GST Council may allow export tag for overseas contract manufacturing
Contract manufacturing for an overseas company is likely to count as an export even if the finished goods stay in India, sources familiar with the proposal said ahead of the Goods and Services Tax Council meeting on October 7.
The change seeks to address a place-of-supply anomaly rather than create a new concession. Work done for an overseas company and paid for in foreign exchange was meant to qualify as an export. It did not get that treatment if the goods remained in India. The proposal seeks to close this gap, according to sources.
The arrangement is common in semiconductors, electronics, pharmaceuticals and chemicals. An overseas company sends raw material or semi-finished goods to a unit in India. The unit processes them, and the goods then go where the overseas company directs, often to a buyer in India. Tax today follows the place where the work is done. Under the proposal, it would follow the location of the customer. The supply would then qualify as an export whether or not the goods leave India. The same treatment is expected for repair, testing, certification, storage and job work, and not only for manufacturing, people familiar with the proposal said.
The timing matters because global manufacturers are shifting parts of their supply chains. The proposal would put an Indian processing or assembly unit on the same tax footing as a unit elsewhere, sources indicated.
A separate proposal covers goods sold to an overseas buyer but delivered, on that buyer’s instruction, into a special economic zone for storage or processing. Such a sale is expected to be treated as an export if the payment is in foreign exchange, or in rupees where the Reserve Bank of India allows it, according to sources.
The Council is also expected to take up waste and scrap. Registered dealers selling plastic waste, electronic waste, scrap tyres or used cooking oil to other registered dealers would face a 2 per cent tax deducted at source. If the seller is not registered, the buyer would pay the tax. The same route is already used for metal scrap, sources familiar with the proposal said. The aim is to collect the tax when the material enters organised trade, bring informal businesses into the system and put registered recyclers on an equal footing.
An outright sale of intellectual property is expected to be treated as a service, the same as a licence, settling a long-running question over how such a sale should be classified, sources said.
“If the place of supply for work performed for foreign buyer is shifted from place of performance or place of delivery to location of the customer, it will remove tax cascading from a number of new age business models. These models include bill overseas ship to Free Trade Warehousing Zone (FTWZ), bill overseas ship to Special Economic Zone (SEZ! for further processing. Removing this cascading will make local manufacturing more competitive in the spirit of keeping exports tax-free,” Nimish Bhatia, Partner, PW&Co LLP.
