Government proposes safe harbour for component warehousing; Details

The Union finance ministry is considering a new safe harbour regime for component warehousing linked to manufacturing, a move that could significantly enhance India’s attractiveness as a global manufacturing and supply-chain hub, according to people familiar with the discussions.

Finance ministry sources said the proposal aims to provide tax certainty for high-volume, low-margin warehousing and parts-staging operations that support manufacturing ecosystems. Under the proposed framework, a deemed operating margin of around 2 per cent would be prescribed for eligible component warehousing activities, translating into an effective tax incidence of approximately 0.7 per cent

Officials said this outcome would be globally competitive and, in some cases, more attractive than comparable arrangements in regional manufacturing hubs such as Vietnam, where effective taxation for similar functions is estimated at close to 1 per cent . While the headline tax differential may appear marginal, policymakers believe the broader value lies in predictability and reduced regulatory friction.

“The intent is not just lower taxation, but certainty,” a senior official said. “Warehousing and component staging are routine, support functions. Prolonged transfer pricing disputes on such activities raise costs and create unnecessary risk for manufacturers.”

The proposed safe harbour is expected to significantly reduce exposure to transfer pricing litigation and audits by providing a clear, pre-agreed margin. This is particularly important for multinational manufacturers that operate complex supply chains, with components moving across borders multiple times before final assembly.

Industry executives have long argued that while India’s incentive schemes, including production-linked incentives (PLI), have improved the economics of manufacturing, operational uncertainty remains a concern. Transfer pricing disputes, retrospective adjustments and prolonged audits can erode cost advantages, especially in functions that generate thin margins.

Officials noted that warehousing and parts staging are inherently scale-driven businesses, characterised by high volumes and low profitability. In such cases, even minor tax disputes can have an outsized impact on return calculations and board-level investment decisions.

According to sources, the proposed regime reflects a shift in policy thinking placing greater emphasis on stable, predictable taxation rather than headline incentives alone. Predictability, they argue, often matters more to global manufacturers than marginal tax savings, particularly when choosing long-term supply-chain locations.

“With comparable or even better post-tax costs and significantly lower regulatory risk, India’s overall proposition becomes stronger than alternatives that may offer slightly lower taxes but higher uncertainty,” an official said.

The proposal is still under discussion, and details around eligibility, thresholds and implementation timelines are yet to be finalised. However, if adopted, the safe harbour regime could complement India’s broader push to embed itself deeper into global value chains and attract investments beyond final assembly into logistics, warehousing and component ecosystems.

For manufacturers reassessing supply chains in a post-pandemic, geopolitically fragmented world, policymakers believe such measures could make India a more compelling and resilient choice.