MOOWR Scheme: Can Depreciation Under the Income Tax Act Still Be Claimed on Imported Capital Goods?

The Manufacturing and Other Operations in Warehouse Regulations, 2019 (MOOWR Scheme) has emerged as one of the most beneficial customs schemes for manufacturers in India. By allowing the deferment of customs duties on imported capital goods and raw materials, the scheme significantly improves cash flows and reduces the upfront cost of imports.

One imported feature of the MOOWR Scheme is that depreciation is not allowed while calculating customs duty on capital goods.

This means that irrespective of whether the machinery has been used for 10, 15 or even 20 years, the deferred customs duty is calculated on the original assessable value at the time of import.

This often leads businesses to ask whether the same restriction applies under the Income Tax. Another common concern is the accounting and tax treatment of deferred customs duty when it eventually becomes payable in case of capital goods.

This blog addresses these practical issues.

Query 1: Can Depreciation Under the Income Tax Act Still Be Claimed? Since depreciation is not recognised under customs law for MOOWR capital goods, can businesses continue claiming depreciation in their books of accounts and under the Income Tax Act?

Yes. Depreciation under the Income Tax Act, 1961 can continue to be claimed on the capitalised value of the asset, excluding the deferred customs duty component.

As per applicable accounting principles:

• Non-refundable duties and taxes generally form part of the cost of a fixed asset.

• However, under the MOOWR Scheme, customs duty is not paid at the time of import.

• Since the liability is merely deferred and not discharged, the customs duty does not become part of the asset's cost at the time of capitalisation.

Accordingly, the asset is capitalised excluding the deferred customs duty and depreciation under the Income Tax Act is claimed on this capitalised value. The customs law restriction on depreciation has no impact on depreciation allowable under the Income Tax Act.

Query 2: Is the Deferred Customs Duty Capital Expenditure or Revenue Expenditure?

Another common question is whether the customs duty paid after several years should again be capitalised as part of the cost of the machinery.

The deferred customs duty should generally be treated as Revenue Expenditure and not as capital expenditure.

By the time the customs duty becomes payable:

• The machinery is normally being sold, disposed of or cleared into the DTA;

• The asset is simultaneously de-capitalised from the books; and

• Therefore, there is no continuing asset to which the duty can be added.

Accordingly, the deferred customs duty is generally recognised as an expense at the time the liability arises rather than being capitalised.

Conclusion

The MOOWR Scheme offers substantial cash flow benefits to manufacturers by deferring customs duties on imported capital goods. While customs law specifically disallows depreciation for the purpose of calculating deferred customs duty, businesses can continue claiming depreciation on the capitalised value of imported machinery in accordance with the provisions of the Income Tax Act. Businesses should carefully evaluate the accounting and tax treatment of such transactions to ensure compliance while maximising the intended benefits of the MOOWR Scheme.