MOOWR: bonded manufacturing and the duty deferral

An importer of inputs pays customs duty when the goods land, then waits weeks or months while those inputs become finished goods and longer still to be paid for them. Manufacture in a customs bonded warehouse breaks that sequence. The Central Board of Indirect Taxes and Customs describes the scheme in its frequently asked questions on manufacture and other operations in a customs warehouse as based on Section 65 of the Customs Act, 1962, which enables the conduct of manufacture and other operations in a customs bonded warehouse, introduced through the Manufacture and Other Operations in Warehouse (no. 2) Regulations, 2019 and explained through Circular No. 34/2019-Customs dated 01-10-2019.

What does Section 65 actually permit?

It permits manufacture inside a bonded warehouse, which changes when duty falls due rather than whether it is owed. The CBIC frequently asked questions record that a unit can import both inputs and capital goods under customs duty deferment with no interest liability, that there is no investment threshold and no export obligation, that the duties are fully remitted if the goods resulting from such operations are exported, and that import duty is payable only if the resulting goods or the imported goods are cleared in the domestic market.

The same document lists the features that make it usable rather than theoretical: no geographical limitation on where such units can be set up, a single application cum approval form with a single point of approval, a single digital account, and no limit on the quantum of clearances that can be exported or cleared to the domestic market. A manufacturer selling entirely into India is eligible, which surprises people who assume the scheme is an export programme.

Where does the cash actually move?

From the port to the point of sale. Under the ordinary route the duty is a cost incurred at import and carried through work in progress, finished stock and receivables before any of it is recovered. Under Section 65 that outflow sits at the moment the finished goods are cleared for home consumption, which for most manufacturers is far closer to the moment cash comes in.

Two features of the CBIC position decide how large the benefit is. The first is that both basic customs duty and integrated tax on imports stand deferred, so the deferral is on the whole import stack rather than on the customs component alone. The second is that no interest is payable on the deferred duty, and the CBIC frequently asked questions state in terms that no interest liability arises when the duties are paid at the time of ex-bonding the resultant goods and that the duty deferment is without any time limitation. A deferral with an interest meter attached is a loan; this one is not. Import duty, in the order it is actually calculated sets out the stack being deferred.

What happens at each exit?

Three exits, three different outcomes, and the whole scheme is really a set of rules about them.

• Finished goods exported. The CBIC frequently asked questions record that where the finished goods are exported, the duty on the imported inputs, both basic customs duty and integrated tax, stands remitted, meaning it is not payable at all.
• Finished goods sold in India. The deferred duty on the inputs becomes payable when the resultant goods are cleared for home consumption, without interest, and there is no quantitative restriction on how much is sold domestically.
• Capital goods cleared for home consumption after use. Cleared under Section 68 read with Section 61 of the Customs Act on payment of applicable duty without interest, and the CBIC frequently asked questions state plainly that depreciation is not available on capital goods cleared for home consumption after use in a Section 65 unit.
• Capital goods exported after use. Exported without payment of duty under Section 69 of the Customs Act, with the export valued under Section 14 of the Customs Act read with the Customs Valuation (Determination of Value of Export Goods) Rules, 2007.

One clarification prevents a common double count. The CBIC frequently asked questions record that duty on capital goods is payable only if the capital goods themselves are cleared into the domestic market, so the duty on capital goods does not get incorporated into the finished goods and no extra duty is payable on finished goods cleared domestically on account of imported capital goods on which duty was deferred.

Who can operate one, and where?

The permission sits on a warehouse licence, so the licensing question comes first. The CBIC frequently asked questions record that those eligible are a person granted a licence for a warehouse under Section 58 of the Customs Act in accordance with the Private Warehouse Licensing Regulations, 2016, or a person making a combined application for that licence along with permission under Section 65, and that the applicant must be a citizen of India or an entity incorporated or registered in India.

Two limits follow. The scheme is available only in a private bonded warehouse licensed under Section 58, and the same document states that at present it is not allowed in a public bonded warehouse licensed under Section 57. And an existing domestic factory qualifies: any unit in the domestic tariff area is eligible to apply, with existing capital goods and inputs accounted for in the prescribed accounting form, which is what makes conversion of a running plant possible rather than requiring a new site.

What does the compliance actually consist of?

An account, a keeper and an audit posture. The CBIC frequently asked questions record that there is no physical control of a Section 65 unit on a day to day basis and that the unit is subject to risk based audits, that no prescribed frequency for such audit exists, and that approval of the bond officer is not required for clearance of goods from the warehouse. That is a considerable operational freedom, and it is granted against the account rather than against a gate.

The account is therefore the obligation. A warehouse keeper has to be appointed for a premises to be licensed as a private warehouse under Section 58, and the CBIC frequently asked questions record that the keeper is expected to discharge duties and responsibilities, maintain accounts and sign documents on behalf of the licensee, and to supervise and satisfy himself about the veracity of the declaration and accounts he signs. Inventory follows generally accepted accounting principles and first in first out may be used. We could not open the text of the Manufacture and Other Operations in Warehouse (no. 2) Regulations, 2019 or of Circular No. 34/2019-Customs on an official host at the time of checking, so this guide does not state the number of the accounting form, the contents of the periodic return or its due date. Read those from the regulations and the circular as in force before you design the process.

What moves in and out, and on what document?

Movement is documented rather than escorted. The CBIC frequently asked questions set out three cases: from a customs station to a Section 65 unit the goods travel on the bill of entry for warehousing, with no separate form prescribed because the goods are already accompanied by it; from a non Section 65 warehouse to a Section 65 unit, on the form for transfer of goods prescribed under the Warehoused Goods (Removal) Regulations, 2016; and from a Section 65 unit to another warehouse, whether or not that warehouse is itself a Section 65 unit, on the form prescribed in the Manufacture and Other Operations in Warehouse (no. 2) Regulations, 2019. The same document records that the goods are not under customs escort during movement.

Returns and re-imports have a defined path too. Where goods cleared from the warehouse are returned by a customer for repair, they are no longer warehoused goods and are entered as domestic tariff area receipts in the accounting form; where exported goods are sent back, they are entered as import receipts and the relevant customs notification for re-imports is followed when filing the bill of entry. Every one of those movements is an entry someone has to make, which is the real cost of the scheme. Documents required to import into India covers the entry documents themselves.

When is the deferral worth the record keeping?

The arithmetic is simple and it is worth doing before the application rather than after. The benefit is the financing cost of the duty over the period between import and clearance, plus the entire duty on whatever share of output is exported. The cost is a permanent obligation to keep a warehouse account that reconciles, a keeper who signs it, and the risk that an audit finds it does not.

That points at a clear profile. A manufacturer with a long conversion cycle, a high imported input content or a meaningful export share gains materially. A manufacturer with fast turns, low import content and no exports is buying a compliance obligation for a small financing gain. The scheme also composes with others rather than excluding them: the CBIC frequently asked questions record that eligibility for export benefits under the Foreign Trade Policy or the Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017 depends on the respective scheme, and that operating under Section 65 has no impact where the scheme allows the benefit.

Where to go from here

Bonded manufacturing changes when a duty is paid, so the guides around it are about what that duty is and what the file has to prove.

• The duty being deferred. Import duty, in the order it is actually calculated.
• The code the duty is calculated from. Classifying goods: the method, not the lookup.
• The financing view of the same number. Landed cost is not the proforma price.
• The credit on the tax half of the stack. IGST on imports and input tax credit.
• The entry documents behind every movement. Documents required to import into India.

Purser keeps the import, the movement and the clearance on one record, so the account behind a Section 65 unit is assembled from the documents as they happen rather than rebuilt before an audit. Purser never submits to a government portal and it never sends an outbound message without a recorded human approval event, so the warehouse account you sign is yours and your broker keeps the filing. Purser Inbound holds that record.

Frequently asked questions

Is MOOWR an exemption from customs duty?

No, it is a deferment with a remission on export. The Central Board of Indirect Taxes and Customs frequently asked questions on manufacture and other operations in a customs warehouse record that a unit can import inputs and capital goods under customs duty deferment with no interest liability, that duties are fully remitted if the resulting goods are exported, and that import duty is payable if the resulting goods or the imported goods are cleared in the domestic market.

Is interest payable on the deferred duty?

No. The Central Board of Indirect Taxes and Customs frequently asked questions record that no interest liability arises when the duties are paid at the time of ex-bonding the resultant goods, that capital goods may be cleared for home consumption under Section 68 read with Section 61 of the Customs Act on payment of applicable duty without interest, and that the duty deferment is without any time limitation.

Does a Section 65 unit have to export?

No. The Central Board of Indirect Taxes and Customs frequently asked questions state that there is no investment threshold or export obligation, that eligibility does not depend on whether the final goods are sold domestically or exported, and that there is no quantitative restriction on the sale of finished goods in the domestic market. What export changes is the outcome: duty on the imported inputs is remitted rather than deferred.

Can an existing factory become a bonded manufacturing unit?

Yes. The Central Board of Indirect Taxes and Customs frequently asked questions record that any unit in the domestic tariff area is eligible to apply, that an old factory in the domestic tariff area may apply, and that existing capital goods and inputs must be accounted for in the prescribed accounting form, which also provides for accounting of domestic tariff area receipts and carries a remarks column.

Is a bonded manufacturing unit under customs supervision?

Not on a day to day basis. The Central Board of Indirect Taxes and Customs frequently asked questions record that there is no physical control of a unit licensed under Sections 65 and 58 on a day to day basis, that the unit is subject to risk based audits with no prescribed frequency, and that approval of the bond officer is not required for clearance of goods from the warehouse. The obligation that replaces supervision is the account, maintained and signed by the appointed warehouse keeper.