Building a positive ecosystem for exports requires support from the government at various stages of the economy. Many factors like global economic conditions, relations with other countries, and geopolitical challenges help exporters compete by way of subsidies and rebates.
The duty drawback Scheme is one such support mechanism. It allows a refund of duties paid to the customs department and other internal taxes in cases where the goods are being used to manufacture other goods that are meant for export.
What is the Duty Drawback Scheme in the Customs Act of 1962?
The Duty Drawback Scheme is the Scheme from the Government of India that can be used by exporters to claim a refund on the products that are imported but are used or incorporated as part of the goods that are being exported or the goods that have remained unused from the start.
The various provisions of the Scheme are detailed in the Section74 and 75 of the Customs Act, 1962. As explained in the various provisions, the exporter must meet some conditions to be eligible for the benefits under the Duty Drawback Scheme.
Goods that were imported should be re-exported by the exporter within two years from the date of payment of the duty. In this case, the exporter can claim back 98% of the duty paid.
The following factors are considered when claiming the duty drawback:
- Goods that are being exported are substantially different from goods imported
- Products that are being used in manufacturing the goods have gone through a physical change
- Inputs utilized in the manufacturing process of the export goods are not uniform.
The Government usually fixes the rate of duty drawback for various products. This duty is paid back on a per-unit basis. The rate of duty drawback depends on:
- The ability to verify the manufacturing process
- Use of raw materials
- Duty paid on inputs
- Standards of manufacturing the final products
Benefits of duty drawback may not be available if:
- The value of the goods being exported is less than the goods that were imported
- The sale proceeds are not received by the exporter as per the time allowed in the Scheme
Duty Drawback Types
There are several types of duty drawback mechanisms available to exporters. The duty drawback types can be explained as follows:
Direct identification manufacturing
The goods that are being used to manufacture another product that will be exported are part of this mechanism. For instance, if machinery and some inputs are being imported to create a motorcycle, which will be later exported. In this case, the duty paid on imported machinery utilized in manufacturing the motorcycle and inputs can be claimed back as per the provisions of the Duty Drawback Scheme.
In this case, the imported products are of the same kind as compared to the goods that are being exported. It does not matter if the imported goods are being exported directly without being used. For instance, when a business imported 500 batteries after paying duty to be used in creating a product, the manufacturing plant already had 200 units in stock. Out of the total stock of 700 batteries, only a few were used to create finished goods. It is not considered which units were consumed in the manufacturing process and the total amount of per unit duty is paid back.
Unused merchandise direct identification manufacturing
In this case, the duty paid on imported goods can be claimed back in case the goods are being exported without being used. The amount of duty paid on the imported goods can be assessed to arrive at the amount of duty drawback.
Unused merchandise substitution manufacturing
It is a case where imported material is exchanged with the other duty-paid units in products that are being exported. The exporter is eligible to claim duty drawback even if the goods imported are lying unused but export has taken place from other units in stock.
Documents Required in the Duty Drawback Process
Exporters are expected to submit various documents to claim duty drawback. These can be explained as follows:
- Certificate on letterhead stating the amount claimed as a drawback
- Copy of Bill of Lading
- Commercial invoice at the time of import
- Export invoice
- Copy of the shipping bill
- Copy of invoices certified by the bank
- Copy of Bill of Entry
- Report of a quality check or goods inspection
- Shipping insurance (if any)
- Proof of duty paid when goods were imported
Process of Claiming Duty Drawback
Duty drawback can be claimed in broadly two ways – following the All Industry Rate or the Brand Rate. If the goods are being exported using an electronic bill, it can be used for the duty drawback process as well. However, if the goods are being exported without an electronic bill, a copy of the shipping bill can be used for claiming duty drawback. In the latter case, the exporter is expected to submit documents as per the requirements explained in Drawback Rules 1995.
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Is duty drawback taxable under GST?
No. Since the duty being paid back is a reimbursement and not a payment, it is not taxable.
Who is eligible for duty drawback?
The legal owner of the goods is responsible for claiming duty drawback.