The Union Budget for FY2026–27 has proposed a new safe harbour regime for component warehousing linked to manufacturing, a move the government believes could materially strengthen India's pitch to global manufacturers. The proposal is aimed at non-residents using bonded warehouses to support just-in-time (JIT) logistics, a critical requirement for electronics and other high-volume manufacturing sectors.
Under the proposal, income from component warehousing activities will be deemed to earn a fixed profit margin of 2% of the invoice value. This would result in an effective tax incidence of around 0.7%, according to finance ministry sources. The regime is slated to come into effect from April 1, 2026.
Competitive Tax Outcome
Finance ministry sources said the proposed effective tax rate is globally competitive and could undercut rates in key manufacturing hubs. Vietnam and similar jurisdictions are often cited as offering effective taxes of around 1% for comparable activities, making India's 0.7% outcome attractive even on a headline basis.
However, officials stressed that the real advantage lies beyond the marginal tax differential. “The proposal delivers a competitive post-tax cost while materially lowering regulatory and audit risk,” a finance ministry source said, adding that this balance is increasingly important for multinational supply chains.
Certainty Trumps Incentives
Unlike low-tax jurisdictions where benefits may hinge on incentives, substance tests, or periodic renegotiations, the proposed safe harbour is codified. According to sources, this significantly reduces transfer pricing disputes, litigation risk, and compliance friction.
This certainty is particularly relevant for warehousing and parts-staging functions, which are typically high-volume but low-margin. In such cases, predictable taxation and fewer disputes can be more valuable than headline incentives that come with regulatory uncertainty or delayed approvals.
Taken together, officials believe the proposal allows India to offer a comparable—or better—overall proposition than competing hubs, even if headline rates elsewhere appear similar.
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