Section 65 owes its origins to the Sea Customs Act, 1878. The earliest notification issued by the then Central Board of Revenue (CBR) dates back to 1927.
Ever since the finance minister’s inspiring budget speech, a number of people have asked me to unravel, “to promote the ‘Make in India’ initiative…a revised system of importing duty-free capital goods and inputs for manufacture and export has been introduced, along with introduction of single point of approval under section 65 of the Customs Act”.
Section 65 owes its origins to the Sea Customs Act, 1878. The earliest notification issued by the then Central Board of Revenue (CBR) dates back to 1927. References to eleven such relics are available even today on the Central Board of Indirect Taxes and Customs (CBIC’s) website, all of which were springboards of early industrialisation. The Motor Vehicles (Manufacture-in-Bond) Rules, 1956 dated November 6, 1956, is a case in point, which sowed the seed of India’s automobile industry with the iconic Hindustan 14 being manufactured for the first time by the Birlas in 1957. Electric gramophones were first manufactured in India under ‘Rules for Manufacture of Complete Gramophone Machine (including Electric Gramophones) in Bond’—CBR notification number 9, dated the July 13, 1946, leading to the incorporation of the iconic Gramophone Company of India (let’s pause a minute here, to think when and how we lost momentum in electronic manufacturing).
All these notifications were rescinded with the enactment of the Customs Act, 1962. A brand new provision—section 65—came into existence and was expected to achieve more. Instead, the Indian trade administration became manically obsessed towards conserving foreign exchange. It sent the country into a downward spiral with some short-sighted and defeatist strategies, aimed at restricting imports, instead of looking at developing our capacity to export.
Section 65 went on to become an adjunct to the Export Oriented Units (EoU) scheme which was launched in 1980, but more as an instrument of restriction and control rather than export promotion. In addition, other complications like restrictions on sales in domestic tariff area and net foreign exchange obligations were also introduced. On top of that were administrative complications to overcome, such as an inter-ministerial board of approval, before you could actually get going. Outside of EoUs, requirement of import licences, high rates of customs duty and all sorts of regulatory clearances bred an inefficient and high cost industry, which continues to struggle till today when it comes to competing without tariff protection.
A quarter century later, the China-inspired model of special economic zones (SEZs) was conceived. Instead of copying the large and integrated SEZ model (five SEZs of China), India took a different path of building hundreds of SEZs. After a decade and half, we find that these contribute a mere 20% of our exports and that, too, with high import content and minimal value addition. The disappointing performance of SEZs can be attributed to legendary disagreements between regulators to controversies around land acquisitions, minimum alternate tax (MAT) and domestic market access.
Come 2019 and the finance minister’s Budget announcement almost seems like a soft launch of what is perhaps the biggest reform, ever. It has opened a whole new book for manufacturing in India.
The Central Board of Indirect Taxes and Customs issued a circular (number 38 dated October 18, 2018), without any fanfare, laying down procedures of the scheme and clarifying some of the most challenging issues relating to accounting as well as clearances into the domestic tariff area. In two and half pages, it has done away with geographical restrictions applicable to the setting up of units under special dispensation. The scheme provides that any unit located anywhere in India is eligible to apply to the commissioner of customs for approval to manufacture under bond. There are no typical complications like inter-ministerial boards of approval. Best of all, imports of raw materials and capital goods are all duty-free till their final clearance.
Thanks to GST, the complications under Central Excise law on what would or would not tantamount to manufacture are gone. Now, any ‘supply’ from such a unit is subject to GST or IGST, as the case may be. Complications arising out of interest on duty deferred, multiple bonds, and bank guarantees have all been sorted out. CBIC’s circular has gone the whole nine yards to prescribe a single bond as well as an integrated digitised accounting form. Most interestingly, there are no thresholds of net foreign exchange earnings or export obligations while, at the same time, no duty concessions for clearances into the domestic tariff area (DTA). Yes, and you do get unrestricted access to the DTA. Overall, CBIC’s scheme provides a level-playing field and fully leverages India’s strong suit—land, labour, entrepreneurship and innovation. Capital, we warmly welcome!
(Author is an IRS officer and retired chief commissioner of customs)