Introduction: Bonded Manufacturing

Bonded Manufacturing is a term used to describe a particular type of manufacturing where the manufacturer executes a bond and his premise is declared a bounded manufacturing premise according to custom laws. It provides various benefits to the manufacturers regarding customs duty and GST payment. Apart from monetary benefits, bonded manufacturing is an attractive option for manufacturers and investors who are willing to process imported goods and raw materials. Bonded Manufacturing provides support to the Indian Government's Make in India initiative and further strengthens India’s position in the Ease of Doing Business index. Let’s understand what bonded manufacturing is and how it affects the manufacturing business in India.

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What is Bonded Manufacturing?

There are scenarios when the manufacturers import the raw materials and other capital goods for processing purposes and later after the processing of these goods is done, the same are exported back to where they originated. In such a scenario the customs duty and IGST are paid by the manufacturers. This tax would have saved because the final goods are not distributed, sold and consumed domestically.

To facilitate such activities in the country and provide manufacturing businesses with tax benefits, the bonded manufacturing guidelines are issued by the CBIC (Central Board of Indirect Taxes and Customs). These guidelines provide that the manufacturers can either establish a bonded manufacturing facility or convert their existing manufacturing facility into a bonded manufacturing facility and claim the GST and Tax Benefits under the bonded manufacturing scheme. Under this scheme, the import duty on the products is waived if they are exported back to other countries after the processing is done in India.

Who should claim the Benefit under the Bonded Manufacturing Scheme?

The Bonded Manufacturing Scheme is relevant to many business entities in India. According to their purpose and business objective, they can choose many schemes run by CBIC to claim benefits. Some of the major case scenarios are as follows-

• If you want to get into a contract with a foreign company to process their products in India and export them back to their origin.
• If a foreign company finds it suitable to outsource the processing of their products in India.
• If a foreign company establishes a subsidiary in India for the processing of its products.
• If an Indian Company starts a joint venture with a foreign company for the purpose of processing the raw materials and goods imported into India.

Benefits of Bonded Manufacturing

The Bonded Manufacturing Scheme provides the following benefits to various stakeholders in the manufacturing and processing business in India-

• Customs Duty

The Customs Duty on the products that are imported with the intention to process in India and later on to export back to the origin country or any other country is deferred until the products are prepared and ready for either export or domestic distribution. Such custom duty is saved if the product is exported. In this scenario the manufacturer only needs to pay for the portion of the the goods utilized domestically.

• IGST Waiver

After the duty waiver through the customs, the GST applicable on these goods is also deferred completely if the whole portion of processed food is exported to other countries. Only the portion which is consumed domestically or distributed to the domestic market is taxed according to the applicable GST rates.

• Flexibility

Under this scheme, the manufacturers have the option to either export all the processed products or utilize them in the domestic market. Unlike other export-oriented schemes, the manufacturer does not need to commit to totally export the manufactured goods instead they can utilize full or any portion of these manufactured goods domestically after clearing them for home usage.

• Easy Setup

The Bonded Manufacturing Units are set up easily considering the less involvement of regulatory authorities. The Commissioner of Customs Act will provide all the import or manufacturing-related approvals.

• Minimal Compliance

The compliances including the initial approvals or the later dealing with the regulatory authority are seamless and straightforward as per the guidelines of the CBIC (Central Board of Indirect Taxes and Customs).

Points to Consider before Setting up a Bonded Manufacturing Unit

Before you set up a bonded manufacturing unit, you may consider the following points as it may affect your decision to choose the bonded manufacturing scheme or any other export-oriented manufacturing scheme by the Central Board of Indirect Taxes and Customs (CBIC). These points of consideration are as follows-

• Deciding the Activity

You first need to decide the activity you wish to undertake under the provisions of bonded manufacturing. It involves the manufacturing, packaging, or other kind of processing of imported goods. You can only claim the benefit under this scheme if your activity is qualified under the scheme.

• Objective of Manufacturing

The objective of manufacturing or other processing of the goods has to be decided in advance. Accordingly, you need to choose the most efficient scheme which can be SEZ, EOU or any other scheme run by the CBIC. If you are not sure about the exports you will be undertaking after the completion of manufacturing then you can choose a flexible scheme like Bonded Manufacturing.

• Expected Sale Volume

The expected sale volume has to be calculated in advance as it will be required to complete the documentation under the bonded manufacturing scheme. On top of that, it will also help you decide the export-oriented manufacturing scheme you wish to go for. If major sales are expected in the domestic market, you can choose to pay the taxes and import duty while in case the major chunk is for export then bonded manufacturing will be a better option.

Bonded Manufacturing Process Flow

The CBIC (Central Board of Indirect Taxes and Customs) has described the process involved in the setup of a bonded manufacturing unit. It further provides a process flow to claim the benefits for the customs and GST after the raw material is processed in India. The process flow goes as mentioned below-

• Step 1:- Filing of application
• Step 2:- Execution of the Bond
• Step 3:- Grant of Section
• Step 4:- Import of Raw Materials and Capital Goods
• Step 5:- Deferment in Custom Duty and IGST
• Step 6:- Initiation of Operations
• Step 7:- Export of Goods or Domestic Distribution
• Step 8:- Waiver on  Custom Duty and GST Accordingly

Conclusion

Bonded Manufacturing emerges as a strategic tool within India's economic landscape that offers a range of benefits to manufacturers, investors, and the nation as a whole. By providing incentives such as deferred customs duty and GST waivers, the scheme fosters an environment conducive to foreign collaboration, subsidiary establishment, and joint ventures, thus bolstering the country's position in the global market. The flexibility of the Bonded Manufacturing Scheme in allowing for both domestic utilization and international export of processed goods, coupled with its streamlined setup and minimal compliance requirements, further solidifies its appeal. However, consideration of the nature of manufacturing activities, the objectives, and the projected sales volume remains critical in determining the suitability of the scheme for businesses. As a cornerstone of the 'Make in India' initiative and a contributor to the country's improved ‘Ease of Doing Business’ index, Bonded Manufacturing fuels continued growth and competitiveness within India's manufacturing sector.