Duty Drawback Scheme

Maximize your export benefits through India's duty refund mechanism

Understanding Duty Drawback

Duty Drawback is a scheme administered by the Indian government that allows exporters to claim a refund of customs duties, excise duties, and service taxes paid on inputs used in the manufacture of exported goods. This scheme aims to make Indian exports more competitive in the global market by neutralizing the impact of duties on input costs.

The Duty Drawback scheme is governed by Section 75 of the Customs Act, 1962, and the Customs and Central Excise Duties and Service Tax Drawback Rules, 2017. It is administered by the Directorate of Drawback under the Department of Revenue, Ministry of Finance.

Key Objectives

  • Promote exports by making them more competitive in global markets
  • Neutralize the cascading effect of duties on input costs
  • Ensure zero-rating of exports as per international trade practices
  • Improve cash flow for exporters through timely refunds
  • Support the Make in India initiative by encouraging local manufacturing

Eligible Duties for Refund

  • Basic Customs Duty paid on imported inputs
  • Additional Customs Duty (CVD) equivalent to excise duty
  • Central Excise Duty on indigenous inputs
  • Service Tax on input services (pre-GST regime)

Note : With the implementation of GST in July 2017, the Duty Drawback scheme has been modified to refund only the Basic Customs Duty for most products, as GST has its own refund mechanism for IGST paid on exports.

Types of Duty Drawback

All Industry Rate (AIR)

The All Industry Rate (AIR) is a standardized rate of duty drawback that applies to specific categories of export products. These rates are determined by the Directorate of Drawback based on the average quantity and value of inputs used in the production of export goods across the industry.

Key Features:

  • Simplified process with minimal documentation
  • Rates notified annually in the Drawback Schedule
  • Expressed as a percentage of FOB value or specific rate per unit
  • No need to maintain detailed records of duty paid on inputs

AIR is the most commonly used method due to its simplicity and quick processing time. Exporters can claim drawback at the time of export by simply declaring the applicable tariff item in the shipping bill.

Brand Rate

The Brand Rate is a custom-determined rate of duty drawback that is calculated based on the actual duties paid on inputs used in the manufacture of specific export products. This rate is determined on a case-by-case basis for individual exporters.

Key Features:

  • Applicable when AIR doesn't exist or is less than 80% of actual duties paid
  • Requires detailed documentation of input consumption and duties paid
  • Application must be filed within 30 days of export
  • Determined by the jurisdictional Commissioner of Customs or Central Excise

Brand Rate is particularly beneficial for exporters with unique manufacturing processes or those using inputs with higher duty incidence than the industry average. It ensures more accurate refund of duties actually paid.

Special Brand Rate

The Special Brand Rate is a variation of the Brand Rate that applies when an exporter finds that the All Industry Rate is less than 80% of the duties actually paid on the inputs. In such cases, the exporter can apply for a Special Brand Rate determination.

Application Process:

  1. Submit application to jurisdictional Commissioner within 30 days of export
  2. Provide detailed statement of materials used, duties paid, and technical manufacturing process
  3. Submit supporting documents (bills of entry, invoices, etc.)
  4. Provisional drawback may be granted pending final determination

Required Documentation:

  • Technical process of manufacture
  • Input-output norms with consumption details
  • Copies of bills of entry for imported materials
  • Invoices for domestically procured inputs
  • Calculation sheet showing duty incidence

The Special Brand Rate determination process typically takes 2-3 months. During this period, exporters can claim provisional drawback at the existing AIR, with the balance amount being paid once the Special Brand Rate is fixed.

Eligibility & Claim Process

Eligibility Criteria

  • Exporter Status: Any exporter with a valid IEC (Importer-Exporter Code) can claim duty drawback
  • Export Goods: The goods must be actually exported out of India
  • Duty Payment: Duties must have been paid on inputs used in the manufacture of export goods
  • Time Limit: Export must take place within 2 years of import of inputs (for imported materials)
  • No Exemption: The export goods should not be subject to any export duty
  • No Prohibition: The export goods should not be prohibited for export under Foreign Trade Policy

Ineligible Categories:

  • X Exports made under advance authorization scheme
  • X Exports where IGST refund is claimed under GST
  • X Exports made from bonded warehouses

Claim Process

Step 1 : Filing of Shipping Bill

Declare the intention to claim drawback in the shipping bill by mentioning the appropriate drawback serial number from the Drawback Schedule.

Step 2 : Export Goods Examination

Customs officials examine the export goods to verify that they match the description in the shipping bill and are eligible for drawback.

Step 3 : Export Confirmation

After the goods are loaded onto the vessel/aircraft, the shipping bill is processed for "Export Out of Charge" (EGM/Export General Manifest filing).

Step 4 : Processing of Drawback Claim

The system automatically processes the drawback claim based on the information in the shipping bill and the applicable drawback rate.

Step 5 : Disbursement of Drawback Amount

The drawback amount is directly credited to the exporter's bank account registered with Customs through electronic fund transfer.

For AIR drawback, the process is largely automated and typically completed within 7 working days after EGM filing. For Brand Rate claims, the processing time is longer due to the detailed verification required.

Important Time Limits

Activity Time Limit Remarks
Filing of Brand Rate Application Within 30 days of export Can be extended by 30 days by Commissioner
Filing of Drawback Claim Within 3 months of export Can be extended up to 1 year by Commissioner
Export after Import of Inputs Within 2 years of import For imported inputs used in export products
Deficiency Memo Response Within 30 days of issuance Claim may be rejected if not responded to in time
Appeal against Rejection Within 3 months of order To be filed with Commissioner (Appeals)

Required Documentation

All Industry Rate (AIR)

  • Shipping Bill with declaration of drawback serial number
  • Export Invoice
  • Packing List
  • Bank Realization Certificate (BRC) or Foreign Inward Remittance Certificate (FIRC)
  • Self-declaration that the export goods are not manufactured under Advance Authorization or other duty exemption schemes
  • Self-declaration that no CENVAT credit/input tax credit has been availed on inputs

For AIR claims, the documentation requirements are minimal as the rates are pre-determined. The process is largely automated through the EDI (Electronic Data Interchange) system at Customs.

For Brand Rate

  • All documents required for AIR
  • Application in prescribed format (ANF-4G)
  • Detailed technical process of manufacture
  • Input-output norms with consumption details of raw materials
  • Copies of bills of entry for imported materials
  • Invoices for domestically procured inputs with duty payment details
  • Calculation sheet showing duty incidence on inputs
  • Certificate from Chartered Accountant/Cost Accountant verifying the duty incidence calculation
  • Self-declaration that the AIR is less than 80% of the actual duty incidence (for Special Brand Rate)

Brand Rate applications require extensive documentation to substantiate the actual duty incidence. Proper record-keeping of all input procurement and duty payments is essential for successful Brand Rate claims.

Duty Drawback in the GST Era

The implementation of Goods and Services Tax (GST) in July 2017 significantly impacted the Duty Drawback scheme. With the introduction of GST, the refund mechanism for taxes paid on inputs used in export goods has undergone substantial changes.

Pre-GST Scenario

  • Drawback covered Basic Customs Duty, CVD, Special CVD, and Excise Duty
  • Higher drawback rates reflecting all these duties
  • Single refund mechanism for all indirect taxes

Post-GST Scenario

  • Drawback now primarily covers only Basic Customs Duty
  • Lower drawback rates reflecting only customs component
  • Separate refund mechanism for GST under the GST law

Key Changes in the GST Era

Two Refund Options for Exporters:

  1. Export under Bond/LUT: Export without payment of IGST and claim refund of unutilized Input Tax Credit (ITC)
  2. Export with IGST Payment: Pay IGST on exports and claim refund of the IGST paid

Revised Drawback Rates:

  • All Industry Rates revised to reflect only Basic Customs Duty component
  • Significant reduction in drawback rates compared to pre-GST era

Important Note: An exporter cannot claim both duty drawback under AIR and IGST refund simultaneously. If an exporter claims IGST refund, they can only claim drawback at the reduced rates that factor in only the customs duty component.

Current Scenario

Under the current system, exporters have to navigate both the Duty Drawback scheme for customs duties and the GST refund mechanism for GST paid on inputs. This dual system requires careful planning to optimize tax benefits while ensuring compliance with both sets of regulations.

Strategic Considerations for Exporters:

  • Evaluate whether to export under bond/LUT or with IGST payment based on cash flow considerations
  • Compare benefits of claiming higher AIR drawback (without IGST refund) versus lower drawback with IGST refund
  • Maintain proper documentation for both drawback and GST refund claims

Benefits & Challenges

Benefits of Duty Drawback

  • Cost Competitiveness: Neutralizes the impact of duties on input costs, making exports more competitive in international markets
  • Improved Cash Flow: Provides timely refund of duties, enhancing working capital availability for exporters
  • Zero-Rating of Exports: Aligns with international trade principles by ensuring exports are not burdened with domestic taxes
  • Simplified Process for AIR: All Industry Rate mechanism offers a straightforward, less documentation-intensive approach for most exporters
  • Flexibility through Brand Rate: Allows exporters with unique manufacturing processes to claim actual duty incidence when AIR is insufficient
  • Export Promotion: Encourages manufacturers to explore international markets by offsetting duty burden

For AIR claims, the documentation requirements are minimal as the rates are pre-determined. The process is largely automated through the EDI (Electronic Data Interchange) system at Customs.

Challenges in Implementation

  • Complex Documentation: Brand Rate applications require extensive documentation and technical details that can be challenging for SMEs
  • Dual Refund System Post-GST: Managing both drawback and GST refund mechanisms increases compliance complexity
  • Reduced Rates Post-GST: Drawback rates have significantly decreased after GST implementation, reducing the benefit for exporters
  • Delays in Processing: Brand Rate fixation and Special Brand Rate applications often face significant processing delays
  • Record-Keeping Burden: Maintaining detailed records of input consumption and duty payment for extended periods
  • Frequent Rate Revisions: Regular changes in drawback rates require exporters to constantly update their pricing strategies

Brand Rate applications require extensive documentation to substantiate the actual duty incidence. Proper record-keeping of all input procurement and duty payments is essential for successful Brand Rate claims.

Frequently Asked Questions

You can claim both, but with limitations. If you claim IGST refund under GST, you can only claim duty drawback at the reduced rates that factor in only the customs duty component (Customs portion of AIR). If you opt for higher AIR drawback rates, you cannot claim IGST refund. This is to prevent double taxation benefits on the same exports.

The standard time limit for filing a duty drawback claim is 3 months from the date of export (defined as the date of "Let Export" order). This period can be extended by up to 9 additional months (making it a total of 1 year) by the Commissioner of Customs if there are sufficient reasons for the delay. For Brand Rate applications, the time limit is 30 days from the date of export, which can be extended by another 30 days by the Commissioner.

You should apply for Special Brand Rate when you can demonstrate that the All Industry Rate (AIR) is less than 80% of the actual duties paid on inputs used in your export product. This typically happens when your manufacturing process uses inputs with higher duty incidence than the industry average, or when you use imported inputs with high customs duty. Before applying, conduct a thorough analysis of your input costs and duty incidence to ensure the effort of documentation is justified by the additional drawback amount.

All Industry Rates (AIR) are calculated by the Directorate of Drawback based on the average consumption of inputs across the industry and the applicable duty rates. The calculation considers factors such as:

  • Average quantity of inputs used per unit of export product
  • Average value of inputs
  • Applicable duty rates on those inputs
  • Value addition in the manufacturing process
  • Average FOB value of export products

Brand Rates are calculated based on the actual duty incidence on inputs used by a specific exporter, as evidenced by their documentation of input consumption and duty payment.

If your drawback claim is rejected, you have the following options:

  1. File an appeal with the Commissioner of Customs (Appeals) within 3 months of the rejection order
  2. If the appeal is rejected, you can further appeal to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) within 3 months
  3. For Brand Rate rejections, you can request a review by providing additional documentation or clarifications
  4. In case of technical issues or errors in the shipping bill, you can request amendments through the proper channels

It's advisable to understand the specific reason for rejection and address those issues before filing an appeal or revised claim.