Indirect Tax Laws and Practice · Manufacture in Bond

Exemption of Imported Materials under Section 66 of the Customs Act

Updated 11 October 2026 · Fact-checked

Section 66 lets the Central Government exempt imported materials from the whole or part of the excess rate of duty, where the materials are used under section 65 to manufacture goods in a warehouse and the materials carry a higher duty rate than the finished goods. It needs a notification and a domestic industry interest.

Understand Exemption of Imported Materials under Section 66

Manufacture in bond means the owner of warehoused goods carries on a manufacturing process or other operation inside the warehouse. Section 65 allows this with the permission of the Principal Commissioner or Commissioner of Customs, subject to prescribed conditions. Duty is not paid when the materials enter the warehouse. It becomes payable when goods are cleared.

A problem can arise. Sometimes the imported raw material attracts a higher rate of duty than the finished goods made from it. This is an inverted position. A domestic manufacturer would then be worse off than a buyer who imports the finished goods directly.

Section 66 solves this. The Central Government may exempt the imported materials from the whole or part of the excess rate of duty. The excess is the amount by which the rate on the materials exceeds the rate on the finished goods.

The power is not automatic. Four conditions must all be met: (1) the materials are used in accordance with section 65 for manufacture in a warehouse; (2) the rate of duty on the materials exceeds the rate on the goods; (3) the Central Government is satisfied that exemption is necessary in the interests of the establishment or development of a domestic industry; (4) the exemption is given by a notification in the Official Gazette.

Keep section 66 apart from its neighbours. Section 65 gives permission to manufacture and deals with waste or refuse. Section 68 deals with clearance for home consumption, which needs a bill of entry, payment of import duty, interest, fine and penalties, and an order of the proper officer. Section 66 only reduces the duty rate on the materials. It does not replace those clearance steps.

Key rules to remember

Excess rate of duty: Excess rate = Rate of duty on imported materials − Rate of duty on finished goods; Section 66 operates only when this is positive. The exemption can cover the whole or part of the excess.
Conditions for exemption under section 66: Materials used under s.65 + material rate > goods rate + Central Government satisfied (domestic industry) + Gazette notification; All four elements are needed. The power is by notification, not an individual officer's order.
Clearance for home consumption (section 68): Bill of entry presented + import duty, interest, fine and penalties paid + order of proper officer; Warehoused goods can be cleared only when all three are met. The order may also be made electronically on risk evaluation.
Waste or refuse (section 65(2)): Exported: duty remitted on the warehoused goods contained in the waste, if the waste is destroyed or duty is paid on it as if imported in that form. Cleared for home consumption: duty is charged on that quantity.; Applies to waste or refuse arising from the operations in the warehouse.

How to solve Exemption of Imported Materials under Section 66 questions

Use this order for any question on exemption of imported materials in bonded manufacture.

1Check that the manufacture is in a warehouse under section 65, with the Commissioner's permission and the prescribed conditions.
2Identify the imported materials and the finished goods, and note the rate of duty on each.
3Compare the rates. If the material rate does not exceed the goods rate, section 66 has nothing to exempt.
4If it does, compute the excess rate.
5Check for a Gazette notification and the Central Government's satisfaction that it serves a domestic industry. Without a notification, no exemption applies.
6Apply the exemption to the whole or part of the excess, exactly as the notification says.
7Treat clearance or export separately: for home consumption apply section 68 conditions, and treat waste or refuse under section 65(2).
8State the conclusion clearly, with the section numbers.

Quickest way: Rate comparison and notification check

When to use it: Use in MCQs and short case questions where rates and a notification are mentioned.

Write the two rates side by side: material and finished goods.
If material rate ≤ goods rate, answer: no section 66 relief.
If material rate > goods rate, ask: is there a notification and a domestic industry interest?
Only the excess can be exempted, never more.
Quote section 66 for exemption, section 65 for permission and waste, section 68 for clearance.

Common mistakes in Exemption of Imported Materials under Section 66

Saying the exemption is available whenever goods are made in a warehouse.
Students link bonded manufacture with automatic relief.
Fix: Remember the extra conditions: higher material rate, Central Government satisfaction, domestic industry interest and a Gazette notification.
Exempting the full duty on materials instead of only the excess.
The word exempt suggests total relief.
Fix: Section 66 reaches only the excess rate, in whole or in part. The duty up to the finished goods' rate stays payable.
Confusing section 66 with section 65.
Both deal with manufacture in a warehouse.
Fix: Section 65 allows manufacture and deals with waste or refuse. Section 66 exempts imported materials from excess duty.
Thinking the Commissioner can grant the exemption.
Section 65 permission comes from the Commissioner.
Fix: Section 66 power belongs to the Central Government and is used by Gazette notification.
Forgetting the section 68 requirements on clearance.
Students think an exemption removes clearance formalities.
Fix: Home consumption clearance still needs a bill of entry, payment of duty, interest, fine and penalties, and the proper officer's order.

Worked examples

Example 1

Imported materials used in a bonded warehouse under section 65 attract customs duty at 20%. The finished goods made from them attract 12%. The Central Government, to develop a domestic industry, notifies exemption of the full excess rate. What duty rate applies to the materials?

Show the solution

Material rate is 20% and goods rate is 12%. The material rate exceeds the goods rate, so section 66 can apply.
Excess rate = 20% − 12% = 8%.
The notification exempts the whole of the excess, so 8% is exempted.
Rate payable on the materials = 20% − 8% = 12%.

Answer: The materials bear duty at 12%, the same as the finished goods. Section 66 applies because of the higher material rate and the notification.

Example 2

Materials are used in bonded manufacture under section 65. The materials attract 10% duty and the finished goods 15%. The owner asks for exemption under section 66. Advise.

Show the solution

Compare the rates: material 10%, goods 15%.
Section 66 needs the material rate to exceed the goods rate. Here it is lower.
There is no excess rate, so there is nothing to exempt, even if the Central Government wished to help a domestic industry.
On clearance for home consumption, the section 68 conditions must still be met.

Answer: Section 66 does not apply because the material rate is lower than the goods rate. No exemption can be given under it.

Exam tips

In MCQs, check the rate comparison first. Many options fail on that condition alone.
Use the phrases: excess rate, Central Government, domestic industry, Official Gazette notification.
If the question covers clearance, also cite section 68's three requirements.
For waste or refuse, remember section 65(2) and the proviso on destruction or payment of duty.
Give a one-line conclusion; do not cite sections you are unsure of.

Practice questions from Manufacture in Bond

Exemption of Imported Materials under Section 66: frequently asked questions

What does section 66 of the Customs Act do?

It empowers the Central Government to exempt imported materials used in warehouse manufacture from the whole or part of the excess rate of duty. This applies where the duty rate on the materials exceeds the rate on the goods made.

Who grants the exemption under section 66?

The Central Government grants it by a notification in the Official Gazette. It must be satisfied that the exemption is necessary for establishing or developing a domestic industry.

Is duty payable when goods made in bond are cleared for home consumption?

Yes. Under section 68, clearance needs a bill of entry, payment of import duty, interest, fine and penalties, and an order of the proper officer. Any section 66 exemption only reduces the rate.

What happens to waste in bonded manufacture?

Under section 65(2), if the resulting goods are exported, duty is remitted on the warehoused goods contained in the waste, provided the waste is destroyed or duty is paid on it. If the goods are cleared for home consumption, duty is charged on that quantity.