Every exporter pretty much aims to maximize profit margins
and save all possible costs. One of the more valuable incentives that make it
achievable is the government's Duty Drawback scheme. Under this scheme,
exporters get reimbursement for customs duties and taxes paid on raw materials
or components imported to make exported goods. It promotes exports, fosters
global competitiveness, and protects local products by refunding these duties
to be sold with a better edge globally.
In this blog, we will explain what duty drawback is, how it
works, different types, and how businesses can take advantage of it.
What is Duty Drawback?
It is a refund of taxes, duties, and fees paid on imported
items used in the manufacture or assembly of products that are used for
exportation. This scheme mainly aims to free the exporter from paying duty on
raw materials by refunding them, hence reducing the price of exported products.
The duty drawback is an export incentive that reduces the import duty levied on the
cost of production so that more companies will export. It prevents taxes from
being a barrier to trade and helps businesses focus more on their global reach.
How Does Duty Drawback Work?
Though a relatively straightforward process, duty drawback
claims are attracted by quite some processes to abide by the government rules.
Here is a simplified overview of how it usually works:
1. Import raw materials or components: A manufacturer
importing raw materials or components needed to produce goods meant for
exports.
2. Payment of Customs Duty: The importing party has paid the
customs duties, taxes, or fees imposed on an imported material at the time of
entry to the country.
3. Production or Assembly: Imported materials are used in
the production of assembled or packed products for export.
4. Export of Finished Products: The finished product
featuring the imported material is exported to the overseas marketplace.
5. Customs Duty Drawback Claim: The exporter makes a claim
to the customs authority to refund the duty paid on imported materials. A claim
made for drawing the refund of duty shall contain documentation evidence in the
form of import and export invoices, customs declarations, and proof to be
offered in support of the contentions that the imported materials have been
used in the production of the exported articles.
6. Drawback of Duties: When the correctness of such a claim
is found by the customs authorities, the duty drawback is put through, and a
refund is made to the exporter.
Duty Drawback Types
The schemes of duty drawback are of different types, each of
which has been formulated to suit every business requirement and situation.
Mainly in India, there are:
1. All Industry Rate (AIR) Drawback
All industry Rates are the drawback rates predetermined by
the government for various product categories. The rate is worked out on the
average incidence of customs duties paid on the inputs used for manufacture
into the exported goods. This rate has been announced periodically by the
government to cover a wide range of export products.
Advantages: The AIR drawback scheme is easy as exporters do
not require any extensive documentation to prove their claims.
Limitations: Since the rate is fixed, exporters cannot claim
a drawback for excess duties beyond the fixed rate, although they have paid
more than actual duties.
2. Brand Rate Drawback
For products not included under the AIR scheme, exporters
can opt for the Brand Rate drawback. It allows exporters to draw a refund based
on the actual incidence of duty on the imported materials used for specific
consignments of exports.
• Benefits: It offers a higher refund than the AIR scheme,
where the actual incidence of duty is higher than that which had been
predetermined.
• Restraints: It calls for more paperwork and is
time-consuming as it is liable for verification by the customs authorities.
3. Special Brand Rate
This facility is applied where an exporter can prove that
the amount of duty paid on the inputs exceeds 80% of the AIR drawback rate. In
that respect, a higher rate can be claimed.
4. Drawback on Re-Export of Imported Goods
If exported without any manufacturing process, the export
vendor can claim a 98% refund of the paid customs duty on importing the goods.
Such a type of duty drawback suits businesses engaged in the activities of
exporting products that have been imported for temporary use and testing.
Duty Drawback Benefits Exporters
The scheme provides a wide range of benefits to the
exporters, and it helps in reducing their costs besides enhancing their competitiveness:
1. Reduces Production Cost: By recovering customs duties on
imported raw materials, firms can significantly reduce the total cost of
production, thereby making the products cheaper in international markets.
2. Higher Profit Margins: Exporters with lower cost
structures either sell their products at a lower price or gain a larger profit
margin as determined by the price positioning of the product.
3. Stimulates Export Expansion: The refund of duties
encourages businesses to expand their export activities, thus contributing to
economic growth and enhancing the expansion of the export sector.
4. Improved Cash Flows: The duty drawback improves the cash
flow of an organization that can then be re-invested in more production,
marketing, or any other growth area.
5. Compliance with International Practices on Trade: The
duty drawback scheme is in consonance with international practice on trade, for
instance, World Trade Organization guidelines that allow a country to return
payable duties on all inputs imported for use in the country in the manufacture
of goods for export.
Maximizing Duty Drawback Benefits
To get the best out of duty drawback, here are a few tips
that may be quite very helpful:
1. Maintain Proper Records: Have record data on all their
importations and exportations and also the customs documentation, invoices, and
manufacturing records to use as proof for the duty drawback.
2. Apply Technology: Invest in software or digital support
tools to keep a record of items and the number of imports and exports, process
of production, and correct record data to easily produce required documents.
3. Rules Awareness: Always updated with new policies from
the government, rates, and eligibility criteria that ensure strict compliance
and timely receipt of maximum refunds.
4. Professional Help: When the process becomes overwhelming,
hiring a customs broker or a duty drawback consultant who specializes in
getting through all the finer points of the scheme might be required.
5. Cash flow planning: Because processing claims for duty
drawback requires certain periods, the cash flow and financial projections
would have to consider the likelihood of delay.
Conclusion
In the drive to reduce costs yet be more global in the
offering of their products, duty drawback has emerged as an unbeatable tool for
exporters. This refund scheme of taxes helps businesses build competitive
advantage products, make profits, and channel saved money back into growth in
the pursuit of international markets. The process may not be totally lacking in
its complications, but those exporters who implement the right strategy or
planning position themselves to fully exploit duty drawbacks.
