IGST on Transfer of Goods Between Two MOOWR Units: Whether GST is Payable?

The Manufacturing and Other Operations in Warehouse Regulations (MOOWR), 2019 provide significant customs duty deferment benefits by allowing imported goods to be stored and manufactured within a bonded warehouse. However, one issue that frequently arises in practice is whether the transfer of goods from one MOOWR unit to another attracts Integrated Goods and Services Tax (IGST).

The answer depends on the nature of the goods being transferred. While the transfer of imported goods that continue to remain under customs bond enjoys a different tax treatment, the position changes once those goods have undergone manufacturing.

This article analyses the legal position under the GST and Customs laws.

Legal Framework

Section 7(1) of the Central Goods and Services Tax Act, 2017 ("CGST Act") defines the term "supply" to include all forms of sale, transfer, barter, exchange, licence, rental, lease or disposal of goods or services made for consideration in the course or furtherance of business. Consequently, every sale is ordinarily liable to GST unless specifically excluded.

One such exclusion is contained in Paragraph 8(a) of Schedule III to the CGST Act, which provides that:

"Supply of warehoused goods to any person before clearance for home consumption" shall be treated neither as a supply of goods nor as a supply of services.

For this purpose, the expression "warehoused goods" has the meaning assigned under the Customs Act, 1962, namely imported goods deposited in a customs bonded warehouse.

Further, CBIC Circular No. 3/1/2018-IGST dated 25 May 2018 clarifies that the transfer of warehoused goods before their clearance for home consumption is outside the scope of GST. Instead, IGST becomes payable only at the time of filing the Ex-Bond Bill of Entry for home consumption. The Circular also clarifies that any mark-up or value addition made while the goods remain under bond becomes part of the assessable value for levy of IGST at the time of ex-bond clearance.

Scenario 1: Transfer of Imported Goods as Such Between Two MOOWR Units

Consider a situation where a MOOWR unit imports raw materials and subsequently transfers those imported goods to another MOOWR unit without carrying out any manufacturing or processing. The transfer may even be made at a profit by adding a commercial mark-up.

In such circumstances, the imported goods continue to retain their character as warehoused goods, since they remain under customs bond and have not been cleared for home consumption.

Accordingly:

• The transaction falls within Paragraph 8(a) of Schedule III to the CGST Act.

• The transfer is treated neither as a supply of goods nor as a supply of services.

• No IGST is payable on the transfer between the two MOOWR units.

• The purchasing MOOWR unit will discharge customs duty and IGST only when the goods are eventually cleared for home consumption through an Ex-Bond Bill of Entry.

• Any mark-up added by the seller forms part of the assessable value on which IGST will ultimately be calculated at the time of ex-bond clearance, in accordance with Section 3(8A) of the Customs Tariff Act, 1975.

Therefore, the mere trading of imported warehoused goods between two MOOWR units does not attract GST, provided the goods continue to remain under customs bond.

Scenario 2: Transfer of Manufactured Goods Between Two MOOWR Units

The legal position changes where the imported goods have undergone manufacturing or processing under Section 65 of the Customs Act, resulting in the manufacture of a new product.

Once manufacturing is completed, the goods being transferred are no longer the original imported warehoused goods. Consequently, they cease to qualify as "warehoused goods" for the purposes of Paragraph 8(a) of Schedule III.

As a result:

• The Schedule III exclusion is no longer available.

• The transfer constitutes a "supply" under Section 7(1) of the CGST Act.

• IGST becomes payable on the transaction value charged by the supplying MOOWR unit.

Accordingly, where one MOOWR unit manufactures finished goods and subsequently sells those goods to another MOOWR unit, the transaction would ordinarily be liable to IGST.

Practical Considerations

Businesses operating multiple MOOWR facilities often transfer inventory between manufacturing locations for operational or commercial reasons. From a tax planning perspective, the timing of such transfers becomes critical.

If imported goods are transferred before any substantial manufacturing activity is undertaken, they continue to retain their status as warehoused goods. Consequently, the benefit available under Schedule III remains available.

On the other hand, once manufacturing is completed, the finished products are likely to fall outside the scope of the Schedule III exclusion, resulting in an immediate GST liability on the inter-unit sale.

Businesses should therefore carefully evaluate the stage at which inventory is transferred between MOOWR units to optimise tax efficiency while remaining compliant with the law.

Conclusion

Where commercially feasible, imported goods should be transferred to the purchasing MOOWR unit before manufacturing or processing commences.

The purchasing MOOWR unit can thereafter undertake manufacturing under Section 65 of the Customs Act.

This structure offers two important advantages:

• Continued deferment of Basic Customs Duty and IGST until the goods are cleared for home consumption; and

• No IGST on the inter-unit transfer of imported warehoused goods.

Such transaction planning can significantly improve cash flow without compromising legal compliance.