Union Finance Minister Nirmala Sitharaman would be presenting the Union Budget on 01 February 2021, one of the most critical Budgets in recent times as it would define India’s path to economic recovery. The Indian economy has been severely impacted by the COVID-19 outbreak which has resulted in growing unemployment, led to a sharp fall in the GDP and also lowered industrial output and profits, jeopardising growth prospects, crimping new foreign investment in manufacturing and affecting the economic wellbeing of a large cross section of people.
One of the worst impacted sectors due to the pandemic has been the manufacturing sector. The industry expects that the government, through the Budget, would bring in incentives or new schemes to infuse fresh life and to also, promote foreign investment in this sector which will assist in generating employment. 
In the past few years, the thrust of the government to promote manufacturing and exports, has been on Special Economic Zones (SEZs), Export Oriented Units (EOUs), Export Promotion Capital Goods (EPCG) etc. However, the aforesaid schemes had been challenged by the US before the World Trade Organization (WTO) and therefore the focus of the government has now shifted to the scheme of duty deferment and manufacturing in Customs Bonded Warehouses (CBWs), a WTO- complied scheme.
Under the said scheme, a manufacturer is allowed to import duty-free inputs/capital goods for undertaking manufacturing in CBWs. Though this concept was prevalent earlier too, but industry had always faced challenges while implementing. One of the main reasons that the earlier process of ‘Manufacturing under bond’ had to be relooked at was the need to obtain dual licenses coupled with a statutory requirement of maintaining records under both sections separately. The in-bond manufacturing process was practically effective only when undertaken under a scheme of Foreign Trade Policy (FTP) such as EOU.
Therefore, heeding to the demand of industry, the Central Board of Indirect Taxes & Customs (CBIC) decided to free up ‘manufacturing under bond’ from the regulatory framework of FTP in 2018. Consequently, manufacturing under Customs bond has now become a standalone scheme, different from schemes under FTP, such as Advance Authorisation, EPCG, EOU, etc.
Brief on taxability of operations under CBW
Duty implications on domestic supply
- No restriction on quantum of DTA (Domestic Tariff Area) supply of finished product
- Customs duty payable on imported goods embedded in finished product & GST payable on supply of finished goods
Duty implications on exports
- No duty incidence
- Same manufacturing facility can be used for domestic supply as well as exports
Benefits of carrying out manufacturing operations for manufacturer exporters
Since last year, CBIC has been issuing new regulations, circulars and FAQs for more clarity under the said scheme. One of the most welcoming circulars was the one issued in October 2020, whereby it was clarified that a Customs bonded manufacturing unit can perform job work for other units. Further, CBIC has also clarified through its FAQs that a unit having 100% domestic sales would be eligible for this scheme; no physical control of Customs on day-to-day operations and in-bond manufacturing units would be eligible to export benefits under FTP provided the respective scheme allows so. These clarifications would help in providing the necessary impetus to the said scheme and would help the government in achieving its objective of making India a manufacturing hub and attract fresh investment into manufacturing.
However, one of the aspects that needs a review to ensure that investors/manufacturers can adopt the scheme with confidence, is for suitable amendments to be made to the Customs Act to give effect to the recent Circulars and FAQs. Also, industry expects that suitable clarifications/relaxations are provided to allow the benefit of depreciation on capital goods at the time of removal, single bill of entry for all consignments cleared from unit during the day and whether pure service units would be eligible for the said scheme. Any announcement to give effect to the aspects captured above will help alleviate industry apprehensions and popularise the scheme amongst manufacturers and exporters.
(The writer is National Leader & Indirect Tax Partner, Deloitte Touche Tohmatsu India LLP)
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