Duty drawback entails the reimbursement of customs duties and internal taxes incurred during the importation of goods. These refunded amounts are then utilized in the production of final products that are subsequently exported from India. Another such scheme is the Advance License Scheme where manufacturers of export goods are incentivised on import inputs.
An example would be the repayment of customs duties and taxes on imported machinery used in the manufacturing of textile products. This mechanism was established by the Ministry of Finance through sections 74 and 75 of the Customs Act, of 1962.
Duty Drawback Scheme under the Customs Act 1962
The Duty Drawback Scheme, outlined in the Customs Act of 1962, enables exporters to receive refunds on customs duties paid for imported goods under certain conditions:
- If imported products are either utilized in other exported goods or remain unused post-import, exporters can claim a refund.
- Sections 74 and 75 of the Customs Act delineate the scheme’s provisions.
To qualify for duty drawback, exporters must meet the following criteria:
- Goods exported must differ from the inputs, which are the imported goods on which customs and taxes were paid.
- Products used in manufacturing exported goods must undergo a physical transformation.
- The number of inputs used per unit in processing export products should not be uniform.
The government sets the rate of drawback per unit of the final product based on factors such as the manufacturing process, raw materials, duty paid on inputs, and quality standards.
However, duty drawback may not be allowed under the following circumstances:
- When the export value of products is lower than the value of imported products.
- If the exporter fails to receive payment for finished products within the specified time frame determined by the government.
What are the Types of Duty Drawbacks?
There are various types of duty drawback, some of which are:
Direct Identification Manufacturing
This type occurs when imported materials are used to make another product, which is then exported. For instance, if you import machinery and parts to manufacture bicycles, and those bicycles are later exported, you can reclaim the import duty paid on the machinery.
Substitution Manufacturing
This type applies when the imported products are similar to the exported ones in terms of quality and type. It doesn’t matter if the imported items were directly used in producing the exported goods. For example, if a manufacturing plant imports 1,000 motors and already has 500 similar motors in stock, it can claim a refund on the duties paid for the imported motors, regardless of whether they were used in production or not.
Unused Merchandise Direct Identification Manufacturing
Import duty can be reclaimed if materials imported are exported without being used. The duty paid upon importation is tracked to facilitate duty drawback claims. For example, if a company imports plastic bangles to make embedded plastic bangles for export and pays the necessary duties, they can still claim duty drawback even if the same plastic bangles are exported without any alterations.
Unused Merchandise Substitution Manufacturing
Import duty can also be claimed when any unused material, originally imported and subjected to duty payment, is later exchanged with other imported duty-paid materials and then exported. For instance, if a manufacturer imports textiles, pays the required duties, and stores them alongside similar textile goods in inventory. If these materials are later combined and not necessarily utilized in manufacturing export products, the manufacturer can still claim a duty drawback upon exporting the unused (substituted) merchandise.
What are the Documents Required in the Duty Drawback Process?
To avail of duty drawback, exporters must provide several documents, including:
- A copy of the shipping bill
- A copy of the bill of entry
- The import invoice
- Evidence of duty payment during importation
- A copy of the bill of lading
- Certified copies of bank invoices
- The export invoice
- Documentation for shipping insurance, if applicable
- Quality test or inspection reports for the goods
- A letterhead indicating the claimed drawback amount
How can one Claim Duty Drawback on Exported Goods?
Duty drawback can be applied online using two methods:
- All Industry Rates and
- Brand Rate.
For exports with electronic shipping bills, the bill itself suffices for claiming duty drawback. However, for exports without electronic bills, a copy of the shipping bill is necessary along with the required documents specified by the Drawback Rules 1995. Failure to provide these documents may result in suspension of the claim, but it won’t halt the export shipment.
What is the All Industry Rate (AIR)?
It’s an average drawback rate set by the government, calculated as a percentage of the FOB (Freight on board) value of exported products. The FOB value represents the final value of exported products after including all related shipment costs such as domestic transportation, storage, handling, brokerage, and service charges.
What is the Brand Rate?
When certain products lack a predefined AIR, duty drawback is determined using the brand rate method as per Rules 6 and 7 of the Drawback Rules 1995. Once the duty drawback claim is settled, it can be processed through the EDI (Electronic Data Interchange) system, allowing for direct crediting of the drawback into exporters’ bank accounts.