ways to cut costs or economize.

It is likely to result in budgetary slack. For example, a manager might overstate the size of the budget that the team actually needs so it appears that the team is always under budget.

It is also likely to ignore external drivers of activity and performance. For example, there is very high inflation in certain input costs.  Incremental budgeting ignores any external factors and simply assumes the cost will grow by, for example, 10% this year.

2. Activity-based budgeting

Activity-based budgeting is a top-down budgeting approach that determines the amount of inputs required to support the targets or outputs set by the company.  For example, a company sets an output target of $100 million in revenues.  The company will need to first determine the activities that need to be undertaken to meet the sales target, and then find out the costs of carrying out these activities.

3. Value proposition budgeting

In value proposition budgeting, the budgeter considers the following questions:

• Why is this amount included in the budget?
• Does the item create value for customers, staff, or other stakeholders?
• Does the value of the item outweigh its cost? If not, then is there another reason why the cost is justified?

Value proposition budgeting is really a mindset about making sure that everything that is included in the budget delivers value for the business. Value proposition budgeting aims to avoid unnecessary expenditures although it is not as precisely aimed at that goal as our final budgeting option, zero-based budgeting.

4. Zero-based budgeting

As one of the most commonly used budgeting methods, zero-based budgeting starts with the assumption that all department budgets are zero and must be rebuilt from scratch.  Managers must be able to justify every single expense. No expenditures are automatically “okayed”. Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not considered absolutely essential to the company’s successful (profitable) operation. This kind of bottom-up budgeting can be a highly effective way to “shake things up”.

The zero-based approach is good to use when there is an urgent need for cost containment, for example, in a situation where a company is going through a financial restructuring or a major economic or market downturn that requires it to reduce the budget dramatically.

Zero-based budgeting is best suited for addressing discretionary costs rather than essential operating costs. However, it can be an extremely time-consuming approach, so many companies only use this approach occasionally.

Read More: https://indiafreenotes.com/budgeting-introduction/

Budgeting introduction

The purpose of the sales mix and quantity variances is to show how much of the sales volume variance is due to a change in the mix of the products sold (sales mix variance) and how much is due to a change in the quantity of the products sold (sales quantity variance).

Sales Mix Variance

The sales mix variance shows how much of the sales volume variance was due to a difference between the actual sales mix and the budgeted sales mix.

The variance is calculated by taking the difference between the actual sales volume and the actual sales volume at the budgeted mix and multiplying this by the budgeted price to give a monetary amount.

The sales mix variance formula is as follows.

Sales mix variance = (Actual sales volume – Actual sales volume at budgeted mix) x Budgeted price

It should be noted that the term standard is often used when referring to unit prices, so budgeted price in the above formula could be replaced with the term standard price.

If actual volume is greater than the actual volume at budgeted mix the sales mix formula gives a positive result and the sales mix variance is a favorable variance. If actual volume is lower than actual volume at budgeted mix the formula will give a negative result and the sales mix variance is said to be unfavorable.

Sales Quantity Variance

The sales quantity variance shows how much of the sales volume variance was due to a difference between the actual volume sold at the budgeted mix and the budgeted volume.

The variance is calculated by taking the difference between the actual sales volume at the budgeted mix and the budgeted sales volume and multiplying this by the budgeted price to give a monetary amount.

The sales quantity variance formula is as follows.

Sales quantity variance = (Actual sales volume at budgeted mix – Budgeted sales volume) x Budgeted price

If the actual volume at budgeted mix is greater than the budgeted volume the sales quantity variance formula gives a positive result and the sales quantity variance is a favorable variance. If actual volume at budgeted sales mix is lower than budgeted volume the formula will give a negative result and the sales quantity variance is said to be unfavorable.

Summing the Sales Mix and Quantity Variances

The sales volume variance is based on the difference between the actual volume of sales and the budgeted volume of sales multiplied by the budgeted unit price.

Sales volume variance = (A – B) x BP

Where A is the actual sales volume, B is the budgeted sales volume and BP is the budgeted unit price.

Using this sales volume variance formula we can now show that the sales volume variance is equal to the sum of the sales mix and quantity variances.

If the term actual sales at budgeted mix (ABM) as discussed above is added and subtracted from this formula we get the following.

Sales volume variance = (A – B) x BP

Sales volume variance = (A – ABM + ABM – B) x BP

Sales volume variance = (A – ABM) x BP + (ABM – B) x BP

Sales volume variance = Sales mix variance + Sales quantity variance

Sales Mix and Quantity Variances Using Contribution and Profit

The above analysis uses the budgeted price per unit of the product to calculate the monetary value of the sales mix and quantity variances. As an alternative for absorption costing the budgeted profit per unit or for marginal costing the budgeted contribution per unit can be substituted for the budgeted price in the above formulas.

Environmental accounting principles and practices are mainly used by organizations to more accurately trace environmental costs back to specific activities. Government agencies, private businesses, local communities and individuals all take responsibility for conserving natural resources and operating sustainably in most developed nations. Governmental agencies and businesses are accountable to the public for setting environmentally related efficiency goals that lead to cost reductions and improved operational processes. These organizations are more likely to implement methods from environmental accounting which is a growing subset of traditional accounting. Here are some of the job duties of environmental accountants, the typical education and training needed to become an environmental accountant and the professional development certifications that position them to be competitive in the job market.

Practices and Benefits of Environmental Accounting

While environmental accounting can focus on environmental management accounting or financial accounting, the most prominent benefits come from the application of environmental management accounting methods. This type of accounting focuses on gathering, estimating and analyzing costs associated with the use of energy and physical materials like timber, metal or coal. Standard accounting practices tended to place these costs in the catch all category of overhead, but environmental management accounting allows accountants to apply activity based cost principles to more accurately associate these costs to various projects or events. Decision makers who can see exactly where these natural resources are used across various projects can locate areas of synergy that allow them to reduce the amount of wasted materials at the program or enterprise level.

Job Duties of Environmental Accountants

Environmental accountants help decision makers to establish energy efficiency goals by doing research on historical data and recent trends about the raw materials used to produce company goods or services. These accountants also keep track of the availability of the raw materials that are used in company goods and services. They conduct calculations to determine if appropriate raw material substitutes can produce lower lifecycle costs as well as reduce environmental impacts that are associated with their companies’ current practices. Environmental accountants are also the business professionals who conduct break even and cost benefit analyses for replacing traditional energy systems with alternative ones like wind turbines and the new solar shingle roofs.

Education and Training Required for Environmental Accountants

The niche field of environmental accounting has not yet matured, and there are only limited university level academic programs that focus directly on this accounting category. For example, Aquinas College in Michigan offers students a Bachelor of Science in Sustainable Business and Dalhousie University in Canada has a Natural Resources MBA. However, most environmental accountants earn traditional undergraduate degrees in accounting, and they usually return to school to gain graduate certificates in environmental science. Many environmental accountants earn specialized credentials like the Certified Environmental Auditor (CEA) designation that is administered through the National Registry of Environmental Professionals. Certifications like the CEA require environmental accountants to have undergraduate degrees from accredited universities, a minimum of four years of environmental auditing experience and successful completion of the CEA exam.

Methods of Environmental Accounting

Businesses use three generally accepted methods to implement environment accounting: financial accounting, managerial accounting and national income accounting. Financial accounting is the process of preparing financial reports, such as earning statements, for presentation to investors, lenders, governing bodies and other members of the public. In this instance, environmental accounting estimates are presented as part of the financial accounting reports.

Managerial accounting is used solely for internal decision making. In this capacity, department heads use environmental accounting to collect data used by senior management to make business-critical decisions, such as those surrounding procurement. Alternatively, environmental accounting is used by government agencies to calculate the nation’s gross domestic product and how business decisions affect the country’s economic wellbeing.

Rationale of Environmental Accounting

Environmental costs are defined by the Environmental Protection Agency as “the many different types of costs businesses incur as they provide goods and services to their customers.” An example of this is leftover manufacturing materials. In addition to allowing a business to operate in a “greener” fashion, environmental accounting management provides it with monetary benefits. For example, if an environmental accounting report indicates that a business consistently discards a large amount of excess material, a company can use this information to choose to purchase less material. While this allows the business to minimize the waste it dispenses in the environment, it is also allows it to save money by not purchasing excess.

Implementation of Environmental Accounting

Environmental accounting can be implemented by businesses of all sizes. Whether administered by a global corporation or a small business, elements need to be in place for success. The firm’s senior management team must support these practices. These leaders are instrumental in setting a positive tone when communicating the benefits of environmental accounting practices to the employee population. The senior management team would be best served by developing cross-functional teams to administer the process. Consisting of employees across all business lines, including finance, sales, manufacturing and procurement, these teams ensure that all environmental accounting policies and procedures are communicated and followed.

Improved management of environmental costs is often good for industry and society, and accountants are used to recognize opportunities for the reduction of environmental costs or to support environmental initiatives that create revenue streams. Subsequently, tracking more granular cost data often leads to better management of resources when it comes to environmental accounting.

An Act to consolidate and amend the law relating to customs.

Be it enacted by Parliament in the Thirteenth Year of the Republic of India as follows. 

Short Title Extent and Commencement:

(1) This Act may be called the Customs Act, 1962.

(2) It extends to the whole of India.

(3) It shall come into force on such date 2 as the Central Government may by notification in the Official Gazette, appoint.

Definitions.

In this Act, unless the context otherwise requires, (1) “adjudicating authority” means any authority competent to pass any order or decision under this Act, but does not include the Board Commissioner (Appeals) or Appellate Tribunal;

(1A) “aircraft” has the same meaning as in the Aircraft Act, 1934 (22 of 1934);

(1B) “Appellate Tribunal” means the Customs, Excise and Gold (Control) Appellate Tribunal constituted under section 129;

(2) “assessment” includes provisional assessment, reassessment and any order of assessment in which the duty assessed is nil;

(3) “baggage” includes unaccompanied baggage but does not include motor vehicles;

(4) “bill of entry” means a bill of entry referred to in section 46;

(5) “bill of export” means a bill of export referred to in section 50;

(6) “Board” means the Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963 (54 of 1963);

(7) “coastal goods” means goods, other than imported goods, transported in a vessel from one port in India to another;

(7A) “Commissioner (Appeals)” means a person appointed to be a Commissioner of Customs (Appeals) under sub-section (1) of section 4;

(8) “Commissioner of Customs”, except for the purposes of Chapter XV, includes an Additional Commissioner of Customs;

(9) “conveyance” includes a vessel, an aircraft and a vehicle;

(10) “customs airport” means any airport appointed under clause (a) of section 7 to be a customs airport;

(11) “customs area” means the area of a customs station and includes any area in which imported goods or export goods are ordinarily kept before clearance by Customs Authorities;

(12) “customs port” means any port appointed under clause (a) of section 7 to be a customs port and includes a place appointed under clause (aa ) of that section to be an inland container depot;

(13) “customs station” means any customs port, customs airport or land customs station;

(14) “dutiable goods” means any goods which are chargeable to duty and on which duty has not been paid;

(15) “duty” means a duty of customs leviable under this Act;

(16) “entry” in relation to goods means an entry made in a bill of entry shipping bill or bill of export and includes in the case of goods imported or to be exported by post, the entry referred to in section 82 or the entry made under the regulations made under section 84;

(17) “examination”, in relation to any goods, includes measurement and weighment thereof;

(18) “export”, with its grammatical variations and cognate expressions means taking out of India to a place outside India;

(19) “export goods” means any goods which are to be taken out of India to a place outside India;

(20) “exporter”, in relation to any goods at any time between their entry for export and the time when they are exported, includes any owner or any person holding himself out to be the exporter;

(21) “foreign-going vessel or aircraft” means any vessel or aircraft for the time being engaged in the carriage of goods or passengers between any port or airport in India and any port or airport outside India, whether touching any intermediate port or airport in India or not, and includes –

( i ) any naval vessel of a foreign Government taking part in any naval exercises;

(ii) any vessel engaged in fishing or any other operations outside the territorial waters of India;

(iii) any vessel or aircraft proceeding to a place outside India for any purpose whatsoever;

(21A) “Fund” means the Consumer Welfare Fund established under section 12C of the Central Excises and Salt Act, 1944 (1 of 1944);

(22) “goods” includes:

(a) vessels, aircrafts and vehicles;

(b) stores;

(c) baggage;

(d) currency and negotiable instruments; and

(e) any other kind of movable property;

(23) “import”, with its grammatical variations and cognate expressions, means bringing into India from a place outside India;

(24) “import manifest” or “import report” means the manifest or report required to be delivered under section 30;

(25) “imported goods” means any goods brought into India from a place outside India but does not include goods which have been cleared for home consumption;

(26) “importer”, in relation to any goods at any time between their importation and the time when they are cleared for home consumption, includes any owner or any person holding himself out to be the importer;

(27) “India” includes the territorial waters of India;

(28) “Indian customs waters” means the waters extending into the sea up to the limit of contiguous zone of India under section 5 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Maritime Zones Act, 1976 (80 of 1976) and includes any bay, gulf, harbour, creek or tidal river;

(29) “land customs station” means any place appointed under clause(b) of section 7 to be a land customs station;

(30) “market price”, in relation to any goods, means the wholesale price of the goods in the ordinary course of trade in India;

(31) “person-in-charge” means, –

(a) in relation to a vessel, the master of the vessel;

(b) in relation to an aircraft, the commander or pilot-in-charge of the aircraft;

(c) in relation to a railway train, the conductor, guard or other person having the chief direction of the train;

(d) in relation to any other conveyance, the driver or other person-in-charge of the conveyance;

(32) “prescribed” means prescribed by regulations made under this Act;

(33) “prohibited goods” means any goods the import or export of which is subject to any prohibition under this Act or any other law for the time being in force but does not include any such goods in respect of which the conditions subject to which the goods are permitted to be imported or exported have been complied with;

(34) “proper officer”, in relation to any functions to be performed under this Act, means the officer of customs who is assigned those functions by the Board or the Commissioner of Customs;

(35) “regulations” means the regulations made by the Board under any provision of this Act;

(36) “rules” means the rules made by the Central Government under any provision of this Act;

(37) “shipping bill” means a shipping bill referred to in section 50;

(38) “stores” means goods for use in a vessel or aircraft and includes fuel and spare parts and other articles of equipment, whether or not for immediate fitting;

(39) “smuggling”, in relation to any goods, means any act or omission which will render such goods liable to confiscation under section 111 or section 113.

(40) “tariff value”, in relation to any goods, means the tariff value fixed in respect thereof under sub-section (2) of section 14;

(41) “value”, in relation to any goods, means the value thereof determined in accordance with the provisions of sub-section (1) of section 14;

(42) “vehicle” means conveyance of any kind used on land and includes a railway vehicle;

(43) “warehouse” means a public warehouse appointed under section 57 or a private warehouse licensed under section 58;

(44) “warehoused goods” means goods deposited in a warehouse;

(45) “warehousing station” means a place declared as a warehousing station under section 9.

Methods of Valuation:

According to the Customs Valuation Rules, 1988, the Customs Value should normally be the “Transaction Value”, i.e., the price actually paid or payable after adjustment by Valuation Factors (see below) and subject to (a) Compliance with the Valuation Conditions (see below) and (b) Customs authorities being satisfied with the truth and accuracy of the Declared Value.

Transaction Value:

Rule 3(i) of the Customs Valuation Rules, 1988 states that the value of imported goods shall be the transaction value. Rule 4(i) thereof states that the transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9.

The price actually paid or payable is the total payment made or to be made by the buyer to the seller or for the benefit of the seller for the imported goods. It includes all payments made as a condition of sale of the imported goods by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller.

If objective and quantifiable data do not exist with regard to the Valuation Factors, if the Valuation Conditions are not fulfilled, or if Customs authorities have doubts concerning the truth or accuracy of the declared value in terms of Rule 10A of the Customs Valuation Rules, valuation has to be carried out by another method in the following hierarchical order:

Comparative Value Method – Comparison with Transaction Value of Identical goods (Rule 5);

Comparative Value Method – Comparison with Transaction Value of Similar goods (Rule 6);

Deductive Value Method – Based on sale price in the importing country (Rule 7); Computed Value Method – Based on cost of materials, fabrication and profit in the country of production (Rule 7A);

Fallback Method – Based on previous methods with greater flexibility (Rule 8).

Valuation Factors:

Valuation Factors are the various elements which must be taken into account by addition (Dutiable factors) to the extent these are shown to be not already included in the price actually paid or payable or deduction (Non-dutiable factors) from the total price incurred in determining the Customs Value, for assessment purposes.

Dutiable Factors:

Commissions and brokerage, except buying commissions;

The cost of containers which are treated as being one for Customs purposes with the goods in question;

The cost of packing whether for labour or materials;

The value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of the imported goods, to the extent that such value has not been included in the price actually paid or payable:

• Material, components, parts and similar items incorporated in the imported goods;
• Tools, dies, moulds and similar items used in the production of the imported goods;
• Materials consumed in the imported goods;
• Engineering, developing, artwork, design work, and plans and sketches undertaken elsewhere than in the importing country and necessary for the production of imported goods;
• Royalties and license fees related to goods being valued that the buyer must pay either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable;
• The value of any part of the proceeds of any subsequent resale, disposal or use of the goods that accrues directly or indirectly to the seller;
• Advance payments;
• Freight charges up to the place of importation;
• Loading, unloading and handling charges associated with transporting the goods;
• Insurance.

Non-dutiable Factors:

• The following charges provided they are separately declared in the commercial invoice:
• Interest charges for deferred payment;
• Post-importation charges (e.g. inland transportation charges, installation or erection charges, etc.);
• Duties and taxes payable in the importing country.

Cases where transaction value may be rejected:

The transaction value may not be accepted for customs valuation in the following categories of cases as provided in Rule 4(2):

If there are restrictions on use or disposition of the goods by the buyer. However, the transaction value not to be rejected on this ground if restrictions:

• Are imposed by law or public authorities in India;
• Limit geographical area of resale;
• Do not affect the value of the goods substantially.

If the sale or price is subject to a Condition or consideration for which a Value cannot be determined. However, conditions or considerations relating to production or marketing of the goods shall not result in rejection.

If part of the proceeds of the subsequent resale, disposal or use of the goods accrues to the seller, unless an adjustment can be made as per valuation factors.

Buyer and seller are related; unless it is established by the importer that:

• The relationship has not influenced the price;
• The importer demonstrates that the price closely approximates one of the test values.

The transaction price declared can also be rejected in terms of Rule 10A, when the proper customs officer has reasons to doubt the truth or accuracy of the value declared & if even after furnishing of further information/documents or other evidence produced, proper officer is not satisfied & has reasonable doubts about the value declared.

Basic Customs Duty

Basic custom duty is the duty imposed on the value of the goods at a specific rate. The duty is fixed at a specified rate of ad-valorem basis. This duty has been imposed from 1962 and was amended from time to time and today is regulated by the Customs Tariff Act of 1975. The Central Government has the right to exempt any goods from the tax.

Countervailing Duty (CVD)

This duty is imposed by the Central Government when a country is paying the subsidy to the exporters who are exporting goods to India. This amount of duty is equivalent to the subsidy paid by them. This duty is applicable under Sec 9 of the Customs Tariff Act.

Additional Customs Duty or Special CVD

To equalize imports with locals’ taxes like service tax, VAT and other domestic taxes which are imposed from time to time, a special countervailing duty is imposed on imported goods. Hence, is imposed to bring imports on an equal track with the goods produced or manufactured in India. This is to promote fair trade & competition practices in our country.

Safeguard Duty

To make sure that no harm is caused to the domestic industries of India, a safeguard duty is imposed to safeguard the interest of our local domestic industries. It is calculated on the basis of loss suffered by our local industries.

Anti-Dumping Duty

Often, large manufacturer from abroad may export goods at very low prices compared to prices in the domestic market. Such dumping may be with intention to cripple domestic industry or to dispose of their excess stock. This is called ‘dumping’. To avoid such dumping, Central Government can impose, under section 9A of Customs Tariff Act, anti-dumping duty up to margin of dumping on such articles, if the goods are being sold at less than its normal value. Levy of such anti-dumping duty is permissible as per WTO agreement. Anti-dumping action can be taken only when there is an Indian industry producing ‘like articles.

National Calamity Contingent Duty

This duty is imposed by Sec 129 of the Finance Act. The duty is levied on goods like tobacco, pan masala or any items that are harmful for health. The rate of the tax varies from 10% to 45% and different rates are applied for different reasons.

Education Cess on Customs Duty

At the prescribed rate is levied as a percentage of aggregate duties of customs. If goods are fully exempted from duty or are chargeable to nil duty or are cleared without payment of duty under prescribed procedure such as clearance under bond, no cess would be levied.

Protective Duties

Tariff Commission has been established under Tariff Commission Act, 1951. If the Tariff Commission recommends and Central Government is satisfied that immediate action is necessary to protect interests of Indian industry, protective customs duty at the rate recommended may be imposed under section 6 of Customs Tariff Act. The protective duty will be valid till the date prescribed in the notification.

Calculating Custom Duty

Custom duty can be calculated on either a specific or an ad valorem basis. The value of goods, for the latter, is determined by Rule 3(i) of the Customs Valuation Rules, 2007. If there is no quantifiable data w.r.t. valuation factors, then the valuation of the items is done using other means based on a system of hierarchy, as follows:

• Comparative Value Method: This method compares transaction values of items similar in nature (Rule 4)
• Comparative Value Method: This method compares transaction values of items similar in nature (Rule 5)
• Deductive Value Method: This method uses the sale price of items in the importing country (Rule 7)
• Comparative Value Method: This method uses costs related the fabrication, materials as well as profit in the production country (Rule 8)
• Fallback Method: This method is based on the earlier methods that offer higher flexibility (Rule 9)

Custom Duty Rates

These rates can either be specific or ad valorem. The duty, in general, varies from the range 0-150%. The average rate, however, is 11.90%. There is a list to refer to for goods that are exempted from this duty.

There are other types of fee that are applicable to custom duty. Thy include:

• LC: Landing charge – 1% CIF
• CVD: Countervailing Duty – 0%, 6% or 12% (CIFD + LC)
• CEX: Education and Higher Education Cess – 3% CVD
• CESS: Education + Higher Education – 3% (Duty + CEX (Education and Higher Education Cess) + CVD)
• Additional CVD: 4% (CIFD + LC + CVD + CESS + CEX)

Customs valuation is the process where customs authorities assign a monetary value to a good or service for the purposes of import or export. Generally, authorities engage in this process as a means of protecting tariff concessions, collecting revenue for the governing authority, implementing trade policy, and protecting public health and safety. Customs duties, and the need for customs valuation, have existed for thousands of years among different cultures, with evidence of their use in the Roman Empire, the Han Dynasty, and the Indian sub-continent. The first recorded customs tariff was from 136 in Palmyra, an oasis city in the Syrian desert. Beginning near the end of the 20th century, the procedures used throughout most of the world for customs valuation were codified in the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (GATT) 1994.

Transaction value

The primary basis for customs valuation under the Agreement is “transaction value” as defined in Article 1. Article 1 defines transaction value as “the price actually paid or payable for the goods when sold for export to the country of importation.” Article 1 must be read together with Article 8, which lets Customs authorities make adjustments to the transaction value in cases where certain specific parts of the good – considered to be a part of the value for customs purposes – are incurred by the buyer but are not actually included in the price paid or payable for the imported goods. Article 8 also allows for the inclusion in transaction value of exchanges (“considerations”) between the buyer and seller in forms other than money. Articles 2 through 7 provide methods of determining the customs value whenever it cannot be determined under the provisions of Article 1.

The methods of customs valuation, in descending order of precedence, are:

• Transaction Value of Merchandise in Question – price actually paid or payable for the goods sold. (Art. 1)
• Transaction Value of Identical Merchandise (Art. 2)
• Transaction Value of Similar Merchandise (Art. 3)
• Deductive Value (Art. 5)
• Computed Value (Art. 6)
• Derivative Method (Art. 7)

This hierarchy is codified in domestic legislation.

The rates of customs duties leviable on imported goods (& export items in certain cases) are either specific or on ad valorem basis or at times specific cum ad valorem. When customs duties are levied at ad valorem rates, i.e., depending upon its value, it becomes essential to lay down in the law itself the broad guidelines for such valuation to avoid arbitrariness and to ensure that there is uniformity in approach at different Customs formations. Section 14 of the Customs Act, 1962 lays down the basis for valuation of import & export goods in the country. It has been subject to certain changes basic last change being in July-August, 1988 when present version came into operation. Briefly the provisions are explained in the following paragraphs.

Tariff Value:

The Central Government has been empowered to fix values, under sub-section (2) of Section 14 of the Customs Act, 1962 for any product which are called Tariff Values. If tariff values are fixed for any goods, ad valorem duties are to be calculated with reference to such tariff values. The tariff values may be fixed for any class of imported or export goods having regard to the trend of value of such or like goods and the same has to be notified in the official gazette. Recently tariff values have been fixed in respect of import of Crude Palm Oil, RBD Palm Oil, RBD Palmolein under Notification No.36/2001-CUS (N.T.), dated 3.8.2001 and for RBD Crude Palmolein under Notification No. 40/2001-CUS (N.T.) dated 28.08.2001.

Valuation of Imported/Export Goods where no Tariff Values fixed:

Section 2(41) of the Customs Act, 1962 defines ‘Value’ in relation to any goods to mean the value thereof determined in accordance with the provisions of sub-section (1) of Section 14 thereof.

Sub-section (1) of Section 14 in turn states that when a duty of customs is chargeable on any goods by reference to their value, the value of such goods shall be deemed to be: “the price at which such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of importation or exportation, as the case may be, in the course of international trade, where the seller and the buyer have no interest in the business of each other and the price is the sole consideration for the sale or offer for sale”.

As far as export goods are concerned, provisions of sub-section (1) of Section 14 provide a complete code of valuation by itself. On the other hand, for imported goods, as per sub-section (1A) of Section 14, the value is required to be determined in accordance with rules made in this behalf. Accordingly, the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 have been framed and notified under Notification No.51/88-CUS (N.T.) dated 18.7.1988.

The provisions of sub-section (1) of Section 14 follow the provisions contained in Article VII of GATT. The Customs Valuation Rules closely follow the WTO Customs Valuation Agreement to implement Article VII of GATT. The methods of valuation prescribed therein are of a hierarchical order. The importer is required to truthfully declare the value in the B/E and provide a copy of the invoice and file a valuation declaration in the prescribed form to facilitate correct and expeditious determination of value for assessment purposes.