The amendments have certainly made the MOOWR Scheme less attractive, and businesses will need to reassess the benefits of other schemes such as EPCG and advance authorisation vis-à-vis MOOWR.
The Indian Government has set its sights on turning India into a global manufacturing hub and achieving the goals of “Make in India” and “Atma Nirbhar Bharat”. To this end, the Indian Government has formulated several initiatives to provide impetus to the manufacturing sector.
One such initiative was the introduction of the Manufacture and Other Operations in Warehouse Regulations (‘MOOWR’) Scheme. This scheme, under the aegis of the Central Board of Indirect Taxes and Customs (CBIC), enables manufacturing and other operations in a bonded warehouse and allows the import of goods (both inputs and capital goods) under Customs duty deferment.
Under the scheme, manufacturers are allowed to import goods without payment of Customs duty. If the goods produced by such manufacturing operations in a bonded warehouse are exported, the duties are fully remitted. Further, applicable import duty on imported inputs is only payable if the finished goods or the imported goods are cleared in the domestic market. Similarly, import duty on capital goods is required to be paid only when such capital goods are removed from the bonded warehouses. The scheme, therefore, offers a working capital advantage to encourage domestic manufacturing.
The scheme encompassed deferral of all components of Customs duty, viz. basic customs duty, integrated goods and services tax (‘IGST’), cesses, etc. Therefore, depending on the duty structure applicable to imported goods, the scheme potentially deferred duties in the range of 30-40%. The scheme was in force from 2019.
Amendment made to the MOOWR Scheme
The Finance Act, 2023 introduced several changes to the Customs Act, 1962. Section 65(1) of the Customs Act was amended and a new provision, i.e., Section 65A, was introduced. These amendments stipulate that duties such as the IGST and Compensation Cess must be paid on goods stored in a warehouse for manufacturing and other operations, from a date that will be notified by the government. However, it is important to note that basic customs duty and other duties will remain exempted for goods already stored in a warehouse.
Specifically, the amendments made by Finance Act, 2023 are:
• Section 59 of the Customs Act allows for the direct filing of the Bill of Entry (‘BoE’) for home consumption at the customs station. The previous requirement of first filing an in-bond BoE and then an ex-bond BoE has been done away with. This change may provide a relief to businesses from a compliance standpoint.
• The payment of deferred customs duties in accordance with the new provision must be made before the goods can be removed from the warehouse, as per the mechanism that will be prescribed.
• Section 65A provides that the BoE for home consumption should be filed at the time of import, instead of the existing mechanism of filing a warehousing BoE. The imported goods can be removed for storage in a bonded warehouse by filing the BoE for home consumption on payment of IGST and Cess (if applicable), without paying Customs duties and other duties of Customs.
• Section 65A also provides that only for the purpose of payment of deferred Customs duties, the imported goods shall be considered as ‘warehoused goods’.
• Transfer of warehoused goods from one bonded warehouse to another will only be permitted upon filing of the BoE for home consumption and on payment of IGST and Compensation Cess (if not paid earlier).
• The new provisions shall not be applicable to those goods for which the BoE for warehouse has already been filed and the goods have been removed for the warehouse before the applicability of new provisions.
• The Government has retained the power to notify goods to which the new set of provisions will not apply.
Implications of amendments
These amendments have stunned the industry, as they substantially impact duty deferment benefit under the MOOWR scheme, which is now restricted only to duties other than IGST and Cess. Thus, IGST and Cess will have to be paid on the goods deposited in the MOOWR warehouse, i.e., paid at the time of importation, as opposed to pre-amendment when it was payable at the time of removal of imported goods from the MOOWR warehouse.
While the above amendment seems to have been introduced considering credit of IGST is generally allowed, however, it adversely impacts cash flow.
Several manufacturers have registered themselves under the MOOWR Scheme. Many others, with capital expansion plans as well as those sourcing raw materials from outside India, were keenly evaluating the MOOWR Scheme to avail the working capital impetus. However, the amendments have taken the industry by surprise, especially as they were not part of the Finance Minister’s budget speech on 1st February 2023 but were unexpectedly included in the Bill presented before the Lok Sabha and later made part of the Finance Act, 2023.
This amendment will be a major dampener for manufacturers under the MOOWR Scheme since they will be required to pay IGST and Cess upfront and the actual benefit will boil down only to basic customs duty and other duties of customs. This will make the MOOWR Scheme lose its sheen. More so, for the importers who had expansion plans and were considering procurement of capital goods under the MOOWR Scheme, may no longer find it advantageous due to significant curtailment of deferment benefit.
Partner,
Dhruva Advisors LLP.
The amendments are marred with some ambiguities as of the date of writing this. One concern is whether any document is required to be filed upon the clearance of finished goods from a customs-bonded warehouse, as earlier the BOE for home consumption was filed at the time of removal from warehouses, which will now be filed at the time of clearance at the port itself. Another issue that comes up is whether interest is payable on the customs duty that is to be paid at the time of clearance of finished goods from a customs-bonded warehouse, as a BOE for home consumption is filed at the time of depositing goods in the warehouse. Section 47 of the Customs Act states that the importer is required to pay import customs duty on the date of presentation of the BOE in case of self-assessment or within one day in the case of assessment, reassessment or provisional assessment. Section 47 further allows for deferred payment in cases where the Central Government by notification permits a certain class of importers to make deferred payment of duty in the manner provided for in the rules. Whereas the duty under the amended MOOWR provisions will be paid at the time of removal from the warehouse. Therefore, it deserves to be clarified that no interest is due on the customs duty amount.
Principal,
Dhruva Advisors LLP.
These issues have left the industry uncertain about the impact of the MOOWR Scheme changes and disillusioned since the rules have been changed mid-way. An open point that emerges concerns pursuing challenges based on promissory estoppel or legitimate expectation. The industry is calling for clear guidelines and instructions from the Government, to ensure that the amendments are implemented smoothly and do not cause undue hardship for businesses.
Conclusion
Overall, the changes to the MOOWR Scheme which are yet to be enforced/implemented have prompted the industry and trade to critically evaluate the scheme in the context of their operations, given the lack of benefits and the cumbersome compliance requirements.
The absence of RoDTEP (Remission of Duties and Taxes on Exported Products) rates for MOOWR units has made the industry question whether the real advantage of the scheme outweighs the costs.
The amendments have certainly made the MOOWR Scheme less attractive, and businesses will need to reassess the benefits of other schemes such as EPCG and advance authorisation vis-à-vis MOOWR.
