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What is Duty Drawback in export: Meaning, types and process

Here’s everything you need to know about the Duty Drawback scheme for Indian exporters — documents required, claim process, along with its advantages and disadvantages.
what is duty drawback
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.

Duty Drawback Scheme: Customs Act 1962

The duty drawback scheme allows exporters to get a refund on customs duties paid on imported products that:
• Are used or incorporated in other products for export
• Remain unused since importation

All the provisions in this scheme are described under Section 74 and Section 75 under the Customs Act, 19621. As stated in these sections, the following conditions must be met to be able to claim duty drawback:
• If the imported goods are re-exported within two years from the date of payment of duty on the importation, then exporters can claim 98% of the duty paid.

To be able to claim duty drawback, the following aspects should be considered:
• Products being exported must be different from inputs
• Inputs refer to imported goods on which customs and taxes have been paid
• Products utilized in making the goods for export must have undergone a physical change
• Number of inputs utilized in processing export products per piece must not be uniform

The government fixes a rate of drawback (for different types of goods) to be paid per unit of the final product at the time of exports. This rate depends on how verified the mode of manufacturing, raw materials used, amount of duty paid on inputs and standards of making the final product are.

Duty drawback might not be allowed under the following conditions2:
• Export value of products is less than the value of imported products.
• If the sale of finished products is not received by the exporter within the allowed time, then drawback shall be deemed by the government.

What are the types of Duty drawback?

Following are some of the main types of Duty drawback3:

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. For example, you import machinery and parts for manufacturing a bicycle, which is later exported. In this case, the duties paid on importing the machinery utilized in manufacturing the bicycle can be claimed under the Duty Drawback Scheme.

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. For instance, a manufacturing plant imports 1,000 motors after paying duties. It also already has 500 motors of the same quality as the imported motors. In total, the inventory now has 1,500 motors. Out of the total, a few motors are used to manufacture products. Regardless of which ones were used, the exporter is entitled to claim a refund on duties paid on importing motors that might have or might not have necessarily been used.

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. For instance, a business imported plastic bangles to manufacture embedded plastic bangles for export. They paid the required duties during imports. Even if the same plastic bangles are exported without any modification, the company is still eligible to claim duty drawback in this case.

Unused merchandise substitution manufacturing:

Import duty can be claimed when any unused material which was exchanged with other imported duty-paid material, is exported. For instance, a manufacturer imports textiles and pays the required duties. It is stored in the inventory where similar textile goods have also been stored. Consider that the two units were combined and, thus, they were not necessarily used in manufacturing export products. In this case, the manufacturer is still eligible to claim duty drawback on exporting unused (substituted) merchandise.

What are the documents required in the duty drawback process?

To claim duty drawback, below are some of the documents that exporters need to furnish4:
• Shipping bill copy
• Bill of entry copy
• Import invoice
• Proof of payment of duty during importing
• Bill of lading copy
• Bank certified invoices copy
• Invoice for export
• Shipping insurance (if any)
• Quality test report/inspection report of goods
• Letterhead showing the drawback amount claimed

How to claim duty drawback?

Filing duty drawback on export goods can be done online as per two methods – All Industry Rate and Brand Rate. In case of exports with an electronic shipping bill, the shipping bill itself can be used to claim duty drawback. However, in case of exports without electronic bills, a copy of the shipping bill can be used to claim duty drawback. In this case, the claim must be accompanied by documents required as per the Drawback Rules 1995. If the required documents are not provided, then the claim may be suspended. However, the export shipment will not be stopped6.

What is All Industry Rate (AIR)?

An average drawback rate (AIR) decided by the government, AIR is calculated as a percent of the FOB (Freight on board) value of export products. The FOB value is the final value of export products after adding all the costs incurred during shipment like domestic transportation costs, storage costs, handling fees, brokerage fees, service charges, etc.

What is Brand Rate?

If some products do not have any AIR fixed by the government, then duty drawback is decided by brand rate method. They grant duty drawback as per Rules 6 and 7 of the Drawback Rules, 1995. Once duty drawback claim is decided, it can be done through the EDI (Electronic Data Interchange) system, which facilitates crediting the drawback directly into the bank account of exporters.

Advantages and disadvantages of Duty Drawback scheme

Advantages

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.

Disadvantages

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.
Claiming refund via Duty Drawback scheme can help exporters in decreasing their costs. The whole process of exporting from India can also be done without setting up a physical warehouse or store in destination countries via e-commerce exports program – Amazon Global Selling.

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Frequently Asked Questions

Is duty drawback taxable under GST?
No. Since duty drawback is a refund and not profit, it is not taxable.
Who is eligible for Duty drawback?
To be eligible to claim duty drawback, an individual must be the legal owner of the goods that are being exported and should have paid custom duties at the time of importing inputs.
Published on July 12, 2022.

Sources:
1. https://www.cbic.gov.in/htdocs-cbec/customs/cs-act/cs-act-ch1-revised3#:~:text=Section%201.&text=(1)%20This%20Act%20may%20be,outside%20India%20by%20any%20person.%5D
2. https://taxguru.in/income-tax/duty-drawback-customs-act-1962.html#:~:text=Under%20section%2074%20of%20the,on%20export%20of%20manufactured%20articles.
3. https://www.cbic.gov.in/htdocs-cbec/customs/cs-act/formatted-htmls/cs-rulee
4. https://www.jmrodgers.com/services/duty-drawback/what-is-duty-drawback
5. https://www.cbic.gov.in/htdocs-cbec/dbk-idx
6. https://commerce.gov.in/wp-content/uploads/2020/12/Annex-3-2-Method-of-Calculation-of-FOB-value.pdf
7. https://www.cbic.gov.in/htdocs-cbec/excise/cxrules/cs-cxduties-st-dbk-rules1995
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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.

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