Bonded Manufacturing — A Newly Improvised Scheme to Boost “Make in India”

Introduction to Bonded Manufacturing

The concept of Bonded Manufacturing is not new as it already existed as Section 65 of Customs Act 1962. In the last one-year, Central Board of Indirect Taxes and Customs (CBIC) under Ministry of Finance has improvised the scheme and has simplified associated procedures as a part of on-going Ease of Doing Business initiative of Government of India.

To convert a new or existing facility into a Bonded Manufacturing premises, it is mandatory to seek license under Section 58 (that converts a premise to Bonded Warehouse) along with a license under Section 65 (that permits manufacturing or other operations like packaging, re-labelling in a Bonded warehouse).

For convenience of both domestic and foreign investors, CBIC has created a digital common application form to seek license under Section 58 and 65 that is available at dedicated web page at Invest India website.

In the spirit of Ease of Doing Business, there will be no regular auditing or approvals required to clear the goods in domestic tariff area (DTA) from a Bonded Manufacturing premise. However, the premises must ensure proper safety and security through measures like installation of CCTV cameras, fire safety measures and deployment of security personnel.

The unit just need to maintain records as per a single format specified in Annexure B of Manufacture and Other Operations in Warehouse Regulations 2019 which should be submitted in the office of Jurisdictional Commissioner of Customs on a monthly basis.

Let us now understand what type of duties/taxes are levied on imported items in India for a better understanding of the benefits of Bonded Manufacturing:

A.      Basic Custom Duty (BCD): This is the tax levied on the Assessment Value of the goods that have landed at the customs border of India. It can vary between 0% to 100%. BCD depends upon the HSN code of the product and the Country of Import.

B.      Social Welfare Surcharge (SWS): It is a tax imposed on the value of goods including the BCD value. It is generally 10% unless the good is exempted from this tax.

C.      Integrated Goods & Services Tax (IGST): IGST is imposed on the imported goods to provide a level playing field for domestic manufacturers, who also pay an equivalent tax (Central GST + State GST or IGST) on sale of goods. IGST on imported goods can be set-off against any other GST liability in India. There are five slabs of IGST 0%, 5%, 12%, 18%, 28%.

D.     Compensation Cess: This is an additional tax that is imposed along with GST on both imported items as well as domestically manufactured items on products that are classified as notified E.g. Special Utility Vehicles, Cigarettes, Tobacco, Aerated Water, etc.

Details on calculation of import duties in India and various online tools can be accessed at Calculation of Import Duty in India — Formula, Online Tools and Exemptions

Figure I: Simplified Illustration of Levy of Customs Duties on Inputs and Outputs from Bonded Manufacturing Premises

Bonded manufacturing premises allows deferment of Customs duty on imported raw material, inputs and capital goods. Unlimited period of duty deferment for manufacturing or other operations, and no export obligations are some of the other advantages.

Since a Bonded Manufacturing premises is also allowed to act like a Bonded Warehouse, the organization is required to maintain records to the goods that are cleared to DTA without any value addition. Such transactions attract both Customs Duty and interest (if Customs Duty are deferred for over 90 days) as per Section 61 of the Customs Act 1961. This flexibility is permitted with the spirit of attaining maximum capability utilization.

Scenarios — Suitability of Manufacturing in a Bonded Premises

Mentioned below are a few examples of what type of manufacturing units may find a Bonded Manufacturing premises conducive for their business model:

A.      Your manufacturing processes are heavily dependent on imported inputs (raw material and capital goods) and you want to defer payment of duties till the manufactured goods leave factory premises. E.g. Electronics Manufacturing, Lithium-Ion Battery Manufacturing, etc.

B.      You are keen to explore opportunities in foreign and domestic market but unsure about the demand for your products in foreign markets. Hence, you do not want to commit to export-focused zones like Special Economic Zones (SEZ) or Export-oriented Unit (EoU) scheme.

C.      You want to tap both domestic and export market through a single manufacturing facility and achieve optimal capacity utilization in your factory.

D.     You are keen to establish a unit in a particular area (due to proximity to market/vendor ecosystem/ specialized human resources/availability of good infrastructure) but there is no SEZ in that area or you are unable to find a suitable plot/facility in established SEZs.

Comparison of Bonded Manufacturing with Other Schemes in India

Is Bonded Manufacturing premises the only option for Customs Duty deferment or exemption? Certainly not, there are several other types of zones (established under different schemes) in India which could be suitable for manufacturing. Special Economic Zones (SEZ) and Export-oriented Unit (EoU) were conceptualized as zones for export purpose. SEZs and EoUs are also permitted to have DTA sales after fulfilment of export obligations.

Bonded Manufacturing premises and Domestic Tariff Area (DTA or any Industrial park) are predominately promoted for manufacturing products for domestic market. Off course, they are also eligible to export entire production in accordance with Foreign Trade Policy of Government of India.

Figure II: Comparison of Bonded Manufacturing with SEZ, EoU and DTA

Let us take an illustrative example (Figure III) to understand the difference between SEZ and Bonded Manufacturing, when the finished products are cleared to DTA:

Figure III: Illustrative Calculation of Applicability of Customs Duty on DTA Clearance for SEZ Vs Bonded Manufacturing Premises

The example above shows that manufacturing in Bonded Manufacturing for the Domestic Tariff Area is more beneficial in a Bonded Premises vis-à-vis SEZ. Also, please note that SEZ must deduct the sales in DTA for calculating the taxable income that is entitled for corporate income tax exemptions mentioned in the Figure II. Corporate Income Tax exemptions in an SEZ are available only for the export sales.

I sincerely hope that you found this article a good read. Any suggestions or specific queries pertaining to your business model are welcome.