The Goods and Services Tax Council is deliberating a proposal to classify contract manufacturing for overseas firms as exports, aiming to resolve long-standing place-of-supply mismatches and align with international best practices, potentially transforming the treatment of services like manufacturing and clinical trials.
The Goods and Services Tax Council is expected to examine a proposal that would treat contract manufacturing for overseas companies as an export even when the finished goods do not leave India, according to people familiar with the discussions. The change is aimed at fixing a place-of-supply mismatch that has long left some cross-border arrangements taxed as domestic supplies despite being paid for in foreign exchange.
The proposal would matter most for industries that rely on India as a processing or assembly hub, including semiconductors, electronics, pharmaceuticals and chemicals. In those cases, an overseas company often ships raw materials or semi-finished goods to an Indian unit for processing before directing the finished product elsewhere, sometimes even to a buyer in India. Under the proposed framework, the tax treatment would depend more on the customer’s location than on where the work was performed, which could bring export-like treatment to services such as manufacturing, repair, testing, certification, storage and job work. The same logic would also be extended to contract work done for overseas sponsors in clinical trials, according to a separate Business Standard report.
The move would also fit a broader effort to reduce tax friction in supply chains that cross borders. Economic Times reported that officials are considering a wider clarification of export rules for services, including work routed through overseas branches of Indian companies, with the aim of cutting disputes over where a supply takes place and how foreign exchange earnings are treated. In practical terms, that could help exporters in sectors such as information technology, consulting and engineering avoid tax cascading, where tax paid at one stage raises costs at the next.
Comparable treatment already exists in other jurisdictions. Singapore’s Inland Revenue Authority, for example, operates a scheme for approved contract manufacturers that can disregard certain value-added activities when goods are exported or delivered to an overseas customer’s designated buyer. That approach is often cited as a model for simplifying compliance in manufacturing networks that serve foreign principals.
The council is also expected to consider a separate set of changes covering goods delivered into special economic zones at an overseas buyer’s instruction, as well as rules for waste, scrap and intellectual property. According to the proposal, sales of plastic waste, electronic waste, scrap tyres and used cooking oil between registered dealers would attract a 2 per cent tax deducted at source, while unregistered sellers would trigger tax collection by the buyer. An outright transfer of intellectual property is also expected to be treated as a service, bringing it into line with the way licences are already taxed and settling an issue that has remained open for years.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
