It was just a matter of time before the darling of Indian exporters – DEPB – was relegated to history books. Being WTO non-compliant, it was seen as a form of subsidy, thereby attracting countervailing duties for Indian goods overseas. Instead, starting the 1st of October, 2011, all goods have been included under the Duty Drawback Scheme. But, at a time when Prime Minister Narendra Modi is inviting the entire world to manufacture in India, does he realise that the Duty Drawback Scheme actually discourages us to even export a Rs.10 lakh car?

Shakti Shankar Patra | The Dollar Business

 

Did you know India is the only country in the world that has an average import tariff in double digits, but still has over $100 billion trade deficit per annum? On the other hand, Germany, which had the highest trade surplus in the world in CY2013, has an average import tariff that is 1/12th as that of India? Does it mean that high import tariff as a trade barrier doesn’t really work?

Let’s look at another set of statistics. Did you know two – Germany and China – of the only four countries (the other two being Russia and Saudi Arabia) that had trade surpluses of over $200 billion in CY2013, were also among the only three (the other being US) that had imports of over $1 trillion? If we ignore Russia and Saudi Arabia since they largely export crude oil, doesn’t this indicate that imports are necessary for exports? For, one needs inputs – be it raw materials or intermediate goods – to manufacture export goods. Isn’t that so?

The obvious question then arises is how to treat the imports that are needed for exports. This question is particularly important for protectionist economies like China and India (both with average import tariffs in double digits) than the Germanys or the USAs (both with average import tariff of less than 1.5%) of the world. And historically, countries have tried to deal with this conundrum by resorting to duty drawbacks.

 

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 he/she 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.”

 

One size fits all?

But then, how will the government know how much customs duty was involved in the manufacturing of an export product? Can it arrive at a drawback rate for each and every product that is exported? The best it can do is arrive at an estimation, isn’t it? And this is the biggest drawback of India’s DBK scheme – there’s less science, a lot of guessing, a lot of lobbying and lots of hits and trials. In fact, it won’t be an exaggeration to say the way the Indian government goes about implementing the DBK scheme, is beyond logic. Let’s prove this.

In India, the DBK scheme is entirely dependent on a Central Board of Excise and Customs (CBEC) schedule that provides All India Rates (AIR), which are nothing but HS Code-wise drawback percentages with caps. To imagine that CBEC can come out with a cap on drawbacks that would do justice to all goods under one HS Code is, to put it mildly, both puzzling & amusing. If this were to be possible, customs duty, while importing a product, would have also had caps. For example, the drawback on automatic cars is 3.67%, but with a cap of Rs.34,000 per unit. Let’s assume, there is a car manufacturing company in India, which exports high-end automatic cars with a price floor of Rs.1 crore. Let’s also assume it uses only one imported component in its cars – gear boxes. Now, the total import duty on gear boxes is 28.852%. This means, even if the company is importing just one component for exporting a car worth Rs.1 crore, the DBK scheme is willing to refund it the duty paid – in whole – on the gear box as long as its price doesn’t exceed Rs.1,17,842.80. For, with a value cap of Rs.34,000 on the drawback on automatic cars, the moment the company imports a gear box worth more than Rs.1,17,842.8, it gets only part refund! Is this rational? Why not have such caps even on import duties? Why not fairly charge a maximum of Rs.34,000 as import duty irrespective of the price of the car?

Moreover, with a cap of Rs.34,000, what is the motivation for a high-end car manufacturer, exporting cars valued in crores, if it sees another company, exporting cars with a price-ceiling of Rs.10 lakh, walk away with the same per-unit refunds. In fact, with a drawback rate of 3.67%, but a value cap of Rs.34,000, isn’t the government essentially telling Indian automakers that they shouldn’t aspire to export any car over Rs.10 lakh?

No wonder, India’s car exports, have never moved beyond hatchbacks!

 

 

Noise over science

If you thought the issue with drawbacks is just the value cap, let’s look at two examples to prove just how absurdly low even some of the percentages are.

According to DGFT’s Standard Input Output Norms (SION), to produce and export 1 MT of Block Frozen Headon Shrimps, imported inputs needed are 2.1 MT shrimp feed, 0.05 MT of kraft paper, 0.05 MT of card board, 0.013 MT of LLDPE granules, 0.03 MT sodium tri-polyphosphate, 0.008 MT sodium meta bi-sulphite and 0.035 MT LLDPE polystyrene pouches. A detailed The Dollar Business Intelligence Unit analysis of the average price of imports of these inputs, and the total duty that would have been paid to import the above mentioned quantities of these at current tariff levels, reveals that the total duty paid would have been Rs.19,543.34. On the other hand, when Cenvat is not availed, the duty drawback on frozen shrimp is just 3.3%. And at today’s price of shrimp exports of Rs.2.74 lakh per MT, the duty drawbacks would have been just Rs.9,042 (see table on page 32-33 titled, Three examples of ‘Noise over Science’ in Drawback Rates formulation). Yes, the duty drawback on shrimp exports is less than 50% of the total duty that is paid to import the inputs that DGFT itself claims are needed! [And we’ve not even discussed the comprehensiveness of the list of inputs mentioned in the SION yet!]

If you thought the drawback permissible appears puny due to too many input factors being considered, let us walk you out of complexity.

Here’s to simplicity. We consider another export item – chocolate. To parrot the logic presented earlier, as per SION, to produce and export 1 MT of chocolate (ITC HS Code 1806), the imported inputs needed are 0.59 MT of cocoa beans or 0.48 MT of cocoa liquor or a combination of cocoa liquor and cocoa butter (0.144 MT and 0.174 MT respectively) or a combination of cocoa beans and cocoa butter (0.176 MT and 0.174 MT respectively). Considering only 0.59 MT cocoa beans is used as input for each MT of chocolate exported, a study of the average price of imports of this input, and the customs duty that would have been paid to import the above mentioned quantity of this input at current tariff level, reveals that the total duty paid would have been Rs. 38376.43. The duty drawback on chocolate is an insignificant 1%. Going by FY2014’s average price of chocolate exports of Rs.3.86 lakh per MT, the duty drawbacks would have been just Rs.3,858! (Again, refer to table titled, Three examples of ‘Noise over Science’ in Drawback Rates formulation).

It’s such a mockery of remission schemes that through a valid scheme set up by an institution that is meant to promote India’s exports directly or indirectly, the duty drawback on just three randomly chosen items that earned thousand of crores for our exchequer last financial year, amount to less than 50% to 89% of the total duties paid to the Customs to import just the direct inputs required (that DGFT claims is needed)!

What export promotion or motivation are we talking?

 

Science or nonsense?

Talking about science, one proof of some mathematical justice being doled out to drawback applicants is in the form of the obvious – SION. But you don’t have to dig very deep to learn that there is very little logic or science behind this entire framework.

It is surprising to note that till date, no such norms have been designed for several key categories like cars. But wait, so what if cars haven’t made it to the list yet, there is a SION for wooden horses!

And the fact that very key elements are missing from the very list of ingredients in many-a-case of SION will have you laugh your head off.

 

To begin proving how “scientific” SION is, consider chocolate. As per SION, DGFT expects India’s ‘export quality’ of chocolate to be made only of cocoa beans and nothing else. [Yes, we are talking of the edible variety!] No sugar. [Sugar without chocolate is alright; not the other way around.] No fats. [We would want to make chocolates that don’t stick internally post-consumption, or maybe we can supply chocolates made for the enemy’s camps.] No flavours. Nothing whatsoever. Well, Cadbury claims its world-standard chocolate bars contain milk solids, soy, wheat, egg, peanuts, tree nuts, emulsifiers like soy lecithin, etc. Clearly, while on one hand, such causally framed norms only encourage India’s exporters and exporting brands to give up the idea of competing with the Nestlés, Ferreros, Lindts and Krafts of the world, on the other, they prove what is being done in the name of remission schemes in India.

 

 

Human hair is another example, and a product that is exported to the tune of Rs.2,300 crore from India each year. As per DGFT, the only two inputs for processing the packaged version of human hair are cardboard boxes and PP granules. This, so we can have strangely smelling, knotty, unwashed hair sent to foreign markets. Where are items like shampoo, comb, glue (for wefting), and many others to ensure that (a) the strange admixture of hair gel, hair oil, hair cream and dry dandruff stained hair is done away with initially and (b) longer lengths of hair can be exported which fetch greater value across international markets?

How logical are these deliberate exclusions?

We can answer that by making our argument very clear, mathematically. As per SION, to produce and export 1 MT of export-quality human hair (HS Code 67030010), the ONLY inputs required are HDPE/PP Granules (HS Code 39012000; 1.05 kg/kg packing material allowed) and cardboard boxes (HS Code 48191010; net+5% allowed). A tabulation of the average price of imports of this input, and the customs duty that would have been paid on inputs reveals that the total duty paid would have been Rs.24,495.53. When Cenvat is not availed, the duty drawback on human hair is 1%. Going by the current export price of human hair exports of Rs.74,61,330 per MT, the eligible duty drawback amounts to Rs.74,613, i.e. 300% of the duty paid! That surprisingly looks like there is enough provision for the exporters to being compensated because they are assumed to have paid only Rs.24,495.53 as customs duty during the import phase. Here’s the real deal: when DGFT includes only two relatively less inexpensive products (like HDPE/PP Granules – average import price of under Rs.100 per kg. – and cardboard boxes – average import price of about Rs.130 per kg.) in the SION of a finished product like human hair that is exported at a price of well over Rs.7,000 per kg, the eligible drawback amount as per the drawback rate will NATURALLY be higher than the actual duty spent!

 

In fact, the example above proves how the inclusion of inputs in SION has been deliberately kept at low levels to ensure that the duty paid amount is either less than or as close to the eligible ‘low percentage’ drawback levels. Straighforwardly equated – higher the number of inputs in SION, higher will be the duty paid on inputs and therefore higher will have to be the drawback rates provided in the scheme!

There are some absolutely hilarious exclusions in SION. If wooden toys have wood included as the only ingredient (no ink, plastic or colour included whatsoever), why isn’t wood included in wooden horses fitted with brass (you might as well call that a brass horse!)? Why is only “centres made from cork and rubber” given as an input in cricket ball (“Where’s the leather cover?” we mean). Strange it is that all forms of soccer balls (sizes 3 to 5) have one input (i.e. PVC/PU Leather Cloth), whereas rubber bladders have seven and tennis balls have ten inputs! And frankly, no cricketer will be allowed by ICC to score a century wearing an abdominal guard made of just “PU leather cloth”!

And just like there is no sugar in fruit juice and instant coffee, there is no chicken in chicken biryani, no vegetable in vegetable pulao or zeera in zeera rice! Pack the rice and pray deep – the chicken, vegetable and zeera will emerge from within. Quite a high-spirited thought, isn’t it!

There are many such examples that make the SION look imperfect enough to be ignored. Worse, it gets India on the backfoot even before ‘Make In India’ can become a reality.

And one is absolutely sure that if Prime Minister Narendra Modi comes to know about this massive spoiler for his ‘Make in India’ campaign, either a few heads will roll, or all the drawbacks of the duty drawback scheme will be shown the door. Maybe both.

The big question is, who will spill the beans?

 

The Asian experience

Before further criticising the DBK scheme, let’s take a look at the history behind it.

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’. After quite an exhaustive analysis of DBK schemes in protected economies, particularly China, 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.” 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.” 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 – flawed implementation at the ground level.

Behind a mask

The rampant use of duty drawbacks by protectionist economies has raised quite a few eyebrows. It is obvious that only countries that have high tariff barriers, need or resort to duty drawbacks. For, if an economy is open to imports and doesn’t discourage them via tariff barriers, the question of duty drawbacks doesn’t even arise, isn’t it? The logical question to ask then is why not remove the anti-trade bias itself? An almost decade-and-a-half old World Bank policy research paper – ‘Can duty-drawbacks have a protectionist bias? Evidence from MERCOSUR’ – has some interesting answers to this question. It claims, “In a political economy setting, where tariffs and duty drawbacks are endogenously chosen through industry lobbying, full duty drawbacks are granted to exporters that use imported intermediate goods in their production. This, in turn, decreases their incentives to counter-lobby against high tariffs on their inputs. Indeed, under a full duty drawback regime, tariffs on intermediate goods are irrelevant to exporters, because they are fully rebated.”

In other words, while depending on which side of the fence you are on, you might call high tariff barriers a necessity or anti-free market, the fact remains that the primary reason for having them is to ‘protect’ domestic manufacturers/producers. And although there is no unanimity on whether this protection is genuinely needed or is ‘bought’ by domestic-lobbying, they are a reality. So, given this reality, don’t duty drawbacks make things only worse by letting the status-quo continue? For, if exporters who use imported components are completely immunised from import duties, they would never counter-lobby against high tariffs. The result? Tariff barriers will continue.

Let’s explain this using a different product. And since the ICC Cricket World Cup is round the corner, let’s talk cricket bats. Bats are primarily made of willow; and the two main forms of willow are Kashmir Willow and English Willow. Let’s assume there are two bat manufacturers in India – Company A that makes only Kashmir Willow bats and Company B that makes only English Willow bats. Now, Company A would obviously want to ward off competition by lobbying with the government for imposition of Anti-Dunping Duty or Safeguard Duty on English Willow imports. On the other hand, Company B would counter-lobby and try to convince the government to reduce/remove import tariff on willow. However, if the government allows Company B to import English Willow at zero duty or refunds the paid duty when the willow is used to make bats for exports, it (Company B) won’t really push for the removal of tariff barriers, isn’t it? How often have we heard exporters that use imported components speak out regarding high import tariffs? Now compare this with how often exporters have complained about drawback duties being low and the answer becomes clear!

Home experience

Till September 2011, India’s primary post-export remission scheme was DEPB. But since it involved the payment of transferable duty scrips, it was susceptible to misuse and in WTO’s eyes, was a form of subsidy. Hence, the Indian government had no choice, but to abolish it and bring all products under the DBK scheme. However, despite having been around for over two decades in India, the lack of understanding of the DBK scheme is simply shocking. Several stakeholders, The Dollar Business spoke to, believe that duty drawback is an incentive scheme, which it is not. It is simply a remission – one that indirectly becomes a reimbursement because the exporters can claim rebates on exporting processed raw materials or inputs.

 

 

Going back to our example of cricket bats. Let’s say Rs.3,000 worth of English Willow is used to make a bat. At 14.172% duty on willow imports, the total duty paid to import the Rs.3,000 worth of wood is about Rs.425.20. Let’s also assume that other raw material expenses, other overheads, domestic taxes like excise duty and labour costs add up to Rs.5,000, thereby taking the final cost of production to Rs.8,000. Assuming 20% profit margins, the bat would now be ready to be exported at Rs.10,000. Now, what is the duty drawback on English Willow bat exports? 6.5%, with a cap of Rs.458.7, if Cenvat has been availed. So, if you are an English Willow bat exporter, all the government is providing you is a scientifically estimated refund of the duty you would have paid for importing the willow, which isn’t and was never supposed to be an incentive!

 

And some more

Of the several other issues that have ensured the DBK scheme has come nowhere close to making India an exporting powerhouse, as has been the case in other Asian countries, a few stand out. Firstly, at times, there are huge delays in the refunds reaching the exporters. The documentation, itself, is a headache. And in case the process goes to litigation, the delays run into years and consequently, costs spiral. What’s shocking is that although 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,” such interests are never paid. Similarly, in the last quarter of a fiscal year, as the government goes about window-dressing its own Balance Sheet, drawback refunds totally dry up.

 

And finally, as is the case with almost everything in India, there’s massive amount of lobbying that goes into the drawback rates. Since there’s hardly any science involved in the calculation, at least the calculation of the value caps, the same are increased/decreased in order to suit vested interests, with Export Promotional Councils (EPCs), which are generally consulted before such changes, being the nerve-centres of such lobbying.

 

 

Some claim that exporters unhappy about the low drawback rates as per the All India Rates (AIR) can resort to Brand Rates of Drawback. There are however questions that this alternative raises. First, why should the government allow a branded entity the benefit of a higher drawback rate under the same DBK Scheme? [Spoken in another tone, why should the thousands of smaller exporters who have little to boast about in the name of brand continue suffering with low drawback benefits?] It has been observed that a certain company in the alcoholic beverage industry has managed a Brand Rate-based drawback of 8-9% at a time when the AIR for its industry is 1% when Cenvat facility has not been availed and 0.15% when Cenvat facility has been availed. Second, if Brand Rate is the way to go, why should individual rates awarded to specific companies not be published like the AIR, and in the process why should it be hidden from competitors what drawback rates are being offered to their industry peers – this is nothing but a way of promoting unfair competition in a case where market forces should be allowed to prevail and dictate who wins and loses? Thirdly, for SMEs and other smaller and lesser known exporters, the cumbersome, non time-bond process of getting their requested Brand Rates approved by the government makes this an absolute no option. In short, Brand Rates remain only for the big fish in the Indian foreign trade ocean to make merry with!

The scheme of Brand Rate fixation should be done away with, with immediate effect. If under one scheme, benefit really has to be passed on to the export community, then it should be uniformly designed and adequately given. There is one simple solution - make the All India Rate determination process transparent and increase the rates with logically designed SION across industries!

 

Time for a change

Whichever way one looks at the current state of India’s DBK scheme, it appears flawed. Not only does it not entirely remit duties, discourage high-value exports, and is clearly mathematically flawed, it also encourages protectionism.

Why allot percentages when the numbers are either invisible or mean absolutely nothing for an exporter who has paid such heavy duties for imports at the backend? [Really, going by our very example, how encouraging is 0.15% of FOB as a rate of remission?!?] And why in the first place have caps that limit even high value-add and high quality exports from India?

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 like the DBK scheme. Period!

 

“Rates can’t be fair to each individual item” - Kamal Jain, Director, Cargomen Logistics Pvt. Ltd.

The motion for the question whether there is an imbalance in drawback on various items is debatable. Is there any rationale or basis for such inequities? In an exclusive interaction with The Dollar Business, Kamal Jain, Director, Cargomen Logistics gives his views on these and other related issues

 

TDB: How scientific do you think are the duty drawback numbers the government arrives at?

Kamal Jain (KJ): Duty drawback rates are based on intelligent exercises based on the input cost of a particular item. The government has got Standard Input-Output Norms (SION) on the basis of which it arrives at the amount of excise duty/customs duty involved in an item. By paying this back as a drawback, the government wants to incentivise exporters and also neautralise the cascading effect of taxes. So, duty drawback rates can’t be absolutely fair to each individual item. In some cases, it is absolutely fair, while in some other, it is a bit less (than the duty paid). But the government ensures that for no item, the rate is higher than the duty paid.

TDB: Technically speaking, every time there is a change in the import duty of a raw material or component, the corresponding drawback rate should also change. Do you think this happens? If not, how much is the lag?

KJ: One should understand that there has been no hike in import duties in the last many years. All that has happened is systematic reduction in duties in order to adhere to GATT norms. So, the question of hiking drawback rates, due to corresponding hikes in import duties, doesn’t arise. On the other hand, since the government wants to encourage exports, none should be concerned about small delays in the reduction of drawback rates due to corresponding reductions in import duties.

 

 

TDB: There’s a perception that in the last 2-3 years, things have improved a lot in the way the customs department handles the issue of duty drawbacks. What’s your take on this?

KJ: I have been in this industry for the last 17 years. Since going electronic, the customs department has upgraded the Electronic Data Interchange (EDI) several times. Today, almost everything – from the bill of entry to the payment of drawbacks – is done online. In fact, I would actually say that Customs is the only department, which has consistently stayed ahead of the curve. But unfortunately, the same kind of automation has not happened in port infrastructure or in the systems of shipping lines. Even today, I collect manual delivery orders from ship liners, which used to be the case even a decade and a half back! The connectivity between the Customs’ server and that of such private agencies hasn’t improved. Even today, only a handful of shipping lines are providing delivery orders online.

TDB: Would you say there has even been a reduction in the documentation required for availing drawbacks?

KJ: Absolutely! Earlier, we used to file drawback shipping bills and then file a separate claim post-exports. But nowadays, the moment you file a drawback shipping bill, the scroll and your credit gets generated. And once approved, the refunds go directly into your accounts, unless of course if a query, regarding the applicability or regarding some declaration, is raised. So, I would say there has been a drastic improvement in recent times.

 

“Process involved in getting back the amount is a nightmare” - Mekhla Anand, Principal Associate, Amarchand & Mangaldas & Suresh A. Shroff & Co.

Tortuous processes and delays in settling litigations are proving to be major impediments when it comes to drawback claims, much to the discomfiture of the exporters. In an exclusive interaction with The Dollar Business, Mekhla Anand, Principal Associate, Amarchand & Mangaldas & Suresh A. Shroff & Co. explains why the biggest challenge for exporters are procedural issues

 

TDB: When it comes to duty drawback, what do you think is the most contentious issue that leads to litigation?

Mekhla Anand (MA): The ones that we come across most often are procedural issues, things like shipping bills not being in order, etc. There’s a general tendency on part of the government to refuse refunds or delay the whole process of refunds. So, there is a lot of going back and forth on why something has not been done. And usually you will find very silly reasons for denial. We often find litigations on the ground that documents are not in order, or there was some malafide or non-payment of interest on the delayed refunds. The second leg of litigation tend to be on these lines.

TDB: Would you say the government is not very sincere in implementing the duty drawback scheme and tries to find as many excuses as possible to not pay the refunds?

MA: That’s a very loaded question! It is a problem we have in all kinds of refunds. Whether it’s duty drawback, or service tax or excise refunds, the intent of the government is, definitely, to ensure that taxes and duties are not exported out, but the whole process of recovering that amount for an assessee is a nightmare. Although the government tries to take proactive steps to monitor it and figure out ways to make the procedure easy, it doesn’t translate much at the ground level. So, saying the government is not intending (to implement the scheme) is a bit too far-fetched, since the problems mostly tend to be at the implementation level.

TDB: On an average, how long do you think a case takes to reach its conclusion, once a drawback related litigation starts? Do you think such cases also hit roadblocks at the judiciary?

MA: No, I don’t think there is any roadblock in the judiciary, other than the inherent issue about litigations in India – they just take too much time. The tribunals are overburdened. I hope with the new benches that are being established, things will get expedited. Even now, once an issue comes up for hearing, it doesn’t take long for things to get resolved.

TDB: Without naming the client, can you give us an example, where refunds were delayed because of some very silly reason?

MA: I can tell you about this one case, where there was some issue with the shipping bills that were filled. You are supposed to write on the shipping bills that they were for duty drawbacks. Then you have to fill up a particular form. In this particular case, although the client believed that it was all done, some documents were missing from the customs file. It is only of late that Indian companies have become very particular about their paper work and ensuring that everything is in order. But till a while back, this was not the case. So, if a document goes missing and, particularly, if it goes missing at the customs end, it is very difficult to recreate a file. In this case, it took a lot of time to get everything on record before the process of obtaining the refund could itself be started.

 

 

TDB: It’s been over three years since DEPB was revoked and everything was brought under duty drawback. How do you think exporters and importers have taken to this?

MA: This is largely a commercial issue and I won’t really be in a position to comment. Clients do come to us and complain about the fact that DEPB was much easier to manage and many made a lot of money selling the licences. So, I hear comments on this aspect, not really much on the amount of drawback they are getting back or if the amount is meeting their requirement or not.

TDB: There’s been a lot of talk on how the government is trying to reduce the documentation required to avail drawbacks. Have you seen any difference on the ground?

MA: Not really! One has to realise that a lot of these things work on practice. The first round of documents might be less, but then there are requisitions for another round, and so on. So, I haven’t seen any reduction in the paperwork.

TDB: Do you think there is a feeling among exporters that drawback rates being what they are, there’s no point in getting into litigation since the cost of it dwarfs the benefits of drawback?

MA: People tend to litigate only after doing a cost-benefit analysis. Being the kind of firm that we are, we would only be involved in high stake matters. So, I am sure, they (clients) take a commercial call before coming to us or going to
anyone else.

TDB: What changes do you think will smoothen the entire process of an exporter getting duty drawback refunds?

MA: As I said, the major issue tends to be implementation. It doesn’t matter how long a list of documents you put up, or how many things you want get done, but once it is all done, as long as the person gets the drawback, without having to persistently justify that they need/deserve the drawback, it will help everybody. The timeframe it takes to get a refund from the government is just very long. One year is a minimum. And if the amount is high, the time taken becomes proportionately longer.

 

“Exporters are not totally happy with the duty drawback scheme” - Tulasi D. Prasad, Chairman, Air Cargo, Agents Association of India

Tulasi D. Prasad, Chairman of the Air Cargo Agents Association of India, believes the government is doing enough groundwork before fixing the duty drawback rates. His only grumble, however, is that its timely settlement is not being done. In a freewheeling interaction with The Dollar Business, Prasad raises the concern and urges the government to speed up the process

 

TDB: What’s your take on the duty drawback scheme? How successful do you think it has been?

Tulasi D. Prasad (TDP): Exporters are not entirely happy with the duty drawback scheme, primarily because of inordinate delays in getting it processed, particularly delays at Customs and DGFT. The documentation process involved is also very heavy. All these lead to undue delays in refund of amounts, due to which exporters are not being able to get the desired benefit on time. To speed up the process, automation should be implemented at various levels.

TDB: Do you think the delay is because of our bureaucracy or does the government deliberately create hurdles so that it won’t have to pay the drawbacks?

TDP: I don’t think the government is not eager to pay the drawback. I think the problem lies somewhere else. A case in point could be lack of manpower in various departments involved in the entire process of clearing the drawback amount. Despite all this, it is a very good scheme and if the refund process could be speeded up, it will be very useful to importers and exporters.

TDB: Do you think the government does enough homework before it arrives at the duty drawback rate for a particular product?

TDP: I assume the government is doing enough exercises before fixing the rate for a particular product. The government is also doing suitable revisions at regular intervals for various products and commodities. However, the government needs to ensure that the benefit reaches the actual exporter in a time bound manner. Then only the Indian trading community will be encouraged to do more and more exports and expand the business across geographies. Ultimately, it will help the country earn more foreign exchange and generate more employment.

TDB: If you look at the drawback schedule, there are quite a few products that don’t appear to have had used imported components. But still, duty drawback is allowed for those. Since ultimately, the logic behind drawback is to neutralise the customs incidence in an export item, isn’t there a contradiction?

TDP: I really don’t know why duty drawback is allowed for many of these products. However, I will share with you my experience with pharmaceutical products. For example, the trouble or the confusion surrounding duty drawback is around the column ‘Other Items’ and the scheme doesn’t clarify which are the commodities or products that fit into ‘Other Items’. And this creates a lot of confusion for exporters, importers, and also for Customs and the sequence continues till the DGFT and further.

TDB: You mean this is problem even in the pharmaceutical industry?

TDP: Yes, because the rate of drawback might vary a lot between a specified product and an ‘other’ product. Moreover, in the pharmaceutical industry, when an exporter exports to LDCs, the government raises objections and claims one can’t avail both FMS and drawback. But there is no printed/documented interpretation that one can’t avail benefits under both the schemes. In such circumstances, the department delays the process of clearing the refund as there is a lack of clarity.

TDB: What is the major concern for exporters? Is it duty drawback rates being low or delays in getting the refunds?

TDP: As far as rates are concerned, they are solely decided by Ministry of Commerce and once that is fixed, exporters can hardly do anything. However, exporters, through their associations, and industry bodies, appeal the government, from time to time, for revisions and modifications. The only grumble is that timely settlement is not being done. Although there is a provision for getting interest on time as per Section 76, it is not being implemented.

 

 

TDB: How has the pharmaceutical sector reacted to the abolition of Duty Entitlement Pass Book (DEPB) scheme?

TDP: During the DEPB regime, exporters used to get all benefits on time, without much follow up or processes. Even though duty drawback is more attractive and there is direct cash benefit, the entire process of refund is quite cumbersome and, at times, there are excessive delays in payment.

TDB: Some claim once the refund under duty drawback goes into litigation, it takes on an average a year to get the refund. Do you agree?

TDP: I don’t agree. Our association meets the regional customs commissioners at regular intervals to speed up the clearances, which is facilitated by Permanent Trade Facilitation Committee. And for the last one and half year, the movement has been good. But still, there is always an excessive backlog. Here implementation of technology can be of help. So, at the end of the day, due to the delays in settlement, the whole purpose of giving benefits under various schemes to encourage foreign trade isn’t being realised. For a business house – in the name of revenue drive – if settlements are not done at the end of last quarter of a financial year, it becomes a concern for the company as it is linked to its cash flows. In Hyderabad alone, there are about 3,500 bills pending. Although automation has been done at Customs, there is still room for improvement. For example, if the Customs raises a query, the system will show a query has been raised, but it will not give details of what the query is, or what kind of declaration is required. These things need to be sorted out, and soon.