India’s duty drawback scheme is a vital tool to make exports possible in India so that domestic businesses remain competitive in international markets. The Customs Act, 1962, was introduced under this scheme, where, the payments of duties and taxes paid on imported goods utilised in the production of export goods are refunded. Given to the Indian exporters as a lifeline, customs duty drawback eases their financial burden and enhances profitability. To be able to claim duty drawback fully, businesses need to understand this scheme in great detail—from the types of duty drawback to eligibility and the process of claiming the drawback.

This blog will explain what the duty drawback scheme involves, its eligibility criteria, documents required, types of duty drawback, and challenges exporters face in claiming duty drawback.

What is the Duty Drawback Scheme?

The government duty drawback scheme is a scheme under which duties and taxes paid in the form of customs and central excise are refunded in case duties have been paid on inputs or raw materials used in manufactured goods exporting goods. It aids exporters in maintaining a competitive pricing position against rivals in international markets.

Under Section 74 and Section 75 of the Customs Act, 1962, exporters can claim refunds for either:

Section 74 – Re-export of Imported Goods

Duty-paid Goods Manufacture and Export Manufacture and Export of Goods using Duty-Paid Inputs (Section 75)

The customs duty drawback reduces the total production costs by refunding duties paid on the import of material, enabling the rate of the duty paid on the export to increase the level of business profitability and increase India's export balance.

Eligibility for Duty Drawback Scheme

To avail the benefits under the duty drawback scheme, exporters must satisfy the following eligibility criteria:

Export of Goods: The export of goods must emanate from India.
Duty Paid Inputs: Payment has to have been made on the import or raw material used in the export process.
Sale Proceeds: Payments in foreign exchange obtained in respect of such exports shall be deposited in India within such time as may be prescribed by the Reserve Bank of India (RBI). However, exceptions are made here when compensation is got through ECGC or RBI has written off realisation requirements.
Goods Not Prohibited for Drawback: Export goods that do not fall under categories in respect of which duty drawback is prohibited (e.g., goods exported to Nepal/Bhutan without payment in freely convertible currency).
Negative Value Addition: The value addition of exports is that the export of goods should have value addition, meaning the value of an export should not be less than the value of imported material in the case of exports.
Timely Filing: Duty drawback claim must be filed within the prescribed time.

Duty Drawback When not eligible.

Section 75 of the Customs Act, 1962 provides some disallowances or cases where the Duty drawback scheme allowed can be recovered.  Further, Section 76 (2) of the Customs Act, 1962 authorized the Central Government to issue notifications prohibiting drawback if the goods are likely to be smuggled back to India after export.

• Drawback Rules, 2017 also provide for certain disallowances. These are summarized below:
• If sale proceeds of export goods are not received within the time stipulated by RBI.
• If no Customs duty is paid on the inputs.
• If imported inputs were obtained under Advance Authorization without payment of duty.(In such case, the exporter can get Brand Rate of Duty Drawback fixed in respect of other 
• Inputs – Para 9 of MF(DR) Circular No. 48/2011 –Custom dated 31.10.2011).
• If the importer avails DFIA.
• Goods manufactured under Customs Bond where inputs were obtained without payment of Customs Duty.
• Goods manufactured by EOU or a unit in SEZ (as they obtain inputs/goods without payment of Customs Duty.
• In case of Negative Value Addition (i.e. Selling price of export goods is less than the value of imported goods [i.e. foreign exchange spent on import of raw material is more than the FOB Value of exports]).
• Jute batching oil is used in the manufacture of jute yarn, twist, twine, etc.
  Packing materials used in relation to the export of jute yarn, jute fabrics, and jute manufacture.
• If the wholesale price of goods in India is less than the amount of Duty Drawback due.
  Where specific rates are provided, drawback will not be paid if it is less than 1% of the FOB Value of the product, unless the drawback claim per shipment is over Rs.500/-
• Export to Nepal/Bhutan.  However, export to Nepal is eligible if payment is received in FCC (i.e. Dollars, EURO, Yen, British Pounds, etc.).
   
• Export of Alcoholic liquor, Cigarettes, Cigars, and Pipe Tobacco as stores to foreign-going vessels of less than 200 tons.
• If goods are exported by a vessel of fewer than 1000 tons; unless the certificate is submitted that sale proceeds in foreign currency have been received and goods have landed at the destination within three months.
• If Duty Drawback is less than Rs.50/-.

Broadly, drawback is not allowed if Customs Duty has not been paid on inputs or the manufacturer has availed some other benefit in respect of duty paid on inputs. The principle is that there cannot be a double benefit.

Duty Drawback – Other (interesting) provisions.

Duty Drawback available even when export proceeds are not realized in certain situations
Provisions of FTP about the realization of export proceeds are that in some cases, duty drawback is available even if payment is not received in Foreign Exchange through a bank (AD). As per Rule 16(A) (5) of Duty Drawback Rules, the benefits of drawback will be available to the exporter even if export proceeds are not realized if the following conditions are satisfied: -

1. Compensation is received from ECGC for the non-realization of sale proceeds and 
RBI Writes off the requirement of realization on merits and 
The exporter produces a certificate from the concerned foreign mission about the fact of non-recovery from buyers.

2. Recovery of Duty Drawback, if the sale proceeds not received – Where a drawback is paid to an exporter, but sale proceeds in respect of such export are not received in the prescribed period (or extended period as may be permitted by RBI), the drawback paid can be recovered from the exporter.  If subsequently, sale proceeds are received within a period of three months of such recovery, then the drawback recovered shall be repaid.

3 No time limit for demand for recovery of the erroneous payment of duty drawback  Demand can be raised for recovery of erroneous payment of duty drawback.  There is no time limit defined for raising such demand – Dadri Inorganics vs. CC [2010 ] 260 ELT 61 (Guj. High Court).

4. Interest in case of erroneous duty drawback – Where any drawback has been paid to the claimant erroneously or it becomes otherwise recoverable under Customs Laws, the claimant shall within two months from the date of demand, pay in addition to the said amount of drawback, interest at the rate fixed under section 28AB of Customs Act.  The amount of interest shall be calculated for the period beginning from the date of payment of such drawback to the claimant till the date of recovery of such drawback.

5. Punishment for fraudulent availment of duty drawback – Section 135(1) of the Customs Act provides for punishment of imprisonment of up to seven years in case of fraudulent availment of duty drawback. Similarly, an attempt to export goods that are prohibited under section 113 has also been made a criminal offense.

6. Goods exported in small vessels – If goods are exported in small vessels of less than 1000 tons, a landing certificate at the port of destination should be submitted within three months.

7. Overvaluation is an offense – Overvaluation of export invoices to avail higher duty drawback is an offense and a penalty can be imposed in such occurrences.

8. FOB Value in case of export by Land – In case of export through land customs station, FOB value will be calculated including loading charges and cost of domestic transportation up to land customs station.

9. Project Exports – There might be project exports instead of product exports.  In such cases, goods may be exported over a period of time for the execution of projects abroad.  This is also eligible for drawback.  The project should be registered with Customs Authorities.  Drawback is available on the value of the material supplied.

10.No Duty Drawback if the market price in India is less than the drawback due – Duty drawback shall not be allowed in respect of any goods, the market price of which is less than the amount of drawback due thereon.  

11. Export in CKD/SKD Condition – Sometimes, goods are packed in Completely Knocked Down (CKD) or Semi Knocked Down Condition (SKD) for convenience of packing and to avoid damage in transit.  Drawback is allowed even in such cases.

12. Export to Nepal /Bhutan – No drawback is available for export of goods to Nepal/Bhutan.  However, export to Nepal or Bhutan will be eligible if the payment is received in Freely Convertible Currency (FCC) e.g. USD, YEN, or Pound Sterling.

Documents Required for Duty Drawback Scheme

To claim a duty drawback, exporters need to furnish the following key documents:

Export bills or shipping bills
Export invoices and packing lists
Bill of lading or airway bill
Customs clearance documents
Proof of payment of customs central excise duties (duty payment receipts and bills of entry)
Proof of receipt of export proceeds makes inclusion of the bank realisation certificate (BRC) necessary.
If applicable, a certificate of origin
In certain cases, a letter of undertaking or bond

To avoid delays or rejections while claiming refunds, these documents must be done correctly and will be complete.

Types of Duty Drawback

The types of duty drawback can be broadly categorised into the following:

All Industry Rate (AIR)

In this method, the government prescribes a fixed rate of drawback for some export products. The rates are derived from input-output norms and average duty incidence; they are thereby determined annually. The small exporter that does not want to claim individual rates may prefer to use the AIR.

Brand Rate of Duty Drawback

However, if a specific export product has an all-industry rate that is insufficient or unavailable, exporters can apply for a brand rate. It consists of computing the actual customs duties actually paid on inputs and reclaiming such duties on the basis of individual production and duty data.

Section 74 Duty Drawback

This provision affects imported goods that are used only minimally and re-exported. Customs duties can be claimed up to 98 percent of that.
Duty drawback of these types provides exporters flexibility in which they can maximise refunds to their liking, based on the particular situation they may find themselves in.

How to Claim Duty Drawback

The process to claim a duty drawback involves the following steps:

Filing Shipping Bill: At the customs port of export, exporters must declare the intention to claim a drawback on a shipping bill filed.
Submission of Documents: Other cases require you to submit all required documents, such as invoices, bills of entry, and proof of payment of duty.
Duty Drawback Claim Submission: Claim the duty drawback, if appropriate, through the Electronic Data Interchange (EDI) system or, alternatively, on a manual basis.
Verification by Customs Authorities: The details are verified by customs officials: export classification, duties paid, and records of shipment.
Approval and Payment: The refund is credited to the exporter’s bank account linked to the shipping bill shortly after it is approved.

Exporters must avoid delays by carefully entering data, right-classifying goods manufactured, and submitting required documents on time.

Common Challenges in the Duty Drawback Process

While the duty drawback scheme simplifies the refund process, exporters often face the following challenges:
Incorrect Classification: An error in the Harmonised System (HS) code could result in the rejection of claims or underpayment of claims.
Inadequate Documentation: Claims may be delayed if missing or inaccurate documents are used.
Negative Value Addition: If the value of exported goods by the FOB is lesser than the value of the imported goods, there are drawback claims that will be rejected.
Non-receipt of Sale Proceeds: The refund will be recovered if sale proceeds are not realised within the stipulated time frame.
Fraudulent Claims: Penalties and legal consequences are associated with overvaluation or misdeclaration.

How to Avoid Mistakes in the Duty Drawback Process

Exporters can avoid pitfalls and ensure smooth refunds under the customs duty drawback process by following these best practices:

Accurate Documentation: They should maintain a file of customs duties paid, invoices, and details of the export process.
Timely Submission: That is a good reason to avoid disallowances—file duty drawback claims within the prescribed timelines.
Consult Professionals: To classify goods properly and avoid noncompliance with regulations, it is a good option to engage experienced customs consultants.
Verify Sale Proceeds: Prevent recovery of refunds by confirming that export proceeds are received in the stipulated period.
Regular Audits: Regular internal audits to look for duplicity that can be identified before the filing of the claim.
If these practices are followed, exporters can indeed reduce the odds of a large delay or error in the claim.

Conclusion

The Indian exporters depend very much on the duty drawback scheme, which allows the exporter to enjoy a zero customs central excise duty on imported goods without affecting the product cost. Businesses have several avenues for pursuing refunds under well-defined types of duty drawback, such as All Industry Rate and Brand Rate. However, this process is laborious, with special care being taken in the area of eligibility, documentation, and compliance with deadlines.

Filing correct claims—and overcoming common obstacles—will allow exporters to be successful in claiming duty drawback. By knowing just how they work and avoiding some common mistakes, businesses can improve their profitability and their status in global markets.
To ensure a seamless refund process and maximize profitability, consider leveraging professional assistance from MyGSTRefund, a trusted partner for export refund services.

FAQs

What is the duty drawback under Section 74?

Refunds that can be obtained through the reduction of duty paid on imported goods under Section 74 involve refunds of duty from goods that are re-imported into Pakistan in the same condition or with little or no use. Makers can recover up to 98% of customs duties actually paid at import.

What is the difference between duty drawback and refund?

Duty drawback refers specifically to the refund of customs duties, excise, or taxes paid on inputs used in export goods. However, refunds are wider and encompass GST, or broader taxes independent of the duty drawback scheme.

Who can file a duty drawback?

Duty drawback claims can be made by exporters for whom previously paying customs duties on imported material or input goods for subsequent export was incurred.

What is an example of a drawback?

An example of a drawback would be when a company imports steel, pays for customs duty, and uses it to manufacture machinery, which they then export. Under the duty drawback scheme, customs duties paid on the imported steel are refunded.

Who can claim duty drawback?

Eligible exporters can claim duty drawback if the duties paid on imported goods used to produce export products were incurred, as long as all eligible criteria are met.