All about Duty Drawback Exim Scheme

Introduction: The term drawback is applied to a certain amount of duties of Customs and Central Excise, sometimes the whole, sometimes only a part remitted or paid by Government on the exportation of the commodities on which they were levied. To entitle goods to drawback, they must be exported to a foreign port, the object of the relief afforded by the drawback being to enable the goods to be disposed of in the foreign market as if they had never been taxed at all. For Customs purpose drawback means the refund of duty of customs and duty of central excise that are chargeable on imported and indigenous materials used in the manufacture of exported goods. Goods eligible for drawback applies to

a) Export goods imported into India as such;

b) Export goods imported into India after having been taken for use

c) Export goods manufactured / produced out of imported material

d) Export goods manufactured / produced out of indigenous material

e) Export goods manufactured /produced out of imported or and indigenous materials.  The Duty Drawback is of two types: (i) All Industry Rate (AIR) and (ii) Brand Rate.

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 2837 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.

The Brand Rate of Duty Drawback is allowed in cases where the export product does not have any AIR of Duty Drawback or the same neutralizes less than 4/5th of the duties paid on materials used in the manufacture of export goods. This work is handled by the jurisdictional Commissioners of Customs & Central Excise. Exporters who wish to avail of the Brand Rate of Duty Drawback need to apply for fixation of the rate for their export goods to the jurisdictional Central Excise Commissionerate. The Brand Rate of Duty Drawback is granted in terms of Rules 6 and 7 of the Drawback Rules, 1995.

The Duty Drawback facility on export of duty paid imported goods is available in terms of Sec. 74 (It is discussed in more detail in under mention para) of the Customs Act, 1962. Under this scheme part of the Customs duty paid at the time of import is remitted on export of the imported goods, subject to their identification and adherence to the prescribed procedure.

Background:

All Industry Rate (AIR) of Duty Drawback:

The All Industry Rate (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 All Industry Rate (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 All Industry Rate (AIR) of Duty Drawback.

The All Industry Rate (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 scrutiny, sanction and payment of Duty Drawback claims in major Custom Houses is done through the EDI system. The EDI system facilitates credit/disbursal of Drawback directly to the exporter’s bank accounts once the EGM has been filed by respective airlines / shipping lines. The correct filing of EGM is essential for speedy processing and disbursal of Drawback claims.

Notification No. 84/2010-Cus (N.T.), dated 17-9-2010 is relevant for ascertaining the current All Industry Rate (AIR) of Duty Drawback for various export products.

Brand Rate of Duty Drawback:

Where the export product has not been notified in All Industry Rate (AIR) of Duty Drawback or where the exporter considers the All Industry Rate (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 upto 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.

Imported goods re-exported-Drawback under Sec. 74

In case of goods which were earlier imported on the payment of duty and are later sought to be exported within a specified period, Customs Duty paid at the time of import of the goods, with certain cuts, can be claimed as Duty Drawback at the time of export of such goods. Such Duty Drawback is granted in terms of Sec. 74 of the Customs Act, 1962 read with Re-export of Imported Goods (Drawback of Customs Duty) Rules, 1995. For this purpose, the identity of export goods is cross verified with the particulars furnished at the time of import of such goods.

Where the goods are not put into use after import, 98% of Duty Drawback is admissible under Sec. 74 of the Customs Act, 1962. 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 upto 12 months subject to conditions and payment of requisite fee as provided in the Drawback Rules, 1995.

Scope:

In this category, two types of cases are covered viz.,

1. Imported goods exported as such i.e. without putting into use – 98% of duty is refunded and

2. Imported goods exported after use – the percentage of duty is refunded according to the period between the date of clearance for home consumption and the date when the goods are placed under Customs control for exports. The percentage of duty drawback is notified under Notification. No 19 Custom, dated 6^th Feb, 1965 as amended from time to time.

Elements necessary for drawback under Sec. 74:-

The elements necessary to claim drawback are;

1. The goods on which drawback is claimed must have been previously imported;

2. Import duty must have been paid on these goods when they were imported;

3. The goods should be entered for export within two years from the date of payment of duty on their importation (whether provisional or final duty). The period can be further extended to three years by the Commissioner of Customs on sufficient cause being shown.

4. The goods are identified as the goods imported.

5. The goods must be capable of being identified as imported goods.

6. The goods must actually be re-exported to any place outside India.

7. The market price of such goods must not be less than the amount of drawback claimed.

8. The amount of drawback should not be less than Rs. 50/- as per Sec. 76-(1) (c) of the Customs Act.

Recent Event:

The Union ministry of finance has notified an increase in the All Industry Rates (AIR) of duty drawback and higher value caps for many items. The major beneficiaries are exporters of textiles, vehicles and automobile components. When the All Industry Rate (AIR) for 2013-14 were notified on September 14, 2013, exporters had expressed disappointment over the reduction in rates for many items, as well as the value caps that limited the drawback amount payable. Exporters of electronics goods had expressed concern on the sharp decline in drawback rates on their items. Exporters of engineering goods had reacted strongly and said the reduction would negate the positive impact of rupee depreciation. The exporters of textiles represented that averaging the duty incidence of many items at the four-digit levels resulted in anomalies. The latest increase in drawback rates through the notification dated January 21, 2014, responds partly to the complaints of exporters of textiles, vehicles and auto components but ignores concerns of the electronics sector.

Salient features of AIR Duty Drawback of 2013 are as follows:

i) As in previous years, the drawback rates have been determined on the basis of certain broad average parameters including, prevailing prices of inputs, standard input output norms, share of imports in input consumption, the applied rates of central excise and customs duties, the factoring of incidence of service tax paid on taxable services which are used as input services in the manufacturing or processing of export goods, factoring incidence of duty on HSD/Furnace Oil, value of export goods, etc.

ii) The residuary All Industry Rate (AIR) of 1% (composite) and 0.3% (customs) is being provided to hitherto “Nil” rated items under chapters 4, 15, 22, few items in chapter 24 and Casein and its derivatives in chapter 35.

iii) The higher residuary rates are being reduced from 1.5% to 1.3% (customs) or from 2% to 1.7% (customs), as the case may be.

iv) In the case of most tariff items with ad valorem all industry rates above 2%, the rates are being supplemented with drawback caps (Drawback Caps means the ceiling of the rate of duty drawback of a product to that level).

v) Wherever the wordings, “Drawback when CENVAT facility has not been availed” have been used, it means that the exporter is eligible to claim the components of Customs, Excise and Service tax. Wherever the wordings, “Drawback when CENVAT facility has been availed” are used, it means that the exporter is eligible only for the Customs portion of duty drawback, so as to curb the exporters from taking double benefit

vi) Wherever the wordings, “Drawback when CENVAT facility has not been availed” have been used, the exporter shall declare, and if necessary, establish to the satisfaction of Assistant Commissioner of Customs or Assistant Commissioner of Central Excise as the case may be, that no CENVAT facility has been availed for any of the inputs or input services used in the manufacture of the export product and if required provide non-availment of CENVAT Certificate. Such Certificate is not required for products which are unconditionally exempted from Central Excise duty like handloom and handicrafts products.

vii) Wherever specific rates have been provided against tariff item in the said Schedule, the drawback shall be payable only if the amount is one per cent or more of free on board value, except where the amount of drawback per shipment exceeds five hundred rupees.

viii) The AIR of Duty Drawback is not applicable to export of product manufactured in Warehouse under Section 65 of Customs Act, 1962, Special Economic Zones, Export Oriented Units (EOUs) etc.

The new notification introduces 18 new entries at the six-digit levels and seven at the eight-digit level for textile exporters, for items covered under the four-digit classifications 6002, 6004, 6116 and 6307. About 120 entries at the six-digit level covered under Chapter 87 (vehicles and auto components) get their customs allocation of drawback raised from 1.7 per cent to two per cent. About 80 of these entries also see a marginal increase in the value caps; three others see a marginal drop.

The other changes include a marginal increase in value caps for six entries in the leather sector, four in paper products and six in textiles. Besides, there are some corrections of obvious errors in description and value caps. Hopefully, the representations from other sectors will also receive due attention.

Conclusion:- The main worry of exporters now is the delay in getting duty drawback. They apprehend that the government’s efforts to keep the fiscal deficit down will result in blocking the disbursal of their legitimate dues. Such delays will not only disrupt their cash flow but result in additional costs in raising finance to fund their operations. The increase in repo rates by the Reserve Bank can make funds costlier and, to that extent, make them relatively uncompetitive. Their sources of comfort are prospects of better growth in developed economies and weakening of the rupee against the dollar.

Author can be reached @ sunraj.18@rediffmail.com