It seems from Union Budget 2026 proposals that India is ready to forgo some revenue now in order to import capital, technology and inventory and secure a cogent role in global manufacturing and supply chains over the medium to long term. Even though efforts have been made through previous budget proposals to make India more supply chain friendly, budget 2026 brings some radical proposals, showing India’s keenness towards becoming a global supply chain hub.
Union Budget 2026 has introduced a suite of customs and tax facilitation measures that legal and tax experts say represent the most cohesive attempt yet to position India as a credible alternative to established supply chain hubs in Southeast Asia.
Major reforms include a 0.7 percent effective tax safe harbour for component warehousing in bonded zones, elimination of officer approvals for warehouse operations, extension of duty deferrals from 15 to 30 days for high-tier Authorised Economic Operators (AEOs), toll manufacturing exemptions for non-resident equipment suppliers, cloud service tax holidays extending to 2047 and extension of customs advance ruling validity from three to five years.
India scored 38th position in the World Bank’s Logistics Performance Index 2023, having climbed six places from 44th in 2018, with its international shipments ranking improving dramatically from 44th to 22nd. With Production Linked Incentive schemes attracting investments of nearly INR 2 lakh crore across 14 sectors and creating over 12.6 lakh jobs, Budget 2026’s customs reforms strike right when India’s manufacturing infrastructure is expanding but supply chain friction remains a constraint.
The Budget’s introduction of a 0.7 percent effective tax safe harbour for non-residents engaged in component warehousing within bonded zones directly strikes on a long-standing uncertainty that deterred multinational enterprises from staging inventory in India for regional distribution.
“The 2025 presumptive taxation regime for electronics provided a lower effective taxation for non-residents supplying services and technology to electronic manufacturers, thereby supporting them in their manufacturing activities in India. Budget 2026 complements this framework by introducing a 0.7% effective tax safe harbour (2% profit margin on invoice value) specifically for non-residents engaged in component warehousing within bonded warehouse zones for electronic manufacturing,” explained SR Patnaik, partner (head – taxation) at Cyril Amarchand Mangaldas.
“The bonded-warehouse safe harbour offers non-residents tax certainty for component warehousing in bonded warehouses on a modest 2% margin, yielding an effective tax of ~0.7%—which directly supports just-in-time inventory staging for export-linked manufacturing,” said Ananya Sharma, group general counsel at JSW Steel. (Her views are personal and cannot be attributed to JSW Steel)
Budget 2025 proposed electronics presumptive regime under Section 44BBD was aimed at non-resident service and technology providers supporting electronics manufacturing, with a deemed-profit framework that reduced disputes but was not an “inventory logistics” incentive per se.
“Moving bonded warehouse movements to self-declaration and online intimation removes transaction-wise officer approvals, which typically reduces administrative dwell time for warehouse-to-warehouse transfers and helps exporters consolidate, re-route, and dispatch inventory faster,” Sharma added.
As of January 31, 2026, there are 1239 Tier 2 and 270 Tier 3 AEO entities in India, according to data available on the Central Board of Indirect Taxes and Customs. Budget 2026 extends duty payment deferral from 15 to 30 days for Tier 2 and Tier 3 AEOs, this proposal could function as a permanent interest-free credit line from the government for India’s most trusted importers.
“A 30-day window allows companies to import components, assemble/process them and possibly begin realising revenue from the sale before the duty is even paid. Further, by effectively holding on to duty funds for an extra two weeks, large-scale importers save significant amounts in short-term financing costs,” said Rajat Bose, partner at Shardul Amarchand Mangaldas & Co.
“While this deferral alone is unlikely to materially alter supply chain location decisions, read with other complementary incentives like bonded warehousing or PLI schemes introduced in prior budgets, it makes a compelling case for the players,” Patnaik added.
“Being a trust-based facilitation measure, this incentive has been extended to the more credible and compliant players with a proven track record, thereby incentivising the businesses to upgrade their compliance standards,” said Tushar Joshi, counsel at DMD Advocates.
Replacing Officer Gatekeeping and Locking in ‘Landed Cost’
The shift to self-declaration for bonded warehouse movements and the introduction of automated out-of-charge clearances for trusted importers represents a fundamental re-engineering of the velocity of goods.
“The exemption reduces procedural complexity at the point of capital equipment import, which can otherwise delay commissioning timelines. For contract manufacturing setups, especially in bonded zones, predictability in duty treatment during installation and scale-up phases is valuable. Whether this meaningfully accelerates manufacturing hubs will depend on consistent implementation and clear operational guidelines,” said Tushar Guderia, SVP, Head (Legal & Compliance) & Company Secretary at Blue Dart
“The 30-day deferral, alongside the removal of officer-level approvals for warehouses, signals that India is moving toward a ‘Green Channel’ model where the government trusts the ledger rather than the physical gatekeeper,” said Bose.
“Steps such as implementation of auto- out of charge to importers (subject to conditions) reflects the Government’s endeavour to promote more optimised and transparent processes, which are expected to make customs procedures more efficient,” Joshi observed.
The extension of customs advance ruling validity from three to five years directly addresses what multinational corporations describe as the “risk premium” they associate with India’s historically litigious tax environment.
“Most manufacturing companies operate on a 4-to-6-year lifecycle. A 3-year ruling often expired mid-production. This created an uncertainty where a company might suddenly face a different duty classification or valuation for the same component in Year 4, disrupting the entire cost model. A 5-year ruling will allow companies to lock in their ‘Landed Cost’ from the R&D stage through to the end-of-life of the product,” said Bose. “Customs disputes in India frequently stem from differing interpretations of HSN codes, for example, whether a part is a “printed circuit board” (lower duty) or a “telecom assembly” (higher duty).”
“This Budget amendment significantly reduces the risk of mid-cycle reclassification and thereby enhancing the predictability regarding duty incidence throughout the duration of key manufacturing programmes,” Patnaik explained.
“For supply chains, predictability is central: classification, valuation, and origin positions drive landed cost and compliance, and extending validity to five years supports longer-term pricing, sourcing contracts, and product lifecycle planning with fewer repeat filings. It also reduces dispute surface area, which is often what investors factor in when they compare jurisdictions for regional hubs,” added Sharma.
Budget 2026 announces a tax holiday until 2047 for foreign entities providing cloud services to global customers via Indian data centres, conditional upon routing domestic services through an Indian reseller and maintaining a 15 percent safe harbour margin for related data centre providers.
“Under the present framework, foreign cloud providers operating through Indian data centres face limited certainty for long-term infrastructure investments due to evolving data localisation norms and global AI demand,” said Patnaik. “Multinational enterprises can utilise low-cost Indian infrastructure and AI model training without any immediate tax leakage. Whilst this reform is primarily tax-driven, it supports augmentation of supply chain digitalisation by establishing cloud and data processing capacities in India,”
The Budget also raises the IT/ITeS safe harbour threshold from INR 300 crore to INR 2,000 crore under a unified IT services category with a 15.5 percent margin.
“The revision primarily enhances tax certainty rather than serving as a direct incentive. Clearer safe harbour thresholds reduce interpretational ambiguity and lower the frequency of transfer pricing disputes. For supply chains, especially where planning, procurement or analytics functions are housed within Global Capability Centres (GCCs), this predictability allows organisations to operate with greater stability,” noted Guderia.
Budget 2026 exempts non-residents supplying capital goods, equipment, or tooling to toll manufacturers in bonded zones for five years, addressing existing ambiguity in the tax treatment of non-resident asset owners.
“Tooling and equipment are often the ‘gating item’ for contract manufacturing, and this exemption reduces tax friction for OEMs placing high-value tooling into India for bonded-zone tolling arrangements. That said, acceleration will depend on execution at the edges—customs processes for admission/monitoring, clear documentation of ownership/use, and smooth movement rules, so the operational rulebook matters as much as the headline incentive,” said Sharma.
“The progression across recent budgets reflects a gradual shift toward risk-based supervision, digital trade facilitation, and infrastructure alignment. This policy continuity is important, as supply chain hubs evolve through steady procedural improvement rather than isolated announcements,” concluded Guderia.
