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?

Indranil das | January 2017 Issue | The Dollar Business

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’?

As the government simplifies the process for fixation of Brand Rates for duty drawbacks,
producers of value-added products will be motivated to export more.

Brand rates

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.

The Process

Even the President of the Federation of Indian Export Organisations (FIEO), R. K. Ralhan, acknowledges that applying for Brand Rates is really complicated. While speaking to The Dollar Business Ralhan says, “Brand Rate fixation itself is a complicated process. Brand Rate is suitable for only those who do value additions, and also suffer from significant wastage during the production cycle. AIR is simpler, convenient, and a more realistic method.”

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 the Directorate of Duty Drawback 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 and Central Excise 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 Directorate of Duty Drawback with copies to the concerned Central Excise Commissionerate which has jurisdiction over the factory of production of the export product. The Central Excise 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 Directorate, 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.

The Brand Rate Letter may be valid for a particular export shipment or for a series of shipments and may also be extended for future shipments for one or more ports on request, subject to proof of availability of related raw materials and duty evidence, when verification was carried out.
Brand Rate proposals involving drawback amount up to Rs.5 lakh may be approved by the Assistant Commissioner/Deputy Commissioner; proposals involving drawback amount of more than Rs.5 lakh but less than Rs.20 lakh may be approved by the Joint/Additional Commissioner and proposals involving drawback amount of more than Rs.20 lakh have to be approved by the Commissioner of Central Excise. No wonder that exporters have shied away from the process of seeking Brand Rate fixation.

But that is not all. Let’s take an example from the Indian automotive industry, which is one of the largest in the world. Various components of the export goods (automobiles), may have been manufactured in jurisdictions of more than one Central Excise Commissionerate. Say the steering wheel is manufactured in Gurgaon, the seats are manufactured  in Nasik, while the assembly line is in Chennai. In such cases, the Brand Rate application is required to be filed within the stipulated period in the headquarters of Central Excise Commissionerate having jurisdiction over the manufacturing unit where the finished automobile is manufactured. The exporter also needs to specify the components which are manufactured in the jurisdiction of other Central Excise Commissionerates and submit the requisite data subsequently in the headquarters of the concerned Commissionerates of Central Excise having jurisdiction over the units where these components are manufactured.

The Commissionerate in which the original Brand Rate application has been filed is now supposed to get the data (pertaining to its Commissionerate) furnished in the application verified and fix the Brand Rate. This Brand Rate may also be subsequently revised on the receipt of final verification reports with respect to components from the concerned Central Excise Commissionerates. Clearly, if you are in the business of exporting a good that requires many specialised components, getting Brand Rate fixed for yourproduct becomes more complicated.

There is more...

If you thought that the process ended with you getting the Brand Rate Letter, you are wrong. The documentation continues well beyond, to address the needs of internal auditors of Central Excise Commissionerate. After the issuance of Brand Rate Letters, all cases involving drawback of more than Rs.1 lakh may be subject to post-audit by the Internal Audit Unit of the Commissionerate. What’s more? Even 20% of the cases involving drawback amount of less than Rs.1 lakh are also randomly selected by the Internal Audit Unit for post-audit.

For this purpose, copies of all Brand Rate Letters are required to be endorsed to the Internal Audit Unit. In case there is any discrepancy or lack of proof or documentation, the Commisionnerate may decide to suspend or revoke the Brand Rate. Certainly not a pleasant thought, especially after furnishing the required documentation and undergoing a rigorous verification process.

Different Strokes

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 the 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 standardised rates.

Agrees Ajay Goel, Director, Brite LED Pvt. Ltd., a manufacturer and exporter of LED lights, as he tells The Dollar Business, “We prefer Brand Rate, and so do most players in the engineering segment. While some may say that the process is complex, we find rates to be much more preferable than AIR. Also, once you understand the process, you will find that the process is not too complicated.”

Exporters from other industries like leather and textiles though have a different take. Speaking to The Dollar Business, Rajiv Wasan, Secretary General,  Agra Footwear Manufacturers & Exporters Chamber, says, “We feel Brand Rate fixation is a complicated process and as such we go for AIR. Under Brand Rate fixation, even if you import shoe soles, you have to give complete information about the entire product. This creates complications. The AIR method is much cleaner and involves less paper work.”

K. K. Lalpuria, Executive Director, Indo Count Industries (a textiles manufacturing company), though has a different reason for preferring AIR. “I believe, in fragmented, non-standardised businesses, exporters prefer the Brand Rate route. Ours is a composite product and we are from an organised sector. Our input/output norm is properly defined in the SION, and hence we prefer to go with AIR for duty drawbacks.”

The Way Forward

Obviously, SION is a “one size fits all” formula, which will not work for exporters of non-standardised products. But with exports of speciality 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. Through same circular CBEC also announced that random cross verification of duty paid documents will be done for not more than 5% of these documents.

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!