India allows manufacturing and other operations in a bonded manufacturing facility

With the Government’s continuous efforts to promote India as the manufacturing hub globally and the commitment towards ease of doing business, another initiative in this direction by the Central Board of Indirect Taxes (CBIC) is allowing import of raw materials and capital goods without payment of duty for manufacturing and other operations in a bonded manufacturing facility.

When the raw materials or capital goods are imported, the import duty on them is deferred. If these imported inputs are utilised for exports, the deferred duty is exempted. Only when the finished goods are cleared to the domestic market, import duty is to be paid on the imported raw materials used in the production. Import duty on capital goods is to be paid if and when the capital goods are cleared to the domestic market.

Private Bonded Facility

Note:When the raw materials or capital goods are imported, the import duty on them is deferred. If these imported inputs are utilised for exports, the deferred duty is exempted. Only when the finished goods are cleared to the domestic market, import duty is to be paid on the imported raw materials used in the production. Import duty on capital goods is to be paid if and when the capital goods are cleared to the domestic market

*When finished goods are exported, in addition to the waiver of BCD + IGST on the imported goods used, the GST on the finished goods can be zero-rated.

Advantages of bonded warehousing

Highlights

Deferred duty on imported capital goods Deferred duty on imported raw materials Warehouse to warehouse duty free transfer allowed No fixed export obligation
Duty on capital goods used in manufacturing or other operations is deferred until their clearance from the bonded facility. Capital goods can be sold to foreign manufacturers after utilization and deferred duty can also be avoided. Duty on imported raw materials used in manufacturing or other operations is deferred until clearance of finished goods. Deferred duty is waived in case finished goods are exported. Duty-free transfer of goods allowed from one warehouse to another No limit on the share of clearance of finished goods for the domestic market. An entity may manufacture in a bonded facility and sell up to 100% of the output in the domestic market.

Ease of bonded manufacturing

  • Single point of approval

Commissioner of Customs acts as the single point of contact for all approvals

  • Common form

Common application cum approval form for a license for private bonded facility and permission for manufacturing and other operations

  • Unlimited period of warehousing

Capital and non-capital goods (raw materials, components, etc.) can remain warehoused until clearance or consumption

  • No geographical restriction

New manufacturing facility can be set up or an existing facility can be converted into a bonded manufacturing facility irrespective of its location in India

  • Easy compliance

Maintain all records of manufacturing and other operations digitally in a single format as per Annexure B

Types of Beneficiaries

Through bonded manufacturing, all types of businesses can avail exemption on customs duty on imported inputs used in the production of finished goods to be exported. In the case of domestic consumption, the duty on imported inputs is deferred until the finished goods are cleared to the domestic market.

For better understanding, illustrations below show how a manufacturer and an e-commerce service provider benefit from bonded manufacturing.

Manufacturer

  • A leading Japanese automobile manufacturer intends to manufacture vehicles in India
  • They file an application for licensing a facility near Nagpur, Maharashtra and import required inputs for production like airbags, gearboxes and capital goods.
  • The duty on such imports is deferred, which provides additional working capital support to the manufacturer.
  • The manufacturer exports 70% of the total produced vehicles and deferred duty on that portion is waived while deferred Custom Duty and IGST are paid on the remaining 30% vehicles at the time of their sale domestically across India.
  • The manufacturer benefits from deferred duty on imported inputs and from reduced production cost due to duty-free imports.

Steps to Start Manufacturing

STEP ONE

Fill Online Application

Fill online application as per Annexure A along with the following details:

  • Nature of manufacturing
  • Particulars of imported inputs
  • Anticipated trade volume, etc.

List of documents required:

  • Certificate of Incorporation (For companies)
  • MoO and AoA (For partnership firm)
  • Partnership Deed (For partnership firm)
  • Copy of ID proofs of proprietors/ partners/ directors
  • Copy of Aadhar Card of Authorised Signatory
  • Documents supporting property-holding rights, such as rent agreement
  • Copy of warehouse license, if issued earlier
  • Ground plan of the site with details
  • Fire safety audit certificate

STEP TWO

Execute a Bond

  • Execute a bond as per Annexure C and submit a physical copy to your Jurisdictional Commissioner of Customs.
  • Maintain detailed accounts as per Annexure B

Note: Before execution of a Bond, a Customs Officer visits the facility to evaluate the compliances in order to issue the license.

STEP THREE

Grant of Sanction

  • Commissioner of Customs grants the permission for manufacturing or other operations in the bonded facility
  • Permission also includes:
    • Manufacturing process or other operations permitted
    • Conditions regarding manufacturing

STEP FOUR

Start Manufacturing or Other Operations

The processes for availing the license for a private bonded facility (as per Section 58) and for manufacturing or performing other operations (as per Section 65) are combined under single application as per Annexure A.

Steps for Clearance of Warehoused Goods

Steps for Clearance of Warehoused Goods

*When goods are transferred from one bonded facility to another, incidence to pay deferred duty is also transferred to the owner of the new facility. The owner of any warehoused goods may, with the permission of the proper officer, remove them from one warehouse to another, subject to such conditions as may be prescribed for the due arrival of the warehoused goods at the warehouse to which removal is permitted.

Essentials to Benefit from Bonded Manufacturing

Export goods

No duty is to be paid on imported raw materials or capital goods if the following are complied with:

  • Documents of export declaration based on the mode of transportation (Shipping Bill/ Bill of Export/ Form prescribed) are produced
  • Export duty, fines and penalties, if any, are paid
  • Order of clearance of goods issued by the Customs Officer

Goods for home consumption

Waste/ refused goods

Requirements for Record-keeping

Requirements for Record-keeping

If licensees fail to comply with any of the provisions of these regulations, they shall be liable to a penalty in accordance with the provisions of the Customs Act, 1962.

Stakeholders

Government Ministry/Department

  • Central Board of Indirect Taxes & Customs
  • GST Commissionerates
  • State Tax Departments
  • Jurisdiction Commissionerate Office

FAQs

Q.1 Who is eligible for applying for manufacture and other operations in a bonded warehouse?

Ans: The following persons are eligible to apply for manufacture and other operations in a bonded warehouse –

  • A person who has been granted a licence for a warehouse under Section 58 of the Customs Act, in accordance with Private Warehouse Licensing Regulations, 2016.
  • A person can also make a combined application for a licence for a warehouse under Section 58, along with permission for undertaking manufacturing or other operations in the warehouse under Section 65 of the Act. The persons mentioned have to be a citizen of India or an entity incorporated or registered in India.

Q.2 Can a factory which is solely into manufacturing goods, which are to be sold in the domestic market, eligible for applying for manufacture and other operations in a bonded warehouse?

Ans: The eligibility of a factory for manufacture and other operations in a bonded warehouse does not depend upon whether the final goods will be sold in the domestic market or exported. There is no quantitative restriction on the sale of finished goods in the domestic market. Any factory can avail a license under Section 58 of the Customs Act along with permission under Section 65 if they intend to import goods without upfront payment of Customs duty at point of import and deposit them in the warehouse, either as capital goods or as inputs for further processing.

Q.3 Is an existing factory which solely manufactured goods to be sold in the domestic market, eligible for application for manufacture and other operations in a bonded warehouse? How will the existing capital goods and inputs be accounted?

Ans: Yes. Any unit in Domestic Tariff Area (DTA) is eligible for making an application for manufacture and other operations in a bonded warehouse i.e. an old factory in DTA is eligible for applying. The accounting form prescribed for the units undertaking manufacture and other operations in a bonded warehouse provides for an accounting of DTA receipts. Thus the existing capital goods and inputs must be accounted in the accounting form prescribed. The form also provides for a remarks column in case certain remarks are to be entered.

Q.4 Is manufacture and other operations in a bonded warehouse allowed in Public Bonded Warehouse licensed under Section 57 of the Customs Act?

Ans: No. At present, manufacture and other operations in a bonded warehouse is allowed only in a Private Bonded Warehouse licensed under Section 58 of the Customs Act.

Q.5 Will a unit licensed under Section 65 and Section 58 of the Customs Act, 1962, be under the physical control of Customs?

Ans: No. There is no physical control of a unit licensed under Section 65 and Section 58 of the Customs Act, 1962, on a day to day basis. The unit will be subject to risk-based audits.

Q.6 Can the license under Section 65 and Section 58 of the Customs Act, 1962, be obtained on bare land with identified boundaries or a built structure is imperative for obtaining the said license?

Ans: The regulations do not mandate that a fully enclosed structure is a prerequisite for grant of license. What is important is that the site or building is suitable for secure storage of goods and discharge of compliances, such as proper boundary walls, gate(s) with access control and personnel to safeguard the premises. Moreover, depending on the nature of goods used, the operations and the industry, some units may operate without fully closed structures. The Principal Commissioner/Commissioners of Customs will take into consideration the nature of premises, the facilities, equipment and personnel put in place for secure storage of goods, while considering grant of license.

Q.7 Do we need to renew license under Section 58 or permission under Section 65?

Ans: The license and permission granted is valid unless it is cancelled or surrendered, or the license issued under Section 58 is cancelled or surrendered. Thus no renewal of the license under Section 58 or permission under Section 65 is required.

Q.8 Can a unit undertaking manufacture and other operations in a bonded warehouse import capital goods without payment of duty? If yes, whether only BCD or both BCD and IGST on imports is covered? For how long is duty deferment available? Is interest payable after some time?

Ans: A unit licensed under Sections 58 and 65 can import capital goods and warehouse them without payment of duty. Manufacture and other operations in a bonded warehouse is a duty deferment scheme. Thus both BCD and IGST on imports stand deferred. In the case of capital goods, the import duties (both BCD and IGST) stand deferred till they are cleared from the warehouse for home consumption or are exported. The capital goods can be cleared for home consumption as per Section 68 read with Section 61 of the Customs Act on payment of applicable duty without interest. The capital goods can also be exported after use, without payment of duty as per Section 69 of the Customs Act. The duty deferment is without any time limitation.

Q.9 Would any customs duty be payable on the goods manufactured in the bonded premises using the imported capital goods (on which duty has been deferred) and sold into the domestic tariff area?

Ans: The payment of duty on the finished goods is clarified in Paras 8 and 9 of the Circular No. 34/2019. Duty on the capital goods would be payable if the capital goods itself are cleared into the domestic market (home consumption). Thus the duty on the capital goods does not get incorporated on the finished goods. Thus no extra duty on finished goods cleared into DTA is payable on account of imported capital goods (on which duty has been deferred). Refer to the Bonded Manufacturing microsite for more details.

Q.10 Can a unit undertaking manufacture and other operations in a bonded warehouse import inputs without payment of duty? If yes, whether only BCD or both BCD and IGST on imports is covered? For how long is duty deferment available? Is interest payable after some time?

Ans: Manufacture and other operations in a bonded warehouse is a duty deferment scheme. Thus both BCD and IGST on imports stand deferred. In the case of goods other than capital goods, the import duties (both BCD and IGST) stand deferred till they are cleared from the warehouse for home consumption, and no interest is payable on duty. In case the finished goods are exported, the duty on the imported inputs (both BCD and IGST) stands remitted i.e. they will not be payable. The duty deferment is without any time limitation.

Refer to the Bonded Manufacturing microsite for more details.

Source- https://www.investindia.gov.in/bonded-manufacturing?

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