Why FTWZs and Bonded Warehouses Matter When You Import

[Pradeep Reddy]

For businesses dealing with imported goods, managing working capital—especially costs related to Basic Customs Duty—can be a major challenge.

Free Trade Warehousing Zones (‘FTWZs’) offer a smart solution by providing duty-free storage, simplifying customs procedures, and reducing financial strain. These specialized zones are governed by the Special Economic Zones (‘SEZ’) Act, of 2005.

Additionally, Customs Bonded Warehouse (‘CBW’) offers another option for deferring customs duties until goods are moved into the domestic market.

This article will explore how FTWZs and CBWs can help businesses dealing with imported goods manage costs and improve efficiency.

What is an FTWZ?

FTWZs are specialized zones within SEZ. These zones enable global trade through warehousing, trading, and re-exporting, simplifying customs procedures.

Cost-efficient option to avail benefits of FTWZ

Although setting up a dedicated FTWZ facility can be an expensive affair, businesses can lease or rent space from existing FTWZ units to enjoy tax incentives and streamlined logistics without high operational costs.

In a typical model, a Trader/Importer enters into a service agreement with an independent and unrelated third-party Warehousing Service Provider (‘FTWZ unit’) for storage of goods and incidental services. The goods are shipped from a foreign country to the FTWZ unit, where they are stored based on the IEC and GST registration of the FTWZ unit without any obligation to pay customs duty or GST.

Upon sale, the Trader invoices the domestic customer (‘DTA buyer’), who then clears the goods and discharges the customs duty and GST. The Trader receives the sale consideration.

If the goods are meant for manufacture, the importer can clear the goods to their factory as per the production schedule, upon paying the customs duty and GST.

Key Features of FTWZs

1.  Duty-Free Trade

FTWZs are deemed to be outside India’s customs territory, with customs duties and IGST payable only when goods enter the domestic market. Goods for re-export remain tax-free.

2.  Strategic Infrastructure

FTWZs are located near key ports and transport hubs, providing state-of-the-art facilities for warehousing and transport. Major FTWZs in India include:

• Arshiya (Nhava Sheva, Maharashtra)
• J. Matadee (Sriperumbudur, Chennai)

3. Flexible Trading

FTWZs allow businesses to:

• Re-export goods without duties
• Sell domestically with applicable taxes
• Conduct transactions in foreign currencies, adapting to global demands

4. Value-Added Services

FTWZs enable activities such as packaging, labeling, assembly, refrigeration, and kit assembly (CKD/SKD). Other services include repackaging, kitting, re-labeling, assembling, lashing, shrink wrapping, strapping, palletization, bottling, clubbing, quality checking, testing, combination packing, and handling.

5.  Just-in-Time (JIT) Delivery

FTWZ enables businesses to adopt JIT delivery, aligning raw-material orders with production schedules and making the supply chain more efficient.

6.  Lessen License Burden

No Drug Licenses/BIS/FSSAI/approvals/certifications are required for importing goods into FTWZs. These certifications are only needed if goods are taken out for Domestic Tariff Area (‘DTA’) sales.

7.  Long-Term Storage Benefits

Goods can be stored without paying customs duty as long as the Letter of Authorization is valid, allowing for flexible inventory management.

8.  Warehousing for Global and Domestic Trade

FTWZs can hold, dispatch, re-sell, re-invoice, or re-export goods on behalf of foreign suppliers, foreign buyers, or DTA suppliers and buyers, providing solutions for both international and domestic trade. Thereby FTWZ allows foreign companies to operate in India without having a permanent establishment

Transaction in FTWZ: Corresponding GST and Customs implications

1. Import goods into FTWZ and sell to customers in the Domestic Tariff Area

• No customs duty and IGST are payable upon import, it is payable only when goods are sold to DTA buyers.
• Goods sold to DTA buyers are treated as imports.
• DTA buyers can file a Bill of Entry or authorize FTWZ to file on their behalf.
• DTA buyers can purchase goods without payment of customs duty and IGST under schemes like Advance Authorization (‘AA’) or Export Promotion of Capital Goods (‘EPCG’).
• Payment from DTA buyers need not be in foreign currency.
• Foreign suppliers selling to domestic buyers from FTWZ do not require GST registration.

2.  Import goods into FTWZ and sell to another FTWZ or SEZ--Transactions between FTWZs or SEZs are exempt from customs duty and GST, however, must be settled in foreign currency.

3.      Import goods into FTWZ and Re-export to a Foreign Country--Goods imported into FTWZ and re-exported are exempt from customs duty and GST, however, must be settled in foreign currency.

4.      Transfer from DTA to FTWZ for Export

• DTA suppliers can transfer goods to FTWZ as zero-rated supplies under GST, meaning no GST is applicable.
• DTA suppliers can claim export incentives such as GST refunds, duty drawback, and AA/EPCG benefits upon filing a Bill of Export.

Customs Bonded Warehouse– An Alternative to FTWZ

A Customs Bonded Warehouse allows businesses to store imported goods. Customs duty is deferred and paid only when goods are cleared for domestic use. If goods are exported, no customs duty shall be payable.

S. No	Aspect	FTWZ	CBW
1	Can a foreign entity hold inventory	Yes	No
2	Customs Duty	Deferred at the time of import, payable upon clearance for home consumption	Same benefit allowed.
3	Interest-free storage period	Can be stored as long as Letter of Authority (‘LOA’) is valid.	Interest-free for 3 months; 15% p.a. interest thereafter.
4	Temporary Removal (‘TR’)	TR possible in FTWZ for up to 120 days for exhibitions.	TR not allowed.
5	Re-export	Allowed, customs duty deferred and waived off upon export.	Allowed, with the same benefit.
6	Activities Allowed	Assembling, re-packing, handling, quality assurance, etc.	Limited scope of activities. Repacking/packing is not allowed
7	Storage of Goods procured from DTA	Allowed.	Not allowed.
8	Dollar Billing to DTA Buyers	Allowed.	Not allowed.
9	Consolidation/Partial Sales	Allowed in FTWZ.	Not allowed in CBW.
10	Responsibility to comply with Customs rules	FTWZ Unit operator	Trader/Importer
11	Maximum storage period	As long as LOA is valid.	One year
12	Masking of purchase value to DTA	Possible	Not possible
13	Can DTA buyer avail benefits of free trade agreement	Yes	Yes

Conclusion

FTWZs and CBWs both offer cost-saving opportunities for businesses in global trade. FTWZs provide more comprehensive services, including value-added activities and longer storage periods, while CBWs offer a simpler solution for deferring customs duties.

Choosing the right option depends on your business needs, but both can significantly enhance supply chain efficiency and reduce operational costs.

The author is a Chartered Accountant with over a decade of experience advising Indian and multinational clients. He currently runs Unnathi Partners based out of Bengaluru, a consulting firm specializing in accounting, tax, and regulatory consulting services.

He is reachable at [email protected].