Duty Drawback: Meaning, Process, and Eligibility

Imagine that you have a manufacturing business that imports raw materials to create finished goods, which you then export. The duty you pay on imports can become a significant cost burden. The burden can lessen when you get some or all the paid duty back. 

This is where duty drawbacks come into the picture. In fact, India’s duty drawback schemes have refunded billions of dollars to exporters over the years, helping them remain price-competitive in international markets. 

Today, we are going to look at what duty drawback means, how the duty drawback scheme works, how to calculate it, the eligibility criteria, and the steps involved in claiming drawback. 

What is Duty Drawback?

Duty drawback is the refund or rebate of customs duties or other duties, such as excise and taxes, that are paid on imported goods when they are subsequently exported. It is after the materials are processed into finished goods. In other words, duties you paid earlier can be “drawn back” under certain conditions.

The duty drawback scheme in India is designed to neutralise the burden of customs duty drawback. Put simply, the idea is that when inputs (raw materials, components, etc.) are taxed on import, that burden should be removed (or partly removed) when they contribute to export goods so that Indian exports can remain globally competitive.

Types/Categories of Drawback

To suit different export situations, there are different types and forms of duty drawback under the Customs Act. This ensures that every exporter, whether relying on standard industry rates or claiming actual duty paid, has a fair mechanism to recover costs.

1. All Industry Rate (AIR) / All Industry Drawback

This refers to the standard or average rate that is fixed on a broad range of products. Exporters can claim this without needing brand-specific computations. Here are some things to know:

• The drawback rates under the AIR are periodically notified. It is often based on the average duty burden on inputs for that specific product class. 
• Under the Drawback Rules, AIR cannot exceed 33% of the market price of the export goods.
• It also includes end-to-end electronic processing of duty drawbacks. 
• Producing separate documentary evidence for the realisation of proceeds is not needed. 

2. Brand Rate / Special Brand Rate

In cases where the actual input duty of an exporter exceeds the AIR, exporters can apply for a brand rate or a special brand rate, which is ideally tailored to their cost structure. 

• The local customs commissioners set the brand rates. 
• The brand rate requires submitting detailed computations and proof of duty paid on inputs. Customs authorities review and fix the rate.
• The brand rate duty drawback gets disbursed electronically directly to the exporter’s account. 

3. Drawback on Re-Export 

Whether the imported goods are processed slightly or not at all, if they are re-exported, a drawback can be claimed under Section 74. This reimburses the import duty drawback.

• According to Section 74, a refund of up to 98% of the import duty can be claimed.

What Are the Benefits of Duty Drawback?

The duty drawback scheme is not simply a refund; it is an important policy designed to streamline operations. The objectives include:

Boosting Exports

Exporters can significantly reduce their cost base as well as offer more competitive prices in global markets through cost-effective measures.

Avoidance of Double Taxation

If duty drawbacks did not exist, the exporter would have to pay both import duties and export duties. Drawback helps neutralise that aspect. 

Promoting Value-Addition

The duty drawback scheme encourages domestic manufacturing that utilises imported inputs, as the duty burden is mitigated. 

Balancing Fiscal Incentives

The government uses drawbacks as one among many export incentive schemes to promote trade without blanket exemptions.

Provides Clarity and Promotes Predictability

The Customs Act and the Drawback Rules help create a statutory framework that enables exporters to know when and how drawback can be claimed. 

Duty drawbacks play a quite important role in India’s foreign trade and customs policy regime. 

Eligibility Criteria: Who Can Claim Duty Drawback?

Several conditions apply when claiming customs duty drawbacks. Below are typical eligibility criteria:

• The goods must be exported from an Indian port / customs station. The export must originate from India.
• The claim must be related to imported or excisable domestic materials on which customs or excise duty has already been paid.
• If the exported goods are manufactured, there should be value addition (i.e., the export value must not be less than the cost of imported inputs in most straightforward cases).
• Sale proceeds of export must be realised (in foreign exchange) and repatriated to India within the prescribed time as per RBI/EXIM guidelines.
• Drawbacks will not be admissible for goods or categories that are excluded, such as exports to Bhutan or Nepal under special trade agreements, or those categories that are prohibited by notification.
• The claim must be filed within the prescribed time limit (often within 3 months of the Let Export Order, with extensions possible).

How to Claim Duty Drawback? Step-by-Step Explanation

Claiming the duty customs drawback is a time-bound, document-driven process. Here is a step-by-step breakdown of all the steps that are included to claim the duty drawback scheme:

Step 1: Filing the Shipping Bill/Export Declaration

When goods are being exported, the exporter can file a shipping bill via Electronic Data Interchange (EDI). More often, the shipping bill itself acts like a drawback claim. The exporter indicates the intention to avail a customs drawback (AIR or Brand Duty Drawback Rate).

Step 2: Document Submission

The documents that are necessary to claim under the duty drawback scheme include:

• Copy of shipping bill (triplicate)
• Copy of the bill of entry
• Invoice of import
• Proof of the duty paid on the imports
• Re-export approval from the Reserve Bank of India.
• Airway Bill/Bill of Lading copy
• Bank-certified invoices copy
• Copy of AR-4
• Manufacturing/processing records
• Certificate or declaration regarding non-availment of ITC / GST credit (if applicable)
• Export invoice and packing list.
• Modvat Declaration
• Bank acknowledgement card

Step 3: Verification by Customs/Drawback Authorities

The customs authorities will verify the claim. It also involves checking documents, after which it will be approved, adjusted, or rejected. However, selected claims are subject to audit and physical verification as part of a risk management system.

Step 4: Fixation of Brand Rate (if applicable)

If AIR is inadequate or not available, the exporter must apply for brand rate fixation, supplying detailed computations. Customs will scrutinise and fix a duty drawback rate.

Step 5: Disbursement 

Upon approval, the drawback will be credited either via NEFT or RTGS to the exporter’s bank account. The EDI systems and custom banks coordinate it.

Step 6: Time Limits and Extensions

The claims must be filed within three months of the date of the Let Export order. 

• The Assistant/Deputy Commissioner may grant an extension of up to 3 months; the Principal Commissioner may grant further extensions of up to 6 months.
• If the application is incomplete, customs may issue a deficiency memo; the exporter must respond within 30 days.

Step 7: Supplementary Claims

Supplementary claims are generally not allowed in most cases.

Step 8: Dispute

If the drawback claim is delayed or rejected, exporters may also appeal to higher customs authorities. For non-credit of drawback, they may check with customs/banks. (ICEGATE has a “Drawback Enquiry” mechanism).

How to Calculate Duty Drawback on Export?

Now that you are aware of the eligibility and the process to apply for duty drawback, here is how to calculate duty drawback on exports. 

Step 1: Determine which duties will be eligible. 

Step 2: Determine how much duty was paid on each imported input (raw materials, components) actually used in the exported product.

Step 3: Multiply the duty borne by the applicable drawback percentage. However, it is necessary to make sure that the duty drawback does not exceed the cap.

Step 4: For re-export cases where goods were used, a time-based reduction is applied.

Step 5: If some portion is disallowed (per rules, notifications, or adjustments), subtract it.

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Conclusion

In order to boost export competitiveness in the Indian commerce landscape, the duty drawback scheme plays an essential role by refunding duties that will eventually lead to cost inflation. Exporters must understand duty drawback, its process, and the eligibility to ensure complete compliance. It is also about reclaiming legitimate refunds that can improve margins and cash flow. For exporters, staying informed as well as filing claims correctly can turn what often feels like a complex process into a strategic advantage, especially in the international marketplace.

FAQs About Duty Drawback Scheme

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