The GST Council may give export treatment to overseas contract manufacturing even when goods remain in India, potentially reducing tax cascading for electronics and semiconductor companies.
The GST Council is considering treating contract manufacturing for overseas companies as an export even when finished goods remain in India, a proposal expected to be discussed at its October 7 meeting. The move could make India more competitive for electronics and semiconductor processing, assembly, testing and other outsourced manufacturing work.
The proposal seeks to address a place-of-supply anomaly rather than create a new tax concession. Currently, work performed for an overseas company and paid for in foreign exchange may not receive export treatment when the processed goods remain in India. Under the proposed change, the place of supply would follow the overseas customer’s location instead of where the work is performed, potentially allowing the supply to qualify as an export even when goods stay in India.
The arrangement is relevant to semiconductors and electronics, where overseas companies may send raw materials or semi-finished goods to Indian units for processing before directing them to buyers in India. The proposed treatment could also cover repair, testing, certification, storage and job work.
“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,” said Nimish Bhatia, Partner, PW&Co LLP.
