Duty Drawback in Q&A

What Is Duty Drawback?

Duty drawback is a government scheme that allows exporters to claim a refund of customs duties, taxes, and fees paid on imported goods, if those goods are later:
--> Exported or
--> Used in producing exported products or
--> Destroyed under customs supervision.
This drawback mechanism helps exporters remain competitive by reducing costs and improving cash flow.

Key points in Q &A

• Are there any exceptions where duty draw back does not apply?
  Yes, No refund if goods are lost due to negligence or destroyed without customs approval.

• What is the Legal Basis for DDBK?
  Governed by Customs Act 1962 (Sections 74-76) and by Customs and Central Excise Duties Drawback Rules 2017. Duty drawback scheme is administered by CBIC (Department of Revenue).

• What taxes are refunded?
  Duty drawback mainly covers Basic Customs Duty (BCD). Other levies like IGST, Compensation Cess, anti‑dumping or safeguard duty are not refundable.

• DDB applies even to Destroyed goods?
  Yes, duty drawback can apply if imported goods are destroyed in manner approved by customs and as per customs authorized procedures. Exporters must maintain proper records/evidence like destruction certificate, inventory, photos, or reports, proving the goods were destroyed as per rules.

Duty Drawback Rate Structures

Duty drawback/Refund rate notified can in two formats. It can be Percentage of FOB value or Flat rate per unit/item.

1. Percentage % based system is used for Products with highly volatile prices or of varying quality, or high-value items where input costs differ greatly per unit.
   Thus ensures the exporter gets a proportional, fair refund of the taxes/duties paid on inputs
2. Flat rate system is used in case of Standardized, mass-produced products where the input cost is consistent.
   So, Refund is the same for every piece, no matter the selling price.

Types of Duty Drawback

There are two types of drawback under the Customs Act.

1. Sec 74 that deals with drawback on Re-export of imported goods and
2. Sec 75 that deals with drawback on export of manufactured goods.

We shall read abt these provisions in detail in coming paragraphs.

Section 74 : Applies to Re-export of Imported Goods

This section is applicable only when imported goods are re-exported, without being used or after minor/limited use. Refund is subject to the following conditions:

1. Time limit: The imported Goods must be re-exported within 2 years from date of duty payment (extendable for sufficient cause by Commissioner of customs).
2. Goods must be identifiable as the ones originally imported.
3. Re-export for Warranty/Repair: Goods returned abroad for warranty replacement or repair can qualify for drawback, provided customs procedures and RBI permissions are followed.
4. Baggage imports: Drawback under this section is also admissible for goods imported as baggage, provided they are re-exported within the prescribed time and identifiable.
5. Postal imports: drawback is also applicable for goods were imported/exported by post.
6. Note: Baggage, cargo, and postal imports all qualify for drawback, but each must be re‑exported through the same mode they were imported in, so customs can verify identity and maintain proper records.

Refund Rates under S.74:

Key particulars of DDB rates are given below:

1. If goods are not used after import, refund up to 98% of duty paid on re-exported goods may be allowed. (Key point here is, goods must be identifiable as the same goods originally imported.
2. Reduced refund if in case the goods are subject to use (only minor use permitted). Major transformation doesn’t fall under purview of this section.
3. Reduced refund shall be calculated as per the govt- notified scale of depreciation. Typical refund brackets range from 98% down to 65%, depending on the category of goods and duration of use. The longer the goods are used, the lower the refund percentage. Commercial/industrial goods: assumed to have slower depreciation and personal goods assumed to wear out faster, so refund percentages drop more quickly.
4. Refund Limitation: For most goods, if they are used beyond 18 months, no refund under Section 74 is admissible. except for motor vehicles, they have a special extended limit of 4 years, with scaled depreciation applied.

Some FAQs

• What is minor use?
  The Customs Act does not define minor use. It can be interpreted as goods that have been put to limited use. Meaning, goods are tested, tried, or used for a short duration but are still in essentially the same condition as imported.

  If there is Substantial transformation then goods might not qualify for DDB under S.74 Instead such cases may fall under S.75 on the grounds that the imported material is used as input in further manufacturing.

• How is it possible to ensure it is the very same goods that were originally imported?
  Customs authorities must be able to verify and establish identity through:
  --> Marks or serial numbers or any other unique identifiers on the goods/packages
  --> Documentation such as Bill of Entry, Import Invoice, Packing List, and Shipping Bill.

Claim process:

Drawback claims under Section 74 typically require manual filing and physical verification of the goods to ensure they match the original imports. Claim related provisions are as follows:

1. Application deadline: The formal application for a refund must be filed within 3 months from the date of the "Let Export Order". The time limit can be extended by another 3 months by AC/DC of customs, if there is sufficient cause.
2. Documents to be filed: Triplicate Copy of Shipping Bill, Copy of Bill of Entry, Import & Export Invoices, TR-6 Challan (evidence of duty payment), Identity Verification proof, RBI Permission (in case of re-exporting for warranty claim or quality rejection)
3. Declaration: At the time of re-export, the exporter must explicitly declare on the Shipping Bill or Bill of Export that the export is being made under a claim for drawback under Section 74.

4. Customs verification:
   Customs officers shall physically examine the cargo to confirm it has not been altered (beyond minor testing or repacking) since importation. Once verified, refund sanction order is issued and the approved amount is credited to your bank account.
   If the exporter is Accredited Client (AEO) or the exporter has high compliance track record, shipment might be cleared based on a documentary check alone without opening the container.

Section 75 : Drawback on Imported Inputs Used in Exports

This section covers refund of Customs duty paid on raw materials or components that are used in manufacturing goods that are exported. Following are the key points covered under that section:

1. The exported goods must have been manufactured or processed domestically using the imported inputs on which customs duties were paid.
2. For manufactured goods under Section 75, no drawback is available if the goods produced from imported materials were used in India before being exported.
3. The export value of the finished products must not be less than the value of the imported materials used (i.e., no negative value addition)
4. The drawback amount must not exceed one-third of the market price of the export product.
5. Export proceeds must be received in convertible foreign exchange within the timeline prescribed by the RBI (typically 15 months). Duty drawback is normally granted on the assumption that export proceeds are received. If proceeds aren’t realized in time, the drawback may be recovered unless coverage by insurance.
6. Unlike S. 74, where there is manual filing, claims under S.75 are filed electronically via EDI system ie ICEGATE
7. The relevant refund rates are notified by the Government annually as All Industry Rates (AIRs) or Brand Rates.

What is All Industry Rate (AIR)?

Standard refund rates are notified by the government annually, for commonly exported products. These rates are determined based on the average duty incidence on inputs used in the manufacture of those product.

Claiming under this requires minimal documentation since the rate is predetermined by Govt and exporters don’t need to prove actual duties paid for each consignment.

Application: as already mentioned above in the intro to Sec.75, ‘Application’ is deemed filed the moment the exporter submits the Shipping Bill electronically in the EDI system while exporting. Shipping bill shall contain a statement declaring that DDB is claimed and relevant DBK Tariff Item Number also has to be updated.

What is Brand Rate (Specific)?

Brand rate is fixed by Government, when no AIR exists or if AIR doesn’t cover at least 80 % of actual duty paid on inputs. In such situations, Exporter can apply to Customs authorities for fixation of Brand Rate.

Brand Rate is Fixed individually for a specific exporter for the specific goods, based on actual duty incidence on imported inputs used in their exported products.

Application process for applying for Brand Rate is as follows:

1. Exporter must file an application with the jurisdictional Customs authority within 3 months from the Let Export Order (LEO) date extendable up to 12 months with proper justification), in prescribed format.
2. Applying for BR Requires detailed documentation from the exporter ie import invoices, duty payment proofs, consumption records to establish input-output ratio, Cost-sheets, Production/stock registers and export documents, since it is based on actual duty incidence for that exporter.
3. Customs verification: Under Section 75, customs verification focuses on documents and records proving imported inputs were used in the exported product, rather than physically matching the same goods as in Section 74.

Common conditions for Duty draw back

Certain fundamental conditions must be satisfied for claiming duty drawback, common to both Section 74 or Section 75 of the Customs Act. They are as follows:

1. Ownership: the claimant must be the legal owner of the goods at the time of export.
2. Application filing: Refund/drawback claim must be filed within the prescribed time (usually 3 months from Let Export Order, extendable).
3. If the goods fall under prohibited categories, drawback is not admissible under either section.
4. If only part of the consignment is exported, drawback is allowed proportionately under both provisions.
5. Drawback is not admitted if the claim is less than ₹50 per shipment.

Section 75A: Interest on Duty Drawback

Section 75A (1) of the Customs Act provides for payment of interest on delayed duty drawback, ensuring exporters receive timely refunds and compensation for administrative delays. Following are the key points covered under the section.

• Section 75A applies to both types of drawback claims.
• If duty drawback is not disbursed within one month of filing a valid claim, the exporter becomes entitled to interest on the delayed payment.
• The Government notifies the penal interest rate from time to time. At present, it is around 6% per annum on the drawback amount due and starts accruing from the day after the one-month period expires until the date the drawback is actually paid.
• Note that, the Interest is payable only when the claim is valid and complete. if delays due to incomplete documentation or exporter’s fault do not attract interest.

 

Section 75A (2) of the Customs Act provides that if duty drawback amount is erroneously received or later found to be undue, the exporter is required to repay it. Key points are:

• the exporter must repay it within 2 months of the demand notice to pay it back interest-free.
• if not paid, interest at the prescribed rate ( 15% per annum) is payable from the date of receipt of the drawback until repayment.