NOVEMBER 12, 2020

By Hardik Gandhi, Komal Sampat & Ankeet Shah

Re-organising global supply chain

WITH global supply chains being redefined and reengineered by new trade flows, businesses are re-organising their supply chain and operating models to ensure near term sustenance while preparing for long-term competitiveness. As far as the Indian market is concerned, we perhaps have a unique opportunity to adopt a more inclusive and proactive role in leveraging skilled resources, competitive costing, developed ecosystem for manufacturing, to forge ahead in the global supply chain re-organisation activity. Moreover, enabling policies from Indian Customs law, such as manufacturing in-bond (MOOWR 2019), fiscal incentives as well as enabling trade facilitation by introducing faceless assessment with digital deployment and leveraging technology under the aegis of turant Customs program, is expected to enhance efficiencies and ease of doing business in India.

Manufacturing in-Bond Scheme: Enabling policy to promote manufacturing

The Central Board of Indirect Tax and Customs (CBIC) has revamped and streamlined the concept of bonded warehouses or the duty suspension regime by introducing revised Manufacture and Other Operations in Warehouse Regulations, 2019 (MOOWR 2019). The scheme of manufacturing in-bond has been modernised and made transparent with simplified compliance requirements and electronic record keeping. The key objective of this scheme is to attract manufacturing in India and provide impetus to "Make in India" initiative.

This scheme, which internationally is known as duty suspension regime, offers multiple benefits such as unlimited period of warehousing without export obligation to import goods duty-free. Primarily, MOOWR 2019 allows import of inputs and capital goods in the Customs bonded warehouse by deferring the duty payment to the date when the manufactured goods and/or the capital goods are cleared from the warehouse, subject to a condition that such inputs and/or capital goods are used for manufacturing or other operations within such warehouse. It is worthwhile to note that if the manufactured goods or capital goods after use are exported from such Customs bonded warehouses, then there would be no duty liability on such inputs or capital goods. However, waste and refuse generated from such manufacturing activity can be cleared for home consumption only on payment of applicable duties even though such waste or refuse is in relation to the manufactured goods, which are exported.

As far as eligibility to opt for the scheme is concerned, a person who already has a license to operate a private warehouse under section 58 of Customs Act, 1962, can apply for permission to manufacture in-bond. Also a person with simplification in the process, can now make a combined application to seek a private warehouse license along with the permission to perform manufacture and other operations in the warehouse at the same time. Commissioner of Customs is a single point of approval for all the approvals and the entire process is electronic. There is no geographical restriction whereby new manufacturing facility can be set up or an existing facility be converted into a bonded manufacturing facility irrespective of its location in India. Also, the eligibility of a facility 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.

As far domestic clearances are concerned, in a case where the importer is required to clear the goods imported as such into the domestic market, then such imported goods can be cleared for home consumption on payment of applicable duties along with interest. Another key aspect is that no interest would be applicable on the imported goods cleared into domestic market, within 90 days from the date of export. Also, the eligibility to export benefits under FTP or IGCR would depend upon the respective scheme. If the scheme allows a unit operating under Section 65, it has no impact on the eligibility. In other words, a unit operating under Section 65 can avail any other benefit, if the benefit scheme allows.

From a procedural and compliance standpoint, the licensee will have to appoint a warehouse keeper having sufficient knowledge about warehousing. The licensee would require maintaining all relevant documents of the receipt, storage, operations and removal of the goods for a minimum period of 5 years and file a monthly return as specified in the rules. Recently, separate rules were notified stating that a person having a license to operate a special warehouse under section 58A can also apply for in-bond manufacturing. It has also been clarified that there may not be 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.

The scheme is expected to play a critical role in business decisions when organisations look at re-organising their global supply chains. The concept of duty deferment on the inputs till exported or cleared for domestic market brings in efficiencies in managing working capital. Moreover, duty deferment of capital goods such as plant, machinery and other assets is certainly a game-changer when organisations evaluate their plans for setting up new facilities or expansion of the existing ones.

Faceless assessments under turant Customs Program: Ease of doing business

CBIC has launched its flagship program turant Customs to implement reforms to ease and benefit the Customs clearance process enabled by technology and digitisation. The key elements of turant Customs programme are faceless, contactless and paperless Customs clearance processes. This includes faceless or anonymised assessment, self-registration of goods by importers, automated clearances of bills of entry, digitisation of Customs documents, etc. The primary purpose of this measure is essentially to reduce the physical interface between businesses and Customs officers and have the assessments done virtually and anonymous.

Pilot programmes of faceless assessment were launched in 2019. The same were followed by the launch of Phase I and II of faceless assessment on 5 June 2020 and 3 August 2020 respectively. It was then decided to rollout faceless assessment at an all India level at all ports of import and for all imported goods by 31 October 2020. CBIC has also constituted National Assessment Centers (NACs) which are organised commodity-wise and will be responsible for implementation of faceless assessment. NACs will work in a coordinated manner and ensure that all assessments are carried out in a timely manner and there is no delay or hold-up of import Customs declarations. In order to bring in uniformity and to enhance the quality of Customs assessments, NACs will also examine the assessment practices of imported goods across Customs stations, will act as a knowledge repository for a particular chapter/product, interact with trade and industry for seeking inputs on assessment and carry out other functions as prescribed. Moreover, NACs will also co-ordinate with investigation authorities, department of valuation, department of analytics and risk management, department of audit and so on for Customs risk and governance.

Digitisation and technology driven customs has opened up a host of opportunities to reform the cross-border clearance ecosystem with appropriate safeguards and risk management. Importers and exporters as well as others engaged in international trade, would no longer be required to prepare and submit volume of bulky paperwork to Customs authorities. Single Window Interface for Facilitating Trade (SWIFT) which was introduced in 2016 enabled businesses to file their documents for clearance though a common entry point and harmonised regulatory compliance system by simplification and single window. SWIFT platform with EDI and ICEGATE are the pillars of the technology-driven modern Customs administration.

Modern trust-based process and assessment by applying technology has enhanced trade facilitation. It may be critical for businesses to assess the impact of this change, especially if there are different practices/litigations on issues related to classification or valuation. It is also perhaps an opportunity for organisations to leverage automation of their global trade which typically involves automating the entire lifecycle of the global trade function across the supply chain to significantly reduce indirect transactional taxes while improving operating efficiencies and gross margin. The possibility could also be integrating ERPs with EDI, ICEGATE in future for seamless information exchange for Customs processes. These reforms will surely expedite Customs clearance and reduce the transaction cost as well as the interface between Customs authorities and importers, exporters and Customs brokers.

Preferential duty benefits under Free Trade Agreements (FTAs): Tightening the noose

To strengthen the relations and to benefit their industry and trade, two or more nations engage into a free trade agreement (FTA) or a preferential trade agreement (PTA). It helps the businesses procure quality products from member nations at reduced tariff rates. However, such reduced tariff rates could be availed subject to compliance with the conditions/requirements as mentioned in the trade agreements and other rules as notified. One of such rules recently notified is the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR 2020). It is a big step taken by CBIC by introducing CAROTAR 2020, which acts as a catalyst for the domestic industry as it aims to cut down on frivolous imports made at a preferential rate under Free Trade Agreement.

As per CAROTAR 2020, the importer shall be required to declare his intention to avail the preferential rate of duty in the Bill of Entry (BOE), indicating the relevant entry and produce a COO. Earlier, the COO produced by the importer was the single main document, which was considered as final for allowing such preferential rate to the importer. Now due to insertion of CAROTAR, the importer, in addition to COO, would be required to collect required information as mentioned in FORM-I of the rules. Such details in FORM-I shall be kept for at least 5 years from the date of filing bill of entry. It requires importer to exercise reasonable care to ensure accuracy and truth of the information received from the exporter.

Owing to such regulations, which are not specific but vague, there is a high possibility that there might be more indictment in future. This can be due to 'reasonable care', which is subjective and can thus have different meaning for different people leading to contradictions. The condition to accumulate requisite information from the exporter too depends on the exporter's discretion to share the said information with the importer. Insertion of CAROTAR 2020 has made the importer dependent on the exporter for the information on the country of origin of goods, whereas the onus to prove such information correct is on the importer. This may also prompt a modification in contract clauses to include a clause for sharing the origin related details and an indemnification clause for the loss that might occur on disallowance of the concessional rate by the authorities, in case the details provided are proved to be untrue.

Conclusion:

India's Customs procedure and administration has always been flagged as an area needing reforms to improve the ease of doing business. The host of policy measures as well technology driven procedural reforms will provide the necessary fillip to trade and industry in these trying times and will also bring in global competitiveness when we are eying for a share of the global manufacturing pie.

[Hardik Gandhi is Director; Komal Sampat is Manager and Ankeet Shah is Assistant Manager with Deloitte Haskins & Sells LLP. The views expressed are strictly personal.]