Duty Drawback Scheme

Duty drawback refers to the refund of customs duties and internal taxes paid while
importing goods, which in turn are used to manufacture final products exported from India.
For instance, refund of custom duties and taxes paid on machinery imported that is used to
manufacture textile products. It was introduced by the Ministry of Finance under section 74
and 75 of the Customs Act, 1962

Customs Act, 1962

The Duty Drawback provisions are described under Section 74 and Section 75 under the
Customs Act, 1962. This Act laid down the various restrictions and conditions to claim
drawback of duties under certain situations.

 Section 74: As per section 74, if the re-exports of imported goods, which are
identified quickly and within two years from the date of payment of duty on the
importation. Then an exporter is eligible to claim 98% of the duty paid by him as
drawback under section 74.

In cases the goods have been put into use after import, Duty Drawback is granted on
a sliding scale basis depending upon the extent of use of the goods. No Duty
Drawback is available if the goods are exported 18 months after import. Application
for Duty Drawback is required to be made within 3 months from the date of export
of goods, which can be extended up to 12 months subject to conditions and payment
of requisite fee as provided in the Drawback Rules,1995.

 Section 75: As per section 75, if the export of goods manufactured or processed out
of imported material with value addition, then a drawback should be allowed of
duties of customs chargeable on any imported materials of a class or description. If
sale proceeds not received within the stipulated period, a drawback is to be reversed
or adjusted. Duty Drawback under section 75 can be claimed either as a fixed
percentage depending upon the value of goods exported.

Goods Eligible for Drawback

The following are the eligible goods for the duty drawback.

 To export goods imported into India

 To export goods imported into India after having been taken for use

 To export goods manufactured/produced out of imported material

 To export goods manufactured/produced out of indigenous material

  To export goods manufactured /produced out of imported or and indigenous
materials.

Eligibility Criteria

The below following are the minimum criteria to claim for processing drawback claim.

 Any individual must be the legal owner of the goods at the time the goods are
exported.

 Unit must have paid customs duty on imported goods.

 Duty drawback is available on most goods on which customs duty was paid on
importation and which has been exported.

Documents Required

The below following are the documents required for processing drawback claim.

 Triplicate copy of the Shipping Bill

 Copy of the Bill of entry

 Import Invoice

 Proof of payment of duty paid on the importation of goods.

 Approval from the Reserve Bank of India for re-exports of goods

 Copy of the Bill of Lading or Airway bill.

 Copy of the Bank Certified Invoices.

 Sixtuplicate Copy of AR-4

 Export invoice and packing list.

 Freight and Insurance certificate

 Copy of the Test report of goods

 Modvat Declaration

 A worksheet showing the drawback amount claimed

 DEEC Book and licence copy where applicable.

 Transhipment certificate where applicable

 Blank acknowledgement card in duplicate

  Pre-receipt for drawback amount on the reverse of Shipping Bill duly signed on the
Rs1/- revenue stamp.

As per section 74(2), goods that have been ‘used’ after their import will still be

entitled to duty drawback but to a restricted extent as notified. The reducing scale at which

drawback will be allowed is as follows 25:

Sl.

No.

Time Period Extent of

drawback

1. Not more than 3 months 95%

2. More than 3 months but not more than 6 months 85%

3. More than 6 months but not more than 9 months 75%

4. More than 9 months but not more than 12 months 70%

5. More than 12 months but not more than 15 months 65%

6. More than 15 months but not more than 18 months 60%

7. More than 18 months NIL

Types of Duty Drawback

a) Direct identification manufacturing: When the imported material is used to manufacture

another product and that product gets exported, then the import duty can be reclaimed.

b) Substitution manufacturing: When imported products are of the same kind and quality as
the export products – irrespective of whether they were used to produce the end export
products – a substitutional manufacturing duty drawback can be claimed.

c) Unused merchandise direct identification manufacturing: Import duty can be claimed for
refund if the imported material is directly exported without being used. The duty paid at the
time of import is tracked to be able to claim duty drawback.

d) Unused merchandise substitution manufacturing: Import duty can be claimed when any
unused material which was exchanged with other imported duty-paid material, is exported.
Duty Drawback scheme and Foreign Trade Policy 2015-20

Duty Drawback Scheme is a part of chapter 4 (DUTY EXEMPTION /REMISSION SCHEMES) of

the FTP, 2015-20 under which refund of duty is claimed.

Objective of chapter -4 of FTP states the schemes that enable duty free import of inputs for
export production, including replenishment of inputs or duty remission. The schemes
provided under this chapter are:

(a) Duty Exemption Schemes.

(b) Duty Remission Scheme:- Duty Drawback (DBK) Scheme, administered by

Department of Revenue

(c) Scheme for Rebate on State and Central Taxes and Levies (RoSCTL).

(d) Scheme for Rebate of State Levies (RoSL).

The duties and tax neutralized under Duty Drawback Scheme are :

(i) Customs and Union Excise Duties in respect of inputs.

(ii) Service Tax in respect of input services.

The Duty Drawback rates of two types

(i) All Industry Rate (AIR)

The All Industry Rate (AIR) is essentially an average rate based on the average quantity and
value of inputs and duties (both Excise & Customs) borne by them and Service Tax suffered
by a particular export product. The All Industry Rates are notified by the Government in the
form of a Drawback Schedule every year and the present Schedule covers more than 3900
entries. The legal framework in this regard is provided under Sections 75 and 76 of the
Customs Act, 1962 and the Customs and Central Excise Duties and Service Tax Drawback
Rules, 1995 (henceforth referred as Drawback Rules).

The AIR of Duty Drawback are notified for a large number of export products every year by
the Government after an assessment of average incidence of Customs, Central Excise duties
and Service Tax suffered by the export products. The AIR are fixed after extensive
discussions with all stake holders viz. Export Promotion Councils, Trade Associations, and
individual exporters to solicit relevant data, which includes the data on procurement prices
of inputs, indigenous as well as imported, applicable duty rates, consumption ratios and FOB
values of export products. Corroborating data is also collected from Central Excise and
Customs field formations. This data is analysed and forms the basis for the AIR of Duty
Drawback.

The AIR of Duty Drawback is generally fixed as a percentage of FOB price of export product.
Caps have been imposed in respect of many export products in order to obviate the
possibility of misuse by unscrupulous exporters through over invoicing of the export value.

The drawback rates as notified by central government by the Notification No. 07/2020-
CUSTOMS (N.T.)
https://www.cbic.gov.in/resources/htdocs-cbec/customs/cs-act/notifications/notfns-
2020/cs-nt2020/csnt_07.pdf

ii) Brand Rate of Duty Drawback

Where the export product has not been notified in AIR of Duty Drawback or where the
exporter considers the AIR of Duty Drawback insufficient to fully neutralize the duties
suffered by his export product, he may opt for the Brand Rate of Duty Drawback. Under this
scheme, the exporters are compensated by paying the amount of Customs, Central Excise
duties and Service Tax incidence actually incurred by the export product.

For this purpose, the exporter has to produce documents/proof about the actual quantity
of inputs / services utilized in the manufacture of export product along with evidence of
payment of duties thereon.The exporter has to make an application to the Commissioner
having jurisdiction over the manufacturing unit, within 3 months from the date of the ‘Let
Export’ order. The application should include details of materials/components/input
services used in the manufacture of goods and the duties/taxes paid on such materials/
components/input services. The period of 3 months can be extended up to 12 months
subject to conditions and payment of requisite fee as provided in the Drawback Rules, 1995.

In terms of Rule 6 of the Drawback Rules, 1995 on receipt of the Brand Rate application, the
jurisdictional Commissioner shall verify the details furnished by the exporter and determine
the amount/rate of Drawback. Where exporter desires that he may be granted Drawback
provisionally, the jurisdictional Commissioner may determine the same, provided the
exporter executes a general bond, binding himself to refund the Drawback amount granted
to him, if it is found later that the Duty Drawback was either not admissible to him or a
lower amount was payable. The Brand Rate letter is thereafter issued to the exporter. The
Custom House of the port of export is also given a copy to facilitate payment of Drawback to
the exporter.
Procedure for Claiming Duty Drawback
The Duty Drawback on export goods (whether AIR or Brand Rate) is to be claimed at the
time of export and requisite particulars filled in the prescribed format of Shipping Bill/Bill of
Export under Drawback. In case of exports under electronic Shipping Bill, the Shipping Bill
itself is treated as the claim for Drawback. In case of manual export, triplicate copy of the
Shipping Bill is treated as claim for Drawback. The claim is to be accompanied by certain
documents as laid down in the Drawback Rules 1995. If the requisite documents are not
furnished or there is any deficiency, the claim may be returned for furnishing requisite
information/documents. The export shipment, however, will not be stopped for this reason.

Supplementary claims of Duty Drawback:

Where any exporter finds that the amount of Duty Drawback paid to him is less than what
he is entitled to on the basis of the amount or rate of Drawback determined by the Central
Government, he may prefer a supplementary claim. This claim has to be filed within 3
months of the relevant date, which is fixed, as follows:

(i) Where the rate of Duty Drawback is determined or revised under Rules 3 or 4 of the
Drawback Rules, 1995 from the date of publication of such rate in the Official Gazette;

(ii) Where the rate of Duty Drawback is determined or revised upward under Rules 6 or 7 of
the Drawback Rules, 1995, from the date of communicating the said rate to the person
concerned; and

(iii) In all other cases, from the date of payment or settlement of the original Duty Drawback
claim by the proper officer.

Advantages of Duty Drawback Scheme

Duty drawbacks are the solution to prevent a company from being taxed twice. Duty
drawbacks are refunds on tariffs designed to prevent a company from being double-taxed
and, more importantly, encourage ongoing trade between nations.

It helps in making the domestic product competitive and cost efficient. Duty drawback
scheme helps exporters claim refund and save costs incurred to produce the final export
products. If a company has never filed a drawback in the past three years, it can claim the
whole a refund together. It makes domestically produced products competitive in
international market which in turn helps in promoting exports and adds to country’s forex
reserves.
Duty Drawback Scheme helps in promoting and supporting the fledgling small and medium
sector enterprises.

Disadvantages of Duty Drawback Scheme

Duty Drawback Scheme, though WTO compliant , is seen as trade distorting . It is often
resorted by nations having high trade barriers which ultimately hurts the exports of the
country globally .So in order to make the domestic products competitive DBK becomes the
last resort.

Also, claiming drawback refunds are a bit complex and demand record-keeping practices.
However, this can be simplified and exporters can claim a refund easily with the support of a
service provider with good expertise.

In Indian context, first of all, there are often significant delays in the returns reaching the
exporters. The documentation is a burden in and of itself. Additionally, if the matter ends up
in court, there will be extensive delays, which will drive up costs. It's shocking that despite
The Customs Act, 1962's Section 75A clearly stating that "any drawback payable to a
claimant under Section 74 or Section 75 shall be paid to that claimant in addition to the
amount of such drawback from the date of filing a claim for payment of such drawback,
interest at the rate fixed under Section 27A from the date after the expiration of said period
of one month until the date of payment and such interest are hardly paid.

Some believe that exporters who are dissatisfied with the low All Industry Rates (AIR)
drawback rates can turn to Brand Rates of Drawback. This alternative does pose some
issues, though. The first question is: Why should the government grant a branded firm
access to a greater drawback rate under the same DBK Scheme?

Second, if Brand Rate is the way to go, why should individual rates awarded to specific
companies not be published like the AIR, and in the process why should it be hidden from
competitors what drawback rates are being offered to their industry peers – this is nothing
but a way of promoting unfair competition in a case where market forces should be allowed
to prevail and dictate who wins and loses? 

Duty Drawback Scheme and WTO

The WTO-Agreement on Subsidies and Countervailing Measures  allows duty drawback
schemes as being WTO-compliant and does not class duty drawback as a subsidy. Since
there are usually no tariff rates in free trade zones, duty drawback schemes have little
relevance in regional and bilateral trade agreements.
It is not clear how duty drawback schemes impact on a country’s development process. Due
to the ineffectiveness of the institutions in many developing countries, tax refund schemes
are often unsuccessful, potentially leading to corruption, fraud and the high administration
costs of the complicated refund system. Other problems include administrative difficulties,
inadequate statistical records and a financial burden on the state. Nonetheless, duty
drawback schemes can impact positively on exports and international competitiveness in
countries with properly functioning institutions.

Duty-free imports of potential input products can be an effective alternative. Although no

duties are levied regardless of whether the input product is consumed domestically or
processed and exported, administration costs and fraud are reduced significantly. Export
processing zones with discount schemes and export credit insurance schemes are
alternative ways of strengthening a country’s export sector.

Requirements

 A properly functioning country-wide administration and monitoring system with

access to the relevant information and sufficient technical and human capacities for
its design, implementation and monitoring

 Clear and coherent political strategy and targets for policy-makers and public
authorities

 Close cooperation and knowledge sharing with research institutions

 Compatible regional and world trade law (WTO conformity)

 Constant market surveying and forecasting

 Efficient customs administration

 ICT infrastructure

 Market price information systems

 Skilled / specialised personnel to man the respective institutions / provide the

respective services.

CAG audits of Duty Drawback Schemes

The customs wing in O/o the CAG of India audits the levy and collection of custom duty and
cross-border preventive functions by the CBIC (Under Dept. of Revenue) through 23 Zones
headed by Principal Commissioner/s across the country and their field formations.

The previous audit by the CAG of revenue receipts – indirect taxes of Union Government are
:-
1).The Report No. 15 of 2011 - Performance Audit of Service Tax on Banking and other
Financial Services and Duty Drawback Scheme Union Government, Department of -Indirect
Taxes https://cag.gov.in/en/audit-report/details/2207#:~:text=Report%20No.%2015%20of
%202011%20%2D%20Performance%20Audit%20of%20Service%20Tax%20on%20Banking
%20and%20other%20Financial%20Services%20and%20Duty%20Drawback%20Scheme
%20Union%20Government%2C%20Department%20of%20%2DIndirect%20Taxes

2). The Report No. 8 of 2013 - Performance Audit of Deemed Export Drawback Scheme and
Reimbursement of Central Sales Tax Union Government, Department of Revenue -Indirect
Taxes

https://cag.gov.in/en/audit-report/details/869