Dec 4, 2019

Bonded Manufacturing Scheme - The potential game changer for manufacturing sector

Government has tweaked the existing scheme of manufacturing under bond at bonded warehouses (Section 58 to 65 of Customs Act) and has come up with a 'Bonded Manufacturing Scheme' which might revolutionise the way manufacturing units are organised among domestic tariff areas, Free Trade and Warehousing Zones, Export oriented units (EOUs) and Special Economic Zones (SEZs).

The relevant customs notification (69/2019) on Manufacture and other operations at Warehouse Regulations 2019 is at this link.
Invest India (an arm of government that encourages investments in India through realtime assistance to entities to set up business) maintains a dedicated website for information dissemination on this topic at this link and the FAQs are hosted here.
Relevant Customs Circular (34/2019) that outlines the regulatory procedural details is at this link.

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Bonded manufacturing scheme overview - [from Invest India's Bonded manufacturing website]
The salient part of this scheme is that one may import capital goods required for manufacturing without payment of import duty and use it in the factory/premises. In addition, all raw material/inputs required can also be imported duty free for manufacturing. If one exports, no duty needs to be paid on anything that was imported. Only if the finished goods are being cleared out of bonded manufacturing zone and into the local market, duties on inputs to the extent of consumption for the cleared products to domestic market needs to be paid. Also, there is no hassle or requirement of any net foreign exchange earning, or any need to export in order to fulfil some obligation against procurement of duty free capital goods, inputs etc.  This is good enough for most of the existing and new industries to move into this new scheme being promoted by Invest India group of Department of Industry and Internal Trade (DPIIT). You get imported capital goods for free, and pay duty on imported raw material/inputs only when you clear them to DTA, thus deferring the duties till you actually sell the products. Even for import, stock and trade business model (say an e-commerce company which imports and sells here), this model makes sense as duties are to be paid only upon sale. Upon non-sale the goods can be returned back. Only if inputs are procured from domestic market, GST is applicable (and credit taken) and which I shall deal later in the post.

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Advertised advantages of bonded warehousing
The advertised highlights of the scheme propagates the advantage of 'no fixed export obligation' and 'deferred duty' aspect.

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Ease of doing business through bonded manufacturing scheme
The scheme also emphasises upon the procedural ease of doing business at bonded manufacturing zones.
While not stated in the website, the circular amply makes it clear that the intention is indeed ease of doing business and therefore no prior permission of proper officer is needed for clearing the goods each time. Also, self sealing facility of goods while clearing has been allowed. Therefore, a lot of trust has been reposed on the operating business.

What are the potential downsides?

- The zone is administered under Customs Act, and therefore the zone will be under total control of customs commissioner with the commissioner (or the designated officer under him) being the sole approving person, and point of contact for  business. Many domestic firms, especially smaller ones, might not be very comfortable with the idea due to legacy reputation of customs department.

- The Annexure B format that covers incoming and outgoing goods, along with details records of consumption, is tedious to maintain. The ERP system of the firm moving into bonded zones needs to be tweaked to align with this format as any error here would lead to serious issues. Maintaining these records digitally by inputting the details manually (say with a poorly designed excel sheet without cross checks) would be a dangerous assignment as any mismatch might attract penal actions. The Annexure is to be maintained digitally as per the notification.


Policy analysis 

The positives:

As a policy measure towards ease of doing business in India, nothing beats this scheme on paper. The EOU scheme (including EHTP, BTP etc) would become defunct, given all the license era obligations of Net Foreign Exchange earnings, limited clearance to domestic tariff areas etc.
SEZ policy too would be challenged as new units may reconsider bonding under this scheme over locating into SEZs.
The Foreign Trade Policy chapters 4 and 5, wherein exemptions of duties under Advance Authorisation(AA) Scheme and Export Promotion Capital Goods (EPCG) schemes are granted for procuring raw material/inputs and capital goods respectively, would also be rendered useless when units move to bonded manufacturing scheme. In fact, with no obligations on duty free import of capital goods, there is no reason now to go under EPCG scheme for any new units being set up. EPCG calls for myriad rules and obligations for exports whereas it's much simpler under bonded zone. It also frees the units from the standard input output norms which at times are tedious to align for new products and take time for fixing of such norms as the process involves the unit, local DGFT office, and DGFT headquarters at New Delhi. Under bonded zones, the input output norms are to be self declared, and any revision of the same has to be simply notified to the jurisdictional bond officer. As long as accounts are maintained, trust is reposed on the units to comply.
The scheme, as it doesn't link exemptions to any export performance, and being made available to all, is WTO compliant in nature.

The negative: 

The scheme disadvantages domestic manufacturers of capital goods and inputs as no exemption has been given to domestic suppliers for supply to these units. GST is applicable to supplies made to the bonded zones and credits may be availed against the same which may later be used when the bonded units supply goods to domestic market. However, not having an upfront exemption would tilt the choice towards imports, assuming all other conditions being same. This goes against 'make-in-India' spirit of the policymakers.

Conclusion

Overall, it's an excellent step as it gives a practical option for investors trying to set up new units. When read in tandem with the reduced corporate tax rate (from 25 to 15% for new units), this move may indeed attract investments into India. It also makes sense for existing units who are thinking of procuring imported capital goods in a significant number to get bonded under the scheme.

The scheme deserves to be advertised widely for better information dissemination.




Location: New Delhi, Delhi, India

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