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Have you ever wondered how businesses stay competitive in international markets despite the high export costs? 

One significant factor is the ability to reclaim duties paid on exported goods—a financial benefit known as the export duty drawback. 

In this guide, we’ll dive into what export duty drawback is, why it’s crucial for your business, and specifically how to calculate duty drawback on export to maximise your returns.

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Definition and Purpose of Export Duty Drawback

What is the duty drawback for exports in India? 

Simply put, it’s a refund on customs duties paid on imported goods that are subsequently exported. 

This scheme aims to make exports more competitive by reducing the cost burden on exporters. By reclaiming these duties, businesses can lower their operational costs, thus making their products more appealing in the global market.

But how do you claim duty drawback on export? It’s crucial to understand the eligible components and the calculation methods involved. The aim is to ensure you don’t leave any money on the table.

Types of Duty Drawback on Export

Duty drawback on exports can significantly reduce costs for businesses engaged in international trade. Understanding the different types of duty drawbacks can help you optimise your claims.

Here’s a table summarising the different types of duty drawback on export:

Type of Duty Drawback

Description

Example

Manufacturing Direct Identification Drawback

Applicable when imported materials are directly used in manufacturing exported goods.

A company imports aluminium sheets, uses them to manufacture car parts, and exports them.

Manufacturing Substitution Drawback

Allows duty refund on imported materials even if export goods are made using domestically sourced equivalents.

A company imports high-quality fabric but uses similar locally sourced fabric to manufacture and export garments.

Unused Merchandise Direct Identification Drawback

For imported goods that are exported without being used in manufacturing.

A retailer imports electronic gadgets and exports the same gadgets without using them.

Unused Merchandise Substitution Drawback

Refunds duties on imported goods when identical domestically sourced goods are exported.

A company imports machinery but exports an identical machine sourced domestically before using the imported one.

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Also Read: Definition, Types, and Effects of Tariffs in International Trade

Eligibility Criteria for Export Duty Drawback

Let’s dive into what makes your goods eligible for duty drawback and how you can benefit from this scheme.

how to calculate duty drawback on export

Overview of Conditions for Eligibility

To be eligible for a duty drawback, you must meet certain conditions. First and foremost, the goods you export must have incurred customs duties upon import. Any item you import into the country, which becomes part of your exported product, can qualify for a duty drawback.

Understanding how to claim duty drawbacks on exports involves knowing the specifics of these conditions. You must prove that the imported goods were used to manufacture or pack the exported products. 

This ensures that only those who genuinely incur these costs can reclaim them, maintaining the integrity of the duty drawback scheme.

Ownership Rights of Goods

Another critical factor in calculating duty drawbacks on exports is the ownership of the goods. To be eligible, you must have clear ownership of the goods from the point of import to the time of export. This means that you, as the exporter, should have purchased and owned the imported goods used in your manufacturing process.

Ownership rights are crucial because they prevent fraudulent claims. If the goods change hands several times before being exported, it becomes challenging to track the original payer of the customs duty. Hence, maintaining clear and documented ownership helps streamline the drawback process.

Also Read: Understanding Customs Clearance Fees and Procedures in India

Payment of Customs Duty on Imported Goods Used in Manufacturing

Paying customs duty on imported goods is a prerequisite for claiming a duty drawback. This might seem straightforward, but keeping meticulous records of all duties paid is essential. When you import raw materials or components, ensure that all customs duties are documented and paid in full.

This documentation is vital when calculating duty drawbacks on export because it forms the basis of your claim. Without proper records, proving that duties were paid becomes difficult, leading to the potential rejection of your drawback application.

Applicability to Goods Carrying Customs Duty Upon Import and Subsequent Export

The duty drawback scheme is designed to apply to goods that carry customs duty upon import and are subsequently exported. Whether you’re exporting the imported goods in their original form or as part of a manufactured product, they must have incurred customs duties at the point of import.

For instance, if you import electronic components to manufacture gadgets for export, the duty paid on those components is eligible for drawback.

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Also Read: Import and Export Services: Basic Guidelines and Procedures

Rate Types and Calculation Factors for Duty Drawback

Understanding the rate types and calculation factors for duty drawbacks is crucial if you're looking to maximise your export profitability. 

When calculating duty drawback on export, it's essential to know the different rate types available, the factors that affect your claim, and how to evaluate the conditions for determining the allowed duty drawback.

Introduction to Duty Drawback Rate Types

When calculating duty drawback, there are three main rate types: all industry rates (AIR), Brand Rates, and Special Brand Rates. Knowing the differences between these rates helps you choose the most beneficial one for your exports.

All Industry Rates (AIR)

 AIR is a standardised rate published annually by the government. It’s based on the average incidence of customs, central excise duties, and service tax on export products. 

AIR simplifies the process by eliminating the need for exporters to calculate exact duties paid on inputs. This rate applies to over 3,900 export products and is ideal for standard exports.

Brand Rate 

If your products are not covered under AIR or if the AIR does not fully neutralise the duties paid, you can opt for the Brand Rate. This rate is calculated based on the duties paid on imported inputs used in manufacturing the export goods. To claim this, you need detailed documentation proving the duties paid.

Also Read: Guide to Understanding Common Port Charges and Dues

Factors Affecting the Calculation of Duty Drawback

Several factors impact the calculation of duty drawback. Understanding these can help you optimise your claims.

Minimum Percent 

There’s often a minimum percentage threshold for duty drawback claims. For instance, the duty drawback amount should typically be at least 1% of the FOB value of the export goods. If the claim falls below this percentage, it may not be eligible for a refund unless it exceeds a specific amount, such as Rs. 500 per shipment.

Amount 

Claims must meet a minimum amount criterion. For example, if the calculated duty drawback is less than Rs. 50, it may not be processed.

Documentation 

Accurate and comprehensive documentation is crucial. This includes proof of duty payment on imported inputs, export documents, and proof of the goods being used in manufacturing. Incomplete or inaccurate documentation can lead to delays or rejections.

Also Read: POL in International Shipping Terms

Condition-Based Evaluation for Determining Allowed Duty Drawback

To accurately calculate duty drawback on export, you must consider various conditions and limitations. These conditions ensure the scheme is used appropriately and benefits genuine export activities.

Condition 1: Usage of Imported Goods

If the goods were imported and re-exported without use, up to 98% of the customs duty paid can be claimed as a duty drawback. However, if the goods were used, the drawback is calculated on a sliding scale based on the extent of their usage.

Condition 2: Time Limit for Export:

The duty drawback claim must be made within a specific timeframe. Typically, you must apply within three months from the date of export, though this can be extended up to twelve months with the appropriate fee and conditions.

Condition 3: Value Addition

The value of the export goods should not be less than the value of the imported materials used in their manufacture. Additionally, the government may prescribe a minimum value addition to ensure that the exports genuinely benefit the economy.

Condition 4: Market Price Limitation

The duty drawback amount should not exceed one-third of the market price of the export product. This prevents excessive claims that could distort market prices and ensures fair compensation.

Also Read: Import and Export Trade: Understanding its Impact and Strategies in India

How to Calculate Duty Drawback on Export: Procedure

Calculating duty drawback can seem complex, but you can ensure you get the full benefits with the proper steps. 

If you're wondering how to calculate duty drawback on export, this section will walk you through the essential steps, ensuring you meet all requirements and maximise your refunds.

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how to calculate duty drawback on export

Step-by-Step Guide on Calculating the Allowed Duty Drawback Amount

Here's a simplified, step-by-step guide to help you navigate through it:

  1. Identify Eligible Duties: List all duties paid on imported and domestic inputs manufacturing your export products. This includes customs duty, central excise duty, and service tax.
  2. Gather Documentation: Collect all necessary documentation, including invoices, proof of duty payments, and export declarations. Accurate records are crucial for substantiating your claim.
  3. Determine the Rate Type: Decide whether your export qualifies for All Industry Rates (AIR) or if you need to apply for a Brand Rate. AIR is a standardised rate, while the Brand Rate is based on actual duties paid and requires detailed documentation.
  4. Calculate the Drawback Amount

For AIR:

  • Use the government-notified percentage of your export products' Free on-board (FOB) value.
  • Example: If the AIR is 5% and the FOB value is $100,000, the duty drawback amount would be $5,000.

For Brand Rate:

  • Calculate based on actual duties paid on inputs. This involves detailed calculations and may require assistance from a customs expert.
  1. File Your Claim: Submit your claim using the prescribed Shipping Bill/Bill of Export format under Drawback. For electronic exports, the Shipping Bill serves as the claim. For manual exports, use the triplicate copy of the Shipping Bill.
  2. Follow-up: Ensure the Export General Manifest (EGM) is filed correctly by the respective airlines/shipping lines. This is essential for the timely processing and disbursal of the drawback claim.

Also Read: Guide on Calculating Ocean Freight Transit Times

Determining When the Drawback Amount Meets or Exceeds the Minimum Requirements

One of the critical aspects of calculating duty drawback on export is ensuring that your claim meets or exceeds the minimum requirements. Here’s how to ensure your claim is valid:

  1. Check the Minimum Percentage: The drawback amount must be at least 1% of the export's FOB value. If it’s less, ensure it exceeds Rs. 500 per shipment. For instance, if your FOB value is $50,000, the drawback must be at least $500 (1%).
  2. Verify the Minimum Amount: The duty drawback amount should be at least Rs. 50. Claims below this amount are typically not processed, so it’s crucial to consolidate smaller claims if necessary.
  3. Assess Value Addition: Ensure that the value of the export goods is more than that of the imported materials used in their manufacture. This ensures compliance with government regulations and prevents rejection of the claim.

Handling Calculations When the Drawback Amount is Less Than Minimum Thresholds

What if your calculated duty drawback is less than the required thresholds? Here’s how to handle it:

  1. Consolidate Shipments: Combine smaller shipments into a single claim to meet the minimum amount or percentage thresholds. This can help ensure that your claim is eligible for processing.
  2. Adjust Export Values: If possible, adjust the FOB value of your export shipments to ensure the duty drawback amount meets the minimum requirements. This could involve minor changes in invoicing or shipment strategies.
  3. Explore Brand Rate Options: If the AIR does not sufficiently cover the duties, consider applying for a Brand Rate. Although more documentation is required, this can ensure you receive a higher drawback amount reflecting the actual duties paid.
  4. Seek Professional Assistance: Engage with customs experts or consultants who can help optimise your duty drawback claims. They can provide insights into maximising your refunds and ensuring compliance with all regulations.

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Also Read: THC In Shipping: Meaning, Calculations

How to Calculate Duty Drawback on Export: Examples

Understanding how to calculate duty drawbacks on exports can significantly impact your business's bottom line. 

Let's explore three scenarios to illustrate different outcomes when calculating duty drawback amounts in Indian currency.

Scenario 1: Duty Drawback Amount Exceeds Minimum Requirements

Imagine you’re an exporter of textile goods. Your FOB (Free on Board) value for a shipment is Rs. 10,00,000, and the applicable duty drawback rate (AIR) is 5%.

  1. Calculation:
    • Duty Drawback = 5% of Rs. 10,00,000
    • Duty Drawback = Rs. 50,000
  2. Analysis: In this scenario, the duty drawback amount of Rs. 50,000 exceeds the minimum requirement of Rs. 50. This amount also meets the criteria of being more than 1% of the FOB value (which would be Rs. 10,000).

This straightforward example shows how to calculate duty drawback on export when the amount exceeds the minimum requirements, ensuring you get the full benefit.

Scenario 2:  Involving Duty Drawback Amount Meeting the Minimum Required Amount

Suppose you export electronic components with a FOB value of Rs. 1,00,000 and an AIR of 1%.

  1. Calculation:
    • Duty Drawback = 1% of Rs. 1,00,000
    • Duty Drawback = Rs. 1,000
  2. Analysis: Here, the duty drawback amount of Rs. 1,000 meets the minimum requirement of Rs. 50 and is exactly 1% of the FOB value. This amount qualifies under the scheme since it’s also above Rs. 500 per shipment.

This scenario illustrates a situation where the duty drawback amount meets the minimum required threshold, allowing you to claim the refund successfully.

Scenario 3: Duty Drawback Amount Less Than the Minimum Threshold

Consider exporting small handicrafts with a FOB value of Rs. 5,000 and an AIR of 1%.

  1. Calculation:
    • Duty Drawback = 1% of Rs. 5,000
    • Duty Drawback = Rs. 50
  2. Analysis: In this case, the duty drawback amount is Rs. 50. It meets the Rs. 50 minimum amount, which is precisely 1% of the FOB value and thus barely meets the percentage threshold. If the calculated amount were slightly lower, say Rs. 45, it would not be eligible for processing.

This situation shows how crucial it is to ensure that both the percentage and amount criteria are met. When amounts are borderline, it’s essential to double-check calculations and consider consolidating shipments if necessary.

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Also Read: Calculating Costs for Oversize Load Shipping and Freight Rates

Required Documents for Claiming Duty Drawback on Export

You need to compile a comprehensive set of documents to claim duty drawback. Here are the essential ones:

Category

Document

Description

Essential Documents

Freight Bill

Details the transportation costs of goods.
 

Bill of Entry

Records the arrival of goods into the country, proving importation and duty payment.
 

Bill of Lading or Airway Bill

Evidence of shipment of goods: Bill of Lading for sea freight, Airway Bill for air cargo.
 

Bank Certified Invoices

Invoices certified by the bank confirming financial transactions related to the export.

Import Documents

Import Invoice

Details the purchase of goods from a foreign supplier, including quantity, value, and description.
 

Proof of Import Duty Payment

Shows duties paid on imported goods; includes bank receipts, challans, or official customs documents.

Export Documents

AR-4 Documents

Declares details of goods for export, including descriptions and quantities, crucial for customs clearance.
 

Export Invoices

Provides a detailed account of goods exported, including value, quantity, and destination.
 

Packing List

Details the contents of each shipment, providing information about packaging and items included.

Document Perfectly, Claim Successfully! 

Pazago's document management system keeps your crucial customs and shipping documents organised and accessible for easy duty drawback claiming. 

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Also Read: 10 Required Pre-Shipment Documents for Export Procedure and Shipping Process

Customs Act, 1962: Sections 74 and 75

Understanding the provisions of Sections 74 and 75 of the Customs Act of 1962 is crucial for exporters looking to benefit from duty drawbacks. 

These sections provide detailed guidelines on calculating duty drawbacks on export, ensuring that exporters can recover duties paid on imported materials.

Section 74: Drawback on Re-export of Duty-paid Goods

Section 74 of the Customs Act of 1962 deals with the duty drawback available when previously imported goods are re-exported. This section mainly benefits businesses that import goods and re-export them without significant alteration. Here’s how it works:

Eligibility

  • Goods must be re-exported within two years from the date of import duty payment. This period can be extended if the customs authorities provide and accept a valid reason​​.
  • The goods must be easily identifiable as the same goods that were imported​.

Drawback Rate

For goods re-exported without being used, up to 98% of the duty paid on import can be refunded​.

The drawback is calculated based on depreciation if the goods have been used. The rate of drawback decreases with the duration of use:

  • Not more than 3 months: 95%
  • More than 3 months but not more than 6 months: 85%
  • More than 6 months but not more than 9 months: 75%
  • More than 9 months but not more than 12 months: 70%
  • More than 12 months but not more than 15 months: 65%
  • More than 15 months but not more than 18 months: 60%
  • More than 18 months: No drawback​.

Section 75: Drawback on Imported Materials Used in Manufacturing Export Goods

Section 75 focuses on duty drawbacks for goods manufactured using imported materials. This section is essential for exporters who use imported inputs in their manufacturing processes. Here’s a breakdown:

Eligibility

  • The exported goods must be manufactured or processed using imported materials​.
  • The export value of the finished goods must be higher than the value of the imported materials used, ensuring that the drawback does not exceed the duty paid on the imports​.

Also Read: Decoding the Customs Act 1962: A Comprehensive Guide

Conclusion

Understanding how to calculate duty drawbacks on export is crucial for enhancing your business's financial health and competitive edge in global markets. Tap into potential savings, refine your export processes, and stay updated with the latest regulations. 

Don’t let these financial benefits go unclaimed—strategically integrate duty drawbacks into your business model and watch your international trade potential soar. 

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FAQs on Duty Drawback on Export

1. What is the role of the Export General Manifest (EGM) in claiming duty drawback?

The EGM confirms that goods have been exported. It's essential for processing and disbursing duty drawback claims.

2. Can I claim a duty drawback on goods exported under a Free Trade Agreement (FTA)?

Yes, but check specific FTA terms, as some may have clauses affecting duty drawback eligibility.

3. How does the Goods and Services Tax (GST) impact duty drawback claims?

Duty drawback under GST is limited to customs duty on imported inputs. GST paid on inputs is claimed as an input tax credit (ITC).

4. Are there any specific sectors that benefit more from the duty drawback scheme?

Yes, sectors like textiles, electronics, automotive, and pharmaceuticals benefit significantly from imported materials.

5. What happens if the sale proceeds from an export are not received within the stipulated time?

The duty drawback granted is deemed void, and the exporter must repay it. The government will specify recovery procedures.

6. Can duty drawback be claimed on goods exported via post?

Yes, provided the goods are appropriately documented and cleared by customs.

7. What is the impact of over-invoicing on duty drawback claims?

Over-invoicing can lead to rejection of claims. Ensure invoices reflect the actual market value.

8. How can I check the status of my duty drawback claim?

Use your credentials to check the status online through the customs or trade portal ICEGATE.

9. Are there penalties for incorrect duty drawback claims?

Yes, penalties include fines, repayment with interest, and possible legal action. Ensure claims are accurate and well-documented.

10. What are the common reasons for rejecting duty drawback claims?

Common reasons include incomplete documentation, failure to meet value thresholds, over-invoicing, and discrepancies in exported goods. Maintain accurate records to avoid rejection.

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