MOOWR Scheme – A promising new era for manufacturing in India

1.    The World Trade Organization (WTO) dispute settlement panel in October 2019 recommended India to withdraw import subsidies available under export promotion schemes like Export Oriented Units (EOU)/Advance Authorization (AA)/Export Promotion of Capital Goods Scheme (EPCG) and Special Economic Zones (SEZ) on basis export performance. The said panel report recommendations are not final, and India has initiated appeal against the panel report on 19 November 2019.

2.    The main bone of contention of the panel report was that the import duties are subsidized in India depending on the export performance which is not allowed in view of the Article 3.1 of the WTO Subsidies and Countervailing (SCM) agreement wherein all developing countries with gross per capita income of 1000 $ per annum for three consecutive years are required to stop all export subsidies. India had already crossed the per capita 1000 $ mark way before 2015 and therefore being recommended by WTO ruling to discontinue with above said export promotion schemes.  While the appeal is filed by India against the said panel report recommendations which delays the scrapping of such schemes there has been overall demand and interest for alternative mechanisms to help boosts Indian trade globally.

3.    Government of India has been looking ways and means to boost the manufacturing facilities in India as per the vision of Prime Minister i.e. Make in India which prompted way to come up with a revamped warehousing schemes as Manufacture and Other Operations Regulations, 2019 (“MOOWR Scheme”). The said scheme or Customs Bonded warehousing provisions has been in place for decades but it has been given new lease of life by altering certain key compliance requirements and options to continue manufacturing with deferred payment of Customs duty options. This MOOWR Scheme has gained momentum with recent clarifications in July 2020. Since this is not export linked scheme, such framework should help boost manufacturing facilities and will help India to be compliant with WTO rulings as well.  The benefits of the scheme, clarifications, processes for application could also be checked on the Invest India portal at www.investindia.gov.in/bonded-manufacturing. This initiative of the Government further strengthens the objective of attracting foreign investments to set-up manufacturing capabilities in India.

4.    Some of the key benefits of the scheme are given as under:

• Duty deferment in case of import of capital goods and raw materials
• No customs duty if the goods are exported from warehouse
• No export obligation
• SION norms to be adopted on self-certification basis
• Interest free storage period till the time the goods could be utilized in manufacturing

5.    Now let us also examine comparative analysis of benefits among different export promotion schemes prevailing in India: 

6.    The fact that importer under MOOWR scheme will enjoy interest free storage period and that there are no restrictions to store the goods till the time raw materials are used in manufacturing facilities will help provide working capital savings. Let us try to understand by way of an illustration:

Company A decides to import certain raw materials under Chapter hearing 8407 having assessable value of INR 10,000/- under MOOWR Scheme. Effective customs duty rate (BCD+CESS+IGST under Customs) being 49.12% will come to around INR 4912. However, since the goods are imported and stored in Customs bonded warehouse, the resulting customs duty amount of INR 4912 would be deferred till the time it is used in manufacturing / domestically cleared. Following probable 3 scenarios could be envisaged:

Case A: If the said raw material is used in finished goods and said finished goods is exported, then the duty incidence at the import of INR 4912 would be waived.

Case B: If the resulting finished goods are cleared in domestic market, the deferment of duty amount on import of raw material could be enjoyed without any interest costs and there is no restriction on period within which such inputs could be used in manufacturing.

Case C: It could also happen that raw materials imported with duty deferment option under MOOWR scheme could not be utilized in manufacturing facility and therefore had to be removed from Customs Bonded warehouse on “as such” basis. In such scenario Customs duty along with applicable interest on such duty amount is required to be paid at the time of clearance of such goods. However, even in this case there is 90 days window available within which if the clearance of such goods is made on “as such” basis, interest would not be charged to the importer under MOOWR scheme. 

Similarly, customs duty applicable could be deferred on import of capital goods till the time same are kept under Customs Bonded warehouse. There are no restrictions like export obligation or period within which production should start using the capital goods under MOOWR Scheme unlike under EPCG scheme. Thus, above illustration could clear that one can plan the procurement and utilization of material / capital goods for production purposes to maximize working capital savings.

7.    At the face, the scheme looks promising but there are certain areas which requires clarification / pose challenges:

a.    Fate of existing licenses of AA, EPCG

b.    Treatment of movement of goods for repairs / testing / job work

c.    Coverage of activities under the term “Other Operations”

d.    Duty Drawback on exports under All Industry Rate (AIR)

e.    Debonding from present EOU / EHTP / ETB schemes and transitional issues

8.    The recent FAQs which were issued by Invest India in July 2020 provide certain clarity wherein it states that benefits under other export promotion schemes could be allowed unless barred by any conditions mentioned under respective schemes However, how to implement the MOOWR scheme when other licenses like Advance Authorization, EPCG etc., are yet to be redeemed or whether a combination of MOOWR Scheme and other export incentive schemes could be effective solution is something that importers will have to carefully investigate.

9.    Having said that, considering the broader objective to boost manufacturing facilities in India it wouldn’t be wrong to expect some positive clarifications. In the meantime, companies to start evaluating their current exports promotion schemes adopted and to check whether same could be replaced with MOOWR. The importer now will have to check applicable legal jurisprudence and framework of different schemes whether there is any bar / restriction to choose more than one export schemes. Further, current product mix, export volumes also to be looked at before finalizing the decision to shift to MOOWR.

10.    However, for the new entrants especially wherein European / American companies are looking to shift manufacturing facilities from China to India, they could certainly eye on the MOOWR, 2019 scheme if their sales volume consists of considerable exports. The recent news that manufacturing set-up in Narasapura, Kolar district of Karnataka by a Taiwanese contract manufacturing giant who opted for MOOWR Scheme have been granted license in less than working weeks’ time only fortifies the determination of the Government to make this scheme a success true to the mantra adopted i.e. “Make in India and Sell anywhere”.

11.    With a corporate tax at 15% for manufacturing companies set-up after 1 October 2019 and with the current MOOWR Scheme, present tax scheme provides a strong stimulus for Manufacturing Industry. A conscious and careful study of tax schemes beneficial to businesses will prove a boon to Companies desirous of setting-up or expanding current manufacturing capacities. True to the recent announcement of “Atmanirbhar Bharat” India now paves way in becoming a preferred hub for manufacturing facilities for India Inc. as well as new entrants from across the Globe eyeing to set-up their manufacturing capacities in India. 

Written jointly with Kapil Joshi Senior Associate at Lakshmikumaran & Sridharan, Pune