Clarification about Re-Export of CG's under Lease agreement of imports

[Raju M]

Dear

We want to Import the machinery from Vietnam under a lease agreement of 5 years. After 5 years Machinery will send back to Origin. And there is no commercial value involved, only we will pay Lease amount yearly.

In this case, what is procedure and documents are required for Customs clearance ???

Do we need to pay Customs Duties??

Any duty exemption schemes are available ???

Please share your valuable suggestions.

[YAGAY andSUN]

In this matter following you need to work under following Legal and Regulatory Frame work:-

1. Customs Laws
2. GST Laws
3. FEMA Laws

The Lease charges i.e. consideration you will pay for leasing of Capital Goods i.e. Machinery, shall become the assessable value for import into India. You would need to pay Customs Duty Cess and IGST on it. IGST will be revenue neutral as ITC shall be available. Also check whether ASEAN FTA provide a particular HSN Code for getting machinery on lease for seeking any concession in Customs Duty or not.

 Import of Machinery on Lease for 5 Years from Vietnam to India – Customs, IGST, and FEMA Procedure

When importing machinery on lease from Vietnam to India for a period of 5 years, the process involves several steps under Customs, Integrated Goods and Services Tax (IGST), and Foreign Exchange Management Act (FEMA) regulations. Below is the detailed procedure:

1. Customs Procedure

The import of machinery on lease will follow the standard customs procedures, with some specific considerations for leased goods.

Steps for Customs Clearance:

1. Bill of Entry (BoE): The importer must file a Bill of Entry at the Customs Department for clearance. This should mention the machinery’s lease nature.
2. Classification and Valuation:
   • HS Code Classification: Identify the correct HS Code for the machinery being imported.
   • Customs Duty: Customs duty is applicable based on the classification of the machinery. You will also need to determine the Customs Value of the machinery, including freight, insurance, and other costs incurred during shipment.
3. Customs Duty Payment: The applicable Customs duties (Basic Customs Duty, IGST, etc.) must be paid. The machinery on lease typically does not involve permanent ownership transfer, but you must still pay customs duties on the import value.
4. Customs Bond/Guarantee: For machinery imported on lease, Customs may require a bond or bank guarantee as the machinery is not being permanently imported. This bond ensures that machinery will be re-exported after the lease period.
5. Importer Exporter Code (IEC): The importer needs an IEC number issued by the Directorate General of Foreign Trade (DGFT) to legally import machinery.

2. IGST (Integrated Goods and Services Tax)

IGST is applicable on the import of goods into India, including machinery, irrespective of whether it is imported on lease.

Steps for IGST Compliance:

1. Leased Machinery Import: The machinery being leased is treated as imported goods, and IGST is levied under the Goods and Services Tax Act (GST).
2. IGST Rate: The applicable IGST rate on the machinery will depend on the classification under the HS Code and the type of machinery. IGST rates vary from 5% to 28% depending on the type of machinery.
3. GST Filing: After paying IGST, the importer must ensure proper filing of GST returns, including GSTR-1 (details of outward supplies), GSTR-3B (summary of outward supplies and taxes paid), and any other relevant forms.
4. GST Credit: If the imported machinery is used for taxable business purposes, the importer may claim input tax credit (ITC) of the IGST paid on import, reducing their GST liability.

3. FEMA Procedure (Foreign Exchange Management Act)

FEMA governs the foreign exchange aspects of the transaction, especially since this involves cross-border leasing.

Key Considerations Under FEMA:

1. Lease Agreement: The lease agreement between the Indian company (lessee) and the Vietnamese company (lessor) should comply with FEMA guidelines and must be properly documented.
   • Lease Term: Ensure that the lease term (5 years in this case) is clearly mentioned.
   • Lease Payments: The payment terms for the lease (e.g., monthly, quarterly, or annually) should be clearly defined in the agreement. Lease payments are typically made in foreign currency (USD or VND).
2. Foreign Exchange Payment:
   • The payment for the lease must be made in accordance with FEMA and RBI guidelines.
   • Remittance Procedure: The Indian company (lessee) needs to route payments to the lessor through an authorized dealer (bank) under Liberalized Remittance Scheme (LRS) or another FEMA-compliant route.
3. FEMA Compliance:
   • For machinery leased from a foreign country, the lease agreement must also comply with the Reserve Bank of India (RBI) guidelines for cross-border leases.
   • The RBI may require approval or intimation regarding foreign exchange transactions, especially for cross-border leasing.
4. Capital Account Transactions: Under FEMA, a cross-border lease agreement involving machinery may be considered a capital account transaction, and thus the Indian company must comply with relevant provisions under FEMA for making payments.

4. Other Regulatory Considerations

• Bank Guarantee or Bond: Customs may ask for a bond or bank guarantee for machinery imported on lease, as it is not a permanent import but is meant to be re-exported at the end of the lease term.
• Documentation: Ensure proper documentation for customs clearance, including the lease agreement, invoices, shipping documents, and proof of payment for duties and taxes.
• Customs Declaration: Clearly mention in the customs declaration that the machinery is being imported on lease.

Conclusion

The process of importing machinery on lease from Vietnam into India requires compliance with Customs, IGST, and FEMA regulations. The key steps involve:

• Customs clearance (filing BoE, paying duties).
• IGST compliance (payment of taxes, claiming input tax credit).
• FEMA compliance (ensuring proper foreign exchange procedures and documentation for lease payments).

By ensuring proper regulatory compliance, the machinery can be imported seamlessly for the agreed lease period.

[Shilpi Jain]

For goods taken on lease and where IGST is paid on the lease amount, there is exemption available.

AI Summary

Company to Import Machinery from Vietnam Under Lease: Customs, IGST, and FEMA Compliance Required for Seamless Process. A company plans to import machinery from Vietnam under a five-year lease agreement, with no commercial value involved aside from annual lease payments. The process requires compliance with Customs, IGST, and FEMA regulations. Importers must file a Bill of Entry, pay applicable customs duties, and possibly provide a customs bond. IGST is levied on the lease, but input tax credit may be available. The lease agreement must comply with FEMA and RBI guidelines, with payments made through authorized channels. An exemption for IGST on lease payments may be available. Proper documentation and regulatory compliance are essential for seamless importation.