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As Finance Minister Nirmala Sitaraman gears up for her record seventh consecutive budget under the new government, the Union Budget 2024-25 presents a golden opportunity to address long-standing customs issues. With a focus on solving legacy challenges, this budget is expected to pave the way for significant reforms that will enhance efficiency, promote local manufacturing, and support India’s ambitious economic visions such as ‘Digital Bharat’ and ‘Make in 'India.’
The Manufacturing and Other Operations in Warehouse Regulations (MOOWR) scheme, which aimed at incentivising domestic manufacturing with duty deferment, faced several challenges, be it the lengthy and complex procedural requirements for obtaining a MOOWR license or amendment in the Finance Act 2023 restricting IGST and GST compensation cess deferment. Notably, solar power-generating companies are prohibited from availing the MOOWR benefits to ensure a level playing field for domestic players. However, a recent Delhi HC decision struck down the notification, which restricted the benefit to the solar power units.
The government is expected to propose amendments to the law to remove the anomaly. While this decision relieved the solar companies, it posed a disadvantage for domestic manufacturers who face higher costs than solar units benefitting from duty deferment on the imported equipment. The government is also expected to ease the procedural requirements to authorise the MOOWR scheme and position India as a competitive manufacturing hub.
Furthermore, the government recently extended the RoDTEP benefit to advance authorisation holders, EOUs, and SEZ units. However, MOOWR units are still curtailed from availing the RoDTEP benefits. Considering the objective of the scheme, there is an expectation that the government may extend the benefit to the MOOWR units.
Another critical issue that needs addressing is the valuation of used capital goods when they are cleared for home consumption after a certain period. Currently, customs duty and taxes on these goods are determined based on their original import value. Accordingly, if the capital goods are removed after being used for ten years, customs duty and the IGST are still levied, even though the depreciated value of such capital goods may be nil. This creates a disadvantage for the MOOWR scheme compared to other schemes. In contrast, under GST, a deduction is allowed based on the period of usage, which reduces the transaction value for tax purposes at the time of supply. Implementing a similar depreciation-based valuation method for the MOOWR would level the playing field, making the scheme more attractive and widely used.
The industry is facing significant delays in the release of goods and denial of the Free Trade Agreement (FTA) benefits in cases of third-party invoicing. Pertinently, it covers bill-to-ship-to transactions where an FTA exists between India and the exporting country despite the selling party being located elsewhere. The key challenge lies in determining the eligibility of FTA benefits and establishing appropriate valuation criteria based on commercial invoices. It is the need of the hour to develop a clear and precise procedure to streamline the import process and interpret the value depicted in the commercial invoice as the definitive import value.
There is a pressing need for an amnesty scheme under customs to address the lingering disputes. The industry is eager to resolve prolonged litigation, and introducing such a scheme in the upcoming budget could be a game-changer for businesses. Historically, the government has successfully implemented similar schemes under direct and indirect tax laws. Such a scheme would offer a one-time window for firms to settle past cases, thereby clearing the litigation backlog and fostering a more compliant and transparent trade environment. This move would relieve the burden on adjudication authorities and provide much-needed clarity and confidence to the industry.
Initiatives such as faceless assessment in direct taxes and the automation of GST compliance and appeals have been pivotal in this transformation. However, the customs appeal process remains reliant on physical document submissions, which can compromise transparency and efficiency.
There is a critical need to modernise the customs appeal process through digitalisation. Transitioning to an online appeal system would facilitate quicker resolution of disputes, enable electronic submission of necessary documents, and ensure timely updates. These advancements would align with India’s broader objective of fostering a ‘Digital Bharat.’
Similarly, implementing a robust online refund mechanism for customs would guarantee prompt repayments, enhance cash flow, and alleviate operational business burdens. These initiatives are essential for creating a more transparent and business-friendly customs environment.
To strengthen the Make in India and Atmanirbhar Bharat initiatives, it is essential to harmonise customs tariffs with the production-linked incentive (PLI) schemes. Adjusting customs duties can effectively reduce imports and stimulate domestic manufacturing. The aim is to promote self-sufficiency, boost manufacturing capabilities within India, and attract investments in strategic sectors. One could expect changes in customs tariffs, which remain unchanged in the interim budget for 2024.
The current setup of the AAR under customs serves a limited purpose and is primarily based in Delhi, restricting accessibility for businesses across India. To enhance its effectiveness, the scope of the AAR should be broadened, with benches established at all major customs locations. This expansion would provide businesses with timely and region-specific rulings, improving clarity and compliance in customs matters.
It is also expected that the government may address the challenges businesses face while reassessing or amending the bill of entry, shipping bill modification, etc.
The Modi 3.0 government and the finance minister have strongly emphasised prioritising tax reforms as part of their 100-day agenda. Their focus includes fostering economic growth, promoting domestic investment, and simplifying tax compliances and procedures. Addressing these issues would undoubtedly encourage investment in critical sectors and streamline administrative processes to improve overall efficiency in tax management.