Manufacturing and other operations in a Warehouse (MOOWR)

– A Feasibility Study

Introduction:

Government of India through the Central Board of Indirect Taxes and Customs (CBIC) has announced a scheme of Customs Bonded manufacturing cum warehousing commonly known as MOOWR i.e. Manufacturing and other operations in a Warehouse. In order to promote manufacturing & other operations in India and to strengthen the initiative of Aatma Nirbhar Bharat (Self Reliant India), the bonded manufacturing scheme allows the importers to import the raw materials and capital goods without payment of duties of customs and IGST. Most striking and interesting aspect of the scheme is that unlike various existing schemes, the MOOWR scheme is delinked to the quantum/ obligation of exports and the benefit is also extended to the importers who import the goods for sale/ removal in the domestic market (i.e. Domestic Tariff Area). This article intends to provide the details about the various benefits in this scheme and insights on the various aspects that needs to be looked into for taking an informed decision on opting for the scheme.

Benefits under the scheme:

  • Import the raw materials or capital goods without payment of Customs Duty and IGST;
  • Bring the imported material to factory and carry out the manufacturing or processing using these raw materials or Capital Goods;
  • Upon export, the manufactured goods or processed goods, the corresponding Customs duty stands waived;
  • In case of clearance for home consumption in domestic area, Customs Duty and IGST needs to be paid at the time of removal from the factory i.e. bonded area – Deferral in payment of duty;
  • Pay Customs Duty and IGST on the Capital goods upon removal of Capital Goods itself for the home consumption – Huge cash flow benefit in case of new setting up/ expansion;
  • No export commitments or export obligation to be fulfilled;
  • No interest implication and the imported inputs/ capital goods can remain in the warehouse without any time limit – Working capital savings;
  • License once obtained is valid for perpetuity unless cancelled. No hassles of periodic renewals.
  • No regular visits by customs officers & no direct/ physical supervision by the Customs officials.
  • Works on the principle of self-assessment.

Assessing the eligibility of the scheme:

The scheme is eligible for the owner of any warehoused goods who carries on any manufacturing process or other operations in relation to such goods. Various aspects that needs to be considered while determining the eligibility of the scheme is as under:

  • Manufacturing: Ambit of ‘manufacturing process’ must be clearly assessed and various activities undertaken must be studied to evaluate the same.
  • Other Operations: Scope of activities to be covered in the ambit of ‘Other operations’ needs to be assessed. It is important to determine the nature of the operations undertaken and its nexus with the goods imported. For example, a mere provision of service which do not have any direct nexus with the goods imported or whether the activity performed is not in relation to the goods imported may not be covered in the scheme. Various sectors that can be covered under the ambit of ‘Other operations’ could be engineering, processing, job work, packaging etc.
  • Trading Activities: A person not undertaking the manufacturing operations i.e. a trader or any other person who is removing the goods ‘as such’ can also avail the benefit under this scheme subject to payment of applicable interest for warehousing goods beyond a specified time limit.

Studying the end use of goods imported:

Businesses must segregate the goods imported into various categories and accordingly a study on the eligibility of the benefit on the various classes of import of goods must be undertaken. All imported goods can be bifurcated into various sub-classes based on its end use to better assess the eligibility of its benefits as under:

  • Import of raw material for manufacture of the finished goods.
  • Import of raw material for provision of service.
  • Import of machinery, equipment’s, apparatus etc. that aid in manufacturing the goods or provision of service.
  • Import of goods for removal as such.
  • Import of goods for administrative use i.e. for construction of factory building, Computers & other equipment’s for administrative use.
  • Import of consumables, tools, dies, jigs, fixtures etc.
  • Import for installation, commissioning, fitting out etc. at the customers project site.
  • Import of goods for removal as warranty replacements, FOC removals, samples, prototypes etc.
  • Import of goods that aid marketing, logistics and other post manufacturing activities that may/ may not be directly in relation to the goods imported.

Studying the impact of supply chain/ distribution and other movement of goods:

Each business may have a different supply chain and a distribution network involving multiple levels of movement of goods. This can pose some challenge in evaluating the point of taxability and the measure of the duty liability for movement at various intermediate stages. Therefore, one must make a proper & correct assessment of the following key movements of the goods in order to correctly zero down the taxability under the scheme:

  • Movement of goods to dealers/ distributors network on sale or return basis.
  • Movement of goods to warehouse for further processing or storage.
  • Bond to bond warehouse transfer of the goods.
  • Sale/ transfer of goods to an EOU/ EHTP/ STP and Bio-Technology Parks or to the Special Economic Zones (SEZ).
  • Removal of goods to job worker for further processing and return or for job work and sale directly from the job workers premises.
  • Treatment in case of destruction/ loss of goods.
  • Treatment in case of generation of waste/ refuse in the course of manufacture.
  • Bill to ship to movement i.e. billed to unbonded location and shipped to a customer within/ outside India.
  • Treatment in case of returns for repairs or any other processing and returning back and in case of an absolute sales return.
  • Sale of goods to a merchant exporter for further export.
  • Sale of goods under the cover of an advance authorisation or EPCG license.

Comparative study & benefit analysis with the existing schemes:

Presently, there are various existing schemes issued under the guise of Customs Act and Foreign trade policy that extends various import-export benefits to the taxpayers. Before taking any decision on opting for the scheme, it is imperative for one to understand the various benefits that are presently being availed and its comparison with the MOOWR scheme. Further, it could be possible that the entire situation is neutral in as much as the benefit under the existing scheme is available even while one opts for this warehousing/ bonded manufacturing scheme. Various existing benefits that needs to be compared are as under:

  • Export Oriented Units (EOUs), Electronics Hardware Technology Parks (EHTPs), Software Technology Parks (STPs) And Bio-Technology Parks (BTPs);
  • Export Promotion Capital Goods (EPCG) scheme;
  • Advance Authorization scheme;
  • Deemed Exports;
  • Duty Free Import Authorization Scheme;
  • Duty Drawback;
  • Merchandise/ Service Exports from India Schemes (MEIS/ SEIS);
  • Preferential trade agreements;
  • Project imports;
  • Other existing exemptions & concessions.

Following broad comparative analysis can be useful in this regard:

Particulars EOU EPCG Advance Authorisation MOOWR
Benefit of Customs Duty on Imports on inputs/ raw materials for exports Yes No Yes Yes
Benefit of Customs Duty on Imports on Capital Goods for export supplies Yes Yes No Yes
Benefit of Customs Duty on Imports of consumables for export supplies Yes Yes

(Partial)

Yes

(Partial)

Yes
Benefit of IGST on the above Yes

(Up to Mar 2021)

Yes Yes Yes
Duty deferment on Domestic supplies Export obligation Export obligation Export obligation No Export obligation
Time limit for removals/ usage 3 years N/A 18 months No time limit
Validity period 5 Years (Extendable to 10 more years) 6 Years 12 months Unlimited validity
Requirement of minimum value addition No

(Positive NFE to be fulfilled)

No Yes Not required
Whether trading of goods allowed No Yes Yes Yes
Benefit of export with payment of tax under GST No Yes No Yes
Benefit of depreciation on Capital Goods Yes Yes N/A No

Estimating the benefit in real terms:

Analysing the benefit under the scheme in real terms can lead to an informed decision making. One must first compute the amount of benefit in absolute terms under the existing schemes as above and compare the same with the benefit in absolute terms under the new scheme. Various aspects to be considered for computing the benefit are as under:

  • Quantum of projected imports in the next 1/3 years and the value of customs duty cost on the same.
  • Reduction in the above cost on account of waiver of the customs duty under this scheme of MOOWR/ Bonded manufacturing.
  • Plotting the normal lead time between import of goods and its removal from the factory after manufacturing and assessing the working capital saving on account of deferral in payment of customs duty i.e. savings on account of opportunity cost.
  • Computing the input-output norms and assessing the percentage of imported material as per BOM in the final output goods at each distribution level i.e. at every stage at which the duty liability is going to be levied.
  • An assessment of the duty benefit must be made as to the applicability of the benefit on various types of duties levied viz., Social welfare surcharge, Anti-dumping duty, safeguard duties etc.

Treatment in case of Transitional/ spill over aspects:

  • Treatment of open Advance Authorisations. Both the scenarios where export obligations completed or pending to be completed;
  • Treatment of open EPCG licenses. Both the scenarios where export obligations completed or pending to be completed;
  • Treatment in case of existing stock of raw materials and WIP, which are duty paid;
  • Return of goods supplied prior to opting of the scheme;
  • Possibility of conversion of the existing licenses into the MOOWR scheme.

Conclusion:

While the scheme looks to be lucrative on the face of it, however it becomes imperative for the businesses to understand the real benefits that would accrue to their industry considering the quantum of foreign trade, nature of supplies, business model and various other intricacies. As can be understood from the above, the MOOWR scheme not only extends the benefits in the form of cost reduction of customs duty/ IGST but also provides the working capital boost by deferring the duty liability. Apart from manufacturers, the scheme also extends the benefit to other operations viz., processing on the imported goods, like repacking, e-commerce etc. A feasibility study can be a good way to head start the impact of the scheme so that a correct and timely decision be taken.

(In case of any feedback or queries, you can reach us at ravikumar@hiregange.com)

Author Bio

Qualification: CA in Practice
Company: Hiregange & Associates
Location: Pune, Maharashtra, IN
Member Since: 05 Aug 2020 | Total Posts: 1

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