The revamped Section 65 scheme of the Customs Act promises to strengthen the supply chain to increase as well as fulfill demand.
Gauging the impact of the COVID-19 pandemic is still an evolving exercise, but without a doubt, its fallout has been negative and widespread across the globe. Challenges arose in the form of export prohibitions and restrictions, which some countries introduced to mitigate critical shortages of medicines and equipment.
In April, the WTO expressed a deep concern over this unsettling trend given that all countries would depend on global supply chains to source critical products to meet the public health challenge. The demand for medical products as well as the disruptions to international transport were also at their peak at the time.
Amidst all this, India has evinced a clear ability to repurpose resources to meet the challenges thrown up — be it in automobile manufacturers making ventilators or in the quick scaling up of production of Personal Protection Equipment (PPE) to now become one of the largest producers of PPE kits. Indian pharmaceutical companies are active partners in working to supply the world with an effective vaccine against the virus; startups are looking to pivot into the healthcare and ed-tech sectors; e-tailing has gone hyper-local in food delivery; new stores for essentials have been created and so on.
In terms of policy, Make in India now has a new overlay and enrichment in the form of the Atmanirbhar Bharat Abhiyan. Self-reliance, going by the experience of today, is a reasonable and prudent aspiration to have. A notable component in Atmanirbhar Bharat is the determination to strengthen the supply chain to increase as well as fulfil demand. This objective is coextensive with the proposition that the revamped Section 65 scheme of the Customs Act – that of “Manufacture and Other Operations” in a warehouse — promises to deliver. The professed intention of the revamped scheme is to support Make in India. A warehouse under the scheme is also a manufacturing facility.
An entity operating under this scheme can import both raw materials and capital equipment into the bonded Customs Warehouse. Import duties leviable stand deferred at the point goods are entered into the warehouse. The warehoused goods can be used to make both export and home market supplies. There are no fixed export obligations nor any conditions towards a net foreign exchange realisation.
When the resultant output is cleared to the home market, the deferred customs duties (including the IGST component) need to be paid in proportion to amount of warehoused goods used up in making this supply. If the resultant goods or the warehoused goods are exported, then the deferred duties on them stand waived. There is no duty payment on capital goods till the time they remain in the warehouse.
Domestic raw materials and capital goods, too, can be procured as normal supplies and used in the warehouse. The entities can also engage a job worker to have better production efficiencies. The application process is simple and online. The system is premised on a digital record-based controls as far as compliance is concerned. All benefits available under GST laws are also available to such an entity, including seeking export refunds. They can be located anywhere in the country and not necessarily in demarcated zones.
The scheme is particularly suitable with those entities with large import volumes — savings are in terms of working capital requirements, a better managed supply chain procuring optimum amounts at a time when prices are right.
The scheme under Section 65 has good parallels elsewhere in the world. In the Indian context, the added attractions are of a large market, the stability of India’s democratic institutions, cost-efficient manpower and the large number of India’s FTAs. The new Production Linked Incentive (PLI) schemes announced for the electronics manufacturing and pharmaceuticals sectors can also be usefully combined with the Section 65 scheme for added benefits. The scheme thus has a wider locus of interest in supporting manufacture, and growth in employment and incomes rather than an overwhelming concern with promoting exports alone.
Customs warehouses have been around for more than 300 years. On their own, they allow for a substantial operational flexibility in the supply chains. Newer technologies in the sphere of supply chain management make for more efficient processes and functioning. The potential customers also get a deeper view of what is available, including empty shelves. Shifting customer priorities and increased expectations translate a product unavailability either into a lost business or deficient service in case of a needless downtime waiting for spares. The continuing growth of the rural areas and smaller cities worldwide indicates a new megatrend that encourages using the possibilities of a well-located warehouse to cater to hitherto unserved areas; and of producing closer to the market.
As a recommendation, it may well make a good strategy for both existing as well as new businesses to explore and leverage the intrinsic advantages of the Section 65 scheme to gain in both productivity and competitiveness.