Drawback was established in 1789 in order to promote exports and manufacturing within the U.S. market. Claimants can recover the duties, taxes and fees paid on the imported merchandise.
As old as the hills
Duty drawbacks, essentially, are post-export replenishment/remission of duty on inputs used in export products. In other words, many governments, particularly those in highly protected economies, refund all taxes paid by an exporter – be it customs duty, service tax or excise duty – so that the products remain competitive in the international markets. And this process of refunding all taxes involved in the manufacturing/production process, once the export is completed, is called duty drawback. Another motivation behind a scheme like Duty Drawback (henceforth referred to as DBK) is to continue to keep the domestic market immune to foreign goods by keeping import duties high.
Moreover, since the imported product is not consumed in the importing country and is ultimately exported, it is only logical for the charged duties to be refunded. Why then not charge ‘zero’ duties to begin with? While that is an ideal situation and India’s Foreign Trade Policy (FTP) does have extremely popular schemes – Advance Authorisation (AA) and Duty-Free Import Authorisation (DFIA) – that cater to such situations, a manufacturer can’t always pre-decide if anyone is importing something to use in a product that will be sold in the domestic market or an export item. Can (s)he?
Hence, Chapter X of The Customs Act, 1962, exclusively deals with duty drawbacks and among other things, reads, “Where it appears to the Central Government that in respect of goods of any class or description manufactured, processed or on which any operation has been carried out in India, being goods which have been entered for export and in respect of which an order permitting the clearance and loading thereof for exportation has been made under section 51 by the proper officer, or being goods entered for export by post under section 82 and in respect of which an order permitting clearance for exportation has been made by the proper officer, a drawback should be allowed of duties of customs chargeable under this Act on any imported materials of a class or description used in the manufacture or processing of such goods or carrying out any operation on such goods, the Central Government may, by notification in the Official Gazette, direct that drawback shall be allowed in respect of such goods.”
Duty drawback and asia
Before further criticizing the DBK scheme, let’s have a look at the history behind it.
CHINA: ‘Elena Ianchovichina’ of The World Bank (she’s currently the Lead Economist in the Chief Economist Office of the World Bank’s MENA region), had authored a paper almost a decade back titled, ‘Trade Policy Analysis in the Presence of Duty Drawback’. Ianchovichina concludes, “Concessional import rights, such as duty exemptions, which override existing protection, have been an important element of the process of gradual trade liberalisation that has boosted growth in China and other countries.”
S. Korea: Similarly, in one of the best-written books on the subjects, titled, ‘Best Practices in Trade Policy Reform’, a team of prominent World Bank economists note, “The government (of South Korea) created special regimes for both direct and indirect exporters that enabled them (exporters) to obtain inputs rapidly and at world or near-world prices. Thus, exporters were insulated from the negative effect of import protection.”
Taiwan: Speaking of Taiwan, the authors note, “Since 1955, Taiwan’s support for exports has included rebates of import duties and other indirect taxes on inputs used directly or indirectly to produce manufactured exports.”
From these examples, it becomes amply clear that all top Asian manufacturing powerhouses have used duty drawbacks for decades. More importantly, proper use of DBK schemes have played a critical role in some of these economies becoming export hubs for manufacturing goods.
But why hasn’t it made any major difference in India? The answer is simple – imperfect implementation at the ground level.
Over coming with issues
India is coming up with the several other issues that have ensured the DBK scheme has come to making India an exporting powerhouse, as has been the case in other Asian countries. Firstly, at times, there were huge delays in the refunds reaching the exporters. The documentation, itself, was a headache. And in case the process goes to litigation, the delays ran into years and consequently, costs spiral. To overcome with this Section 75A of The Customs Act, 1962, clearly says, “Where any drawback payable to a claimant under section 74 or section 75 is not paid within a period of one month from the date of filing a claim for payment of such drawback, there shall be paid to that claimant in addition to the amount of drawback, interest at the rate fixed under section 27A from the date after the expiry of the said period of one month till the date of payment of such drawback,”
Low drawback rates as per the All India Rates (AIR) can resort to Brand Rates of Drawback.
There are however questions that these alternative raises. First, why should the government allow a branded entity the benefit of a higher drawback rate under the same DBK Scheme?
Time for a change
If we earnestly want the ‘Make in India’ movement to become a success, there’s a need for an absolute overhaul of a flawed-by-character and inefficient-by-dimension arrangement.
Brand Rate Fixation-Brand Rates: Too cumbersome to claim?
Duty drawback rates in India are mostly associated with All Industry Rates (AIRs) based on SION. And while there is a provision for fixing Brand Rates, why do only a few exporters opt for it? Are Brand Rates suitable for only those exporters who engage in value additions and suffer from significant wastage during the production cycle? Is AIR actually more realistic in addition to being simple? And is the ‘claim process’ the very reason why Brand Rates isn’t a popular option for Indian exporters?
It’s a known fact that many governments across the globe, particularly those in highly protected economies, refund all taxes paid by an exporter – be it customs duty, service tax or excise duty – so that the products remain competitive in international markets. [China is the biggest example of how government incentives and subsidies can do wonders for the export sector]. And this process of refunding all taxes involved in the manufacturing/production process, once the export is completed, is called duty drawback.
In other words, duty drawbacks, essentially, are post-export replenishment/remission of duty on inputs used in export products. And India is no exception! To negate the impact of import duties, and to ensure that Indian products are competitive in global markets, the Indian government too had introduced the duty drawback scheme years back.
Under the duty drawback scheme, Indian exporters may avail remission through two mechanisms – the All Industry Rate (AIR) or the Brand Rate. AIR is essentially an average rate based on average volume and value of inputs [as per the standard input and output norms (SION)] and duties (both Excise & Customs) borne by them and service tax suffered by a particular export product. In fact, AIRs are notified by the government in the form of a Drawback Schedule during various time intervals.
The Brand Rate on the other hand is allowed in cases where the export product does not have any AIR of duty drawback or the same neutralises less than 4/5th of the duties paid on inputs used in the manufacturing of export goods. Surprisingly, a majority of exporters prefer to claim remission on the basis of AIR, while complaining that AIR does not fully negate the impact of duties suffered as SION is not in tune with market realities. But then, why don’t they opt for Brand Rate Fixation scheme? What’s stopping them? Is it a lack of awareness about the scheme or the very ‘process’?
First, let’s see what makes an exporter eligible for Brand Rates of duty drawback. An exporter, according to Central Board of Excise and Customs (CBEC), can apply for Brand Rate fixation where the export product has not been notified in the AIR Schedule or where the exporter considers that AIR of duty drawback is insufficient to fully neutralise the duties suffered by his export product.
Under this scheme, exporters are fully compensated for customs, central excise duties and service tax actually incurred by them. Sounds fair. But how does an exporter go about proving his case? This is the crux of the matter, as apparently the documentation and the process to apply for Brand Rate fixation negates the benefits. An exporter has to produce documented proof about the actual quantity of inputs/services utilised in the manufacturing of export product along with evidence of payment of duties. While the government sure needs to have documented proof, the troublesome method of seeking proofs keeps exporters away from the mechanism.
” Duty drawback is a convenient way for preferential economies to continue to maintain high tariff barriers, while at the same time increasing the competitiveness of its own products in international markets. Duty drawbacks are generally not considered as direct subsidies in importing nation”
Let us then take a look at what this so-called complicated process – of fixing a Brand Rate – entails. The exporter who wishes to go for Brand Rate fixation has to make an application to Concern authorities in the prescribed format with a drawback calculation worksheet, along with enclosures (in the form of three drawback statements called DBK-I, II/II-A & III/III-A), within 60 days from the date of export of goods. Data regarding consumption of inputs in manufacturing of export goods are furnished in DBK-I statement. Duties paid to Customs are furnished in DBK-II and DBK-III statements, respectively. And there is more! The applicant also has to file DBK-IIA and DBK-IIIA statements to declare the stocks of imported and domestic materials commencing three months prior to the date of first supply upto the date of application.
The application now has to be submitted to the Duty Drawback Section Customs Commissionerates which has jurisdiction over the factory of production of the export product.
The Customs authorities then conduct verification of the authenticity of utilisation of inputs and payments of duties on the inputs on the basis of records maintained by the exporter. A verification report is then sent to the Directorate of Duty Drawback. The Duty Drawback Section Customs, after going through the verification report and other relevant documents submitted by the exporter, processes and issues a drawback Brand Rate Letter to the exporter. Basis this letter the concerned Custom House (from where the goods were exported) refunds duty drawback to the exporter.
Different view
Despite the complicated process involved in Brand Rate fixation, there are a number of exporters who opt for this mechanism. For, the simple fact remains that,more complex an export product
the less are the chances that the true value of duties suffered will be reflected in AIR.
The reason is simple. It is almost impossible for SION mechanism to do justice to all variations of several products that are exported out of India and with more complex products being manufactured and exported out of India, it is but natural that exporters will seek the actual remission that is due to them and not the standardized rates.
The Way Forward
Obviously, SION is a “one size fits all” formula, which will not work for exporters of non-standardized products. But with exports of specialty products on the rise, more exporters are expected to move to Brand Rate fixation mechanism.
The government also seems to be aware of the fact and is working towards increasing exporters’ confidence in Brand Rate fixation mechanism.
In fact, the requirement of submitting original duty paying documents have been done away with vide a Customs Circular (54/2016) dated November 22, 2016. Eligible exporters now need to submit a self-attested declaration stating that the drawback calculations are correct and the duty paying documents have been endorsed for utilisation of the claim. A similar certificate from an independent Cost Accountant or Chartered Accountant endorsing the same is also required. CBEC expects that this will significantly reduce time and efforts of both exporters and Customs officials.
This sure is a welcome change. Brand Rate fixation, under the current drawback scheme, is possibly the only way to fully negate the impact of duties suffered, specially by exporters who are manufacturing and exporting value-added goods. If policymakers earnestly want the ‘Make in India’ movement to succeed, they need to overhaul the complicated Brand Rate fixation mechanism and make the process simpler. It’s that simple!
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2020-06-08