MOOWR defeats purpose of duty hike on capital goods

The government has raised the customs duty on import of some capital goods and issued notifications to raise the customs duty on many more capital goods in due course of time. The government has also kept alive the provisions that will enable many manufacturers to avoid paying the import duty on capital goods altogether.

The government says that it has started removing many exemptions to capital goods for various sectors like power, fertilizer, textiles, leather, footwear, food processin­­­g and fertilizers because they have hindered the growth of the domestic capital goods sector.  Most capital goods would attract 7.5% basic customs duty, except some advanced machineries that are not manufactured within the country. This would create employment opportunities, result in increased economic activity and double the production of capital goods by 2025, says the government.

However, Sections 58 and 65 of the Customs Act, 1962 read with Manufacture and Other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR) allow import of capital goods, even second hand capital goods, without payment of basic customs duty (BCD) and Integrated Goods and Services Tax (IGST). Such imports at zero duty are not subject to any export obligation. So, even the manufacturers who are engaged only in the manufacture of goods for domestic market can take the benefit of zero duty import of capital goods. They need to pay the duty (without interest) on the capital goods only at the time of their clearance in the domestic tariff area (DTA). If they re-export the capital goods after using them for a few years, they can avoid payment of the duties. These provisions allow import of even all inputs such as raw materials, components, consumables etc. without payment of duty at the time of imports. Payment of duty on inputs (without any interest) is necessary only at the time of clearance of goods manufactured in the bonded warehouse into the DTA.

Interestingly, the MOOWR does not restrict exporters from taking advance authorisations or authorisations under the Export Promotion Capital Goods (EPCG) scheme even if they have taken a license under Sections 58 and 65 of the Customs Act, 1962 for manufacture under bond. Still, the MOOWR is not very popular with many exporters because they cannot get the benefits of duty drawback at All Industry rates and under the Remission of Duties or Taxes on Export Products (RoDTEP) scheme.  Also, the exporters are not sure that the government will not amend the MOOWR to suit its convenience.

Even so, many manufacturers without any exports or who use mainly duty free inputs for export production are considering the MOOWR scheme because they can import capital goods without payment of any import duties. So, the domestic producers of capital goods are facing the prospects of more manufacturers opting for the MOOWR scheme and thus losing altogether the protection that the import duties give them, whether the duty rates are 7.5% or 10% or even higher.  

Quite obviously, the government wants to give more protection to domestic capital goods producers by raising the import duties and also wants to defeat that very objective by allowing duty free import of capital goods under the MOOWR scheme. While such a phenomenon is not unusual in the government, the capital goods manufacturers do not seem to have noticed the contradiction. That is unusual.

email:tncrajagopalan@gmail.com