What is tooling and tooling cost all about?

For making bespoke components as per customer’s drawing, the factory needs to develop exclusive tooling (Die, Tool, Mold, Fixture, gauges, etc). As a normal practice, the customer pays for tooling cost and keep ownership (but tooling remains in the factory). Factory charges tooling costs upfront because amortization is too risky and can impact their cash flow.

A separate invoice has to be generated by the factory, asking the customer to pay for Tooling Development Cost. This blog is about the tax implication on this invoice (of tooling development charges). Is there a tax on tooling development costs in India (for the overseas customer)?

The issue is when Tooling Invoice is raised to overseas customers.

India has recently (in July 2017) observed the biggest indirect tax reform, called GST – Goods and Service Tax Act 2017. Tooling development is a business activity hence falls under the ambit of Indian GST law. It is very important to investigate the tax implication on tooling development cost if the customer is located outside India.

Zero-rating (No Tax) is well defined for Export of Goods and Service, but tooling…

When goods (manufactured using the same tooling) are exported from India, zero-rating (no tax) is applicable. This is clearly defined in GST law.

But for tooling development invoice, we find clauses (of GST) ‘in favor of’ and also ‘against’ zero-rating (no tax).

• Not in-favor – Section 2(5) of IGST Act: Goods (Tooling) are not moving out from India. Hence, not exported, so no zero-rating of tax.
• In-favor – Section 15(2) of the CGST Act: Tooling is part of the same contract, which results in exports, so zero-rating is to be applied. The entire value chain of exports is tax-free.

What businesses are doing now and where it is hurting?

In the case of non-clarity, businesses prefer to pay tax and avoid tax liability for the future. This safety step (by businesses) is increasing the tooling cost amount and making Indian suppliers less competitive.

So it is important to study and/ or provide clarity about this issue (Tax on tooling development cost in India).

Let’s find out how other countries are dealing with the same issue: