QUESTION

A client in India (A) is getting an item from Dubai. This item has to be attached to a machine and then exported full complete unit to the same client in Dubai. What is the best method to do this transaction? Kindly share your expert comments along with relevant Sections/notifications/circulars from GST & Customs.

ANSWER

Facts of the case:

Goods are being imported from Dubai. These will be attached to a machine and then the whole machine will be exported to Dubai. To find the best possible tax planning.

Interpretation:

Two mutually exclusive strategies available to you are as follows;
1. Getting duty free import against Advance Authorization under foreign trade policy.
2. Getting customs drawback under section 75 of Customs.

A cost and benefit analysis shall be drawn out to weigh which option is more favorable in your case. This is a question of fact and the answer will differ depending on the facts of the goods imported and exported. To illustrate;

Case 1 : Item imported is of Rs. 100 and exported machine is for Rs. 50,000. (Custom duty = 10%, IGST = 18%, AIR = 2%)
Option 1- Getting Advance Authorization and foregoing customs drawback.
Custom duty saved = 100 x 10% = 10
Total duty saved = 10
(IGST 19.8 is neither cost nor benefit since it is paid by you and then refunded to you)

Option 2- Getting Custom Drawback and foregoing Advance Authorization.
Custom Duty paid = 100 x 10% = 10
Customs drawback under section 75 = 50,000 x 2% = 1,000
Total drawback = 1000
Total cost = 10
Net saving = 990
(IGST 19.8 is neither cost nor benefit since it is paid by you and then refunded to you)

So, option 2 is more beneficial.

Case 2 : Item imported is of Rs. 20,000 and exported machine is for Rs. 50,000. (Custom duty = 10%, IGST = 18%, AIR = 2%)
Option 1- Getting Advance Authorization and foregoing customs drawback.
Custom duty saved = 20,000 x 10% = 2,000
Total duty saved = 2,000
(IGST 3,960 is neither cost nor benefit since it is paid by you and then refunded to you)

Option 2- Getting Custom Drawback and foregoing Advance Authorization.
Custom Duty paid = 20,000 x 10% = 2,000
Customs drawback under section 75 = 50,000 x 2% = 1,000
Net Saving = -1000
(IGST 3,960 is neither cost nor benefit since it is paid by you and then refunded to you)

So, option 1 is more beneficial.

Conclusion:

Two options available are Advance Authorization and Customs Drawback under section 75. The benefits under the two will change depending on what portion of the price of final product is constituted by the item which is being imported for it. (Reply dt. 24/02/2022)