Duty drawback scheme — What is it and how can exporters from India benefit?

While many companies in India may dream of expansion, the cost of doing global trade and exporting goods to overseas markets can be challenging. Fortunately, the Indian government offers a valuable mechanism to ease this burden for exporters: the duty drawback scheme. This initiative provides a refund on duties and taxes paid by exporters on the inputs used to manufacture goods that are eventually shipped overseas. 

By providing this financial relief, the duty drawback scheme for exporters aims to improve the competitiveness of Indian businesses and Indian exports in the international marketplace. 

What is the duty drawback scheme in India, and how does it work?

So what is the definition of a duty drawback scheme? Let’s explain how it works in India. Administered by the Central Board of Indirect Taxes and Customs (CBIC), it allows Indian exporters to reclaim customs and excise duties on inputs for exports. This means that exporters can get a refund on components, raw materials and consumables used in the manufacturing or processing of goods that are subsequently exported out of India via international logistics.

Here’s how it looks in practice. Let’s take an example of a garment exporter in India,

• Import of Raw Materials: An Indian textile manufacturer in Surat imports high-quality raw cotton from Egypt to produce premium bed linens for the international market. 
• Manufacturing Process: The manufacturer then uses this imported cotton, along with other domestically sourced materials and processes, to manufacture a batch of bed linen.
• Export of Finished Goods: Once the bed linen is ready, the manufacturer receives an export order from a retailer in the United States. They ship this consignment of bed linen to the US using express shipping.
• Filing the Duty Drawback Claim: At the time of export, the manufacturer files a claim via the duty drawback scheme with the customs authorities. They provide documentation including the import invoices showing the duty paid on the raw cotton, the export documents (like the shipping bill), and details of the manufactured goods. 
• Verification and Sanction: The customs authorities examine the documents to verify the authenticity of the import, the utilization of the imported cotton in the exported bed linen, and the adherence to the duty drawback rules. If everything is in order, they sanction the duty drawback claim.
• Receiving the Refund: Based on the applicable duty drawback scheme rates, the manufacturer receives a refund of the customs duty they initially paid on the imported cotton. The savings may even be enough to cover their international shipping charges from India.

This refund essentially neutralizes the impact of these duties and shipping charges, making Indian exports more price-competitive in the international arena.

Types of duty drawback scheme rates

The government has established two different types of duty drawback rates to accommodate the diverse range of export products and manufacturing processes in India. 

• All Industry Rate (AIR): This is a standardized duty drawback rate determined by the government for a wide array of export products. The AIR is calculated based on the average incidence of customs and central excise duties suffered by various export sectors. The latest AIR can be found in drawback schedules posted on the CBIC website¹.
  
  
• Brand Rate: When the AIR is not available, exporters can opt for the brand rate. Here, the exporter applies to the customs authorities to fix a specific duty drawback scheme rate based on the actual duties paid on the imported inputs used in their particular manufactured goods.

Fixed percentage duty drawback rates are also affected by the amount of time the raw goods spend in India before they are consumed and sent for export².

Duty drawback rules and eligibility criteria for Indian exporters

To benefit from the duty drawback scheme, exporters must meet certain eligibility criteria. These duty drawback rules are designed to ensure the integrity and proper implementation of the scheme. Key conditions typically include:

• The goods being exported must have been manufactured or processed in India using imported inputs on which customs or central excise duties have been paid.
• There must be documentary evidence to support the payment of these duties on the imported inputs.
• The export must be made in accordance with the relevant export regulations.
• The exporter must file a claim for duty drawback within the prescribed time limits.

Meeting these duty drawback rules is essential for a smooth and successful claim process. Exporters should familiarize themselves thoroughly with these requirements to avoid any potential delays or rejections.

Benefits of the duty drawback scheme for exporters

The duty drawback benefits for exporters in India are as follows: 

• Improved Cash Flow: By receiving refunds on the duties paid, exporters experience a positive impact on their working capital and overall cash flow. This allows them to reinvest in their business, expand operations, and manage their finances more effectively.
• Reduced Production Costs: The duty drawback scheme effectively lowers the cost of production for exported goods by offsetting the initial duty burden on imported shipments. 
• Enhanced Competitiveness: With reduced costs, Indian exporters can offer more attractive prices to international buyers, thereby enhancing their ability to compete with businesses from other countries. 
• Boost to Exports: By making exporting more financially viable, the duty drawback scheme encourages more businesses to engage in international trade, ultimately contributing to the growth of India's overall exports.

Export from India to the world with DHL Express

The duty drawback scheme is a vital pillar supporting India's export sector. By providing a mechanism for refunding duties paid on imported inputs, it directly addresses the cost disadvantages faced by exporters, fostering a more competitive environment in the global market. 

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