The government recently revised duty drawback rates on a host of products. So far, so good! But does it really mean something to the exporters who were desperately waiting for a change in the drawback rates? Not much, we’d reckon!

Manisha Choudhari | February 2016 Issue | The Dollar Business

Quite often, exporters have to import certain parts to make a product before they export it. For exporters in India, this poses a real problem, given that the average import tariff in India is in double digits. To solve this problem, the country ostensibly uses the system of duty drawbacks. Duty Drawback, for the uninitiated, is nothing but a refund of the duty that is charged on any imported or excisable material used in the manufacture of goods in India for export purposes. In simple 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. Sounds logical! However, no matter how good the intentions may be when it comes to duty drawback; the system has its own pullbacks.

Intention Vs. Impact

India, like China, is a protectionist economy. It implemented the drawback system in the 1960s in order to avoid the discouraging impact of the high import tariff on exporters. But is the duty drawback rate implemented in India sufficient enough to hearten exporters?

Under the Duty Drawback Scheme (DBK) specific percentages are given on various export goods to exporters availing the scheme. Exporters who avail Duty Drawback can either use the All Industry Rates (AIR) or Brand Rates. The All Industry Rates are fixed by the Central Board of Excise and Customs (CBEC) for products manufactured in the country, and take into account the averages of wastages, consumption, taxes and duties paid, and FOB prices of the products that are being exported. DGFT’s Standard Input Output Norms (SION) is the list of the inputs required, and the amount of said inputs required, to manufacture a certain product for export. They are presented as HS Code-wise drawback percentages with caps – both when CENVAT is availed, and when it is not.

On the other hand, the Brand Rates are usually set for products not listed in the AIR, or if an exporter is unhappy about the low drawback rates as per AIR, (s)he 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?] 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!

According to a policy research working paper by Betina Dimaranan, Elena Ianchovichina, and Will Martin of the World Bank, titled ‘China, India, And The Future Of The World Economy: Fierce Competition Or Shared Growth?’, the impact of a well-functioning duty drawback system in India would have obviously had a major impact on domestic industries, but would have an insignificant effect on the world economy. Given the importance of this scheme to exporters, and given that exports made up 23.2% of the GDP back in 2014 itself, it is highly baffling that when it comes to duty drawback for Indian exporters, why the process remains long and tedious. There are also accusations that rates lack sound logic. Additionally, many exporters complain about the amount of paperwork required to avail the duty drawback. Talking to The Dollar Business, Rohit Jain of Economic Laws Practice (ELP) mentions that even the new

Foreign Trade Policy did not reduce paperwork as was hoped, and that more steps need to be taken in order to reduce the burden of paperwork on the exporters availing duty drawback. However, with quite a bit of the work coming under the Electronic Data Interchange (EDI), at least the process has become easier.

Unattended Claims

A major complaint from exporters is about the length of time it takes for duty drawback to be refunded. As per a working paper titled “India’s Merchandise Exports: Some Important Issues and Policy Suggestions” by Dr. H. A. C. Prasad, Dr. R. Sathish Salam, and Shyamsunder Singh, in 2014, over Rs.10,000 crore worth duty drawback claims were pending across the nation, with at least Rs.500 crore pending in the state of Karnataka itself. This poses a huge challenge to exporters, especially small producers and exporters, as when the money is not refunded on time, the delay simply adds on to the exporters’ already long bills.

Change, No Good

The government recently (on November, 2015) altered the All India Rates. While some products remained unaffected, drawback rates for many of them were changed. For example, in the case of cigarettes in consumer packs (HS Code: 240201), the rate fell from 4% to 1%, and for perfumes (HS Code: 330301), it fell from 2.8% to 1.9%. On the other hand, products like molluscs in chilled or frozen form (HS Code: 030701) went from 1.4% per kg to 2.6% per kg. Not to questioning intentions of the policymakers, the we really wonder, did the changes made really mean something to exporters who were desperately waiting for bigger breather in AIR?

Let us not even get into the lackadaiscal attitude of the government agencies where drawbacks are concerned – try putting in the aforementioned HS codes on the Commerce Ministry’s Export Import Data Bank (240201, 330301 and 030701), and all that will pop up on your screen is the message ‘No record found!’ As it turns out, the government has not even bothered to amend wrong HS codes that appeared in earlier documents that announced Drawback Rates! To give further detail, Molluscs in chilled/frozen form cannot possibly be exported under 030701. Why? Check the Schedule of Customs Tariff, the 6-digit breakdown for HS Code 0307 for Molluscs and Aquatic invertebrates (except Crustaceans and Molluscs) begins with 030711. Similarly, cigarettes in consumer packs aren’t exported under HS Code 240201. When it comes to tobacco products, the only HS codes under 2402 are 240210, 240220, and 240290. Lastly, perfumes don’t come under HS Code 330301, but, 330300 (Perfume and Toilet Waters). In fact, there are many such examples that will leave you baffled. Can someone please explain how an exporter of these products will avail their rebate amount if they can’t figure out which HS Code to claim Drawback under? The one they actually mentioned in shipping bills or the one mentioned in the claim document? Isn’t this more of ‘export confusion’ than an ‘export promotion’?

All Over The Place

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

A year back, The Dollar Business had carried a cover story titled, ‘Duty Drawback and all its drawbacks’. It had reported shocking findings from SION that continue to live on. Even today there is no SION for cars. Even today, the SION for wooden horses doesn’t have wood

Even today, SION for chocolate has no sugar or edible fats or flavours. [Even Kim Jong-un will imagine serving such a chocolate bar to his enemy very hard; actually, you can be sure that Putin will send anything but such a preparation to welcome the new American to the White House.]

Talking about chocolate, allow us to show some gratitude to the delicacy that has pampered our sweet tooth for years now, mathematically. As per SION, to produce and export 1 MT of export-quality chocolate (HS Code 1806), the ONLY input required is cocoa beans (HS Code 18010000; 0.59 MT/MT chocolate 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 36.136%, i.e. Rs.45,625.31. When Cenvat is not availed, the duty drawback on chocolate is 1%. Going by the current export price of chocolate exports of Rs.2,14,000 per MT, the eligible duty drawback amounts to Rs.4,305, i.e. 9.43% of the duty paid!

Well, if you’re exporting shrimps, well, life isn’t all the bad. Yes, the duties you need to pay have increased, but on the bright side, so has the duty drawback allowed to you (the duty drawback rate has been increased from 3.3% per kg to 3.8% per kg)! Unfortunately, you still don’t get fully reimbursed for the products you imported – but at least it’s 20% more from the last year rate.

If you’re exporting human hair, it’s like winning the lottery. Even though the percentage of duty that you pay has increased, so has the percentage of the duty drawback allowed to you – now, a whopping 383.46%. 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.

The Way Ahead

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. 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. Apart from re-thinking the rates, perhaps SION should also look into the list of inputs, in order to help alleviate the exporters’ distress, because when you think about it, where exactly is the incentive here? And think of it this way, if the rates are higher, only then will they encourage foreign investors to set up their manufacturing hubs in India, thus bringing in more foreign exchange and revenue.

Of course, it is difficult to please everyone, and if an exporter is unhappy with his rates, he can always opt to go for Brand Rates or Special Brand Rates. If the government wants to make the Make in India movement successful, there’s a need for an absolute overhaul of a flawed-by-character and inefficient-by-dimension arrangement like the DBK scheme.

To be fair, they are not asking for much – just that the rates be fixed fairly, and that the complete duty drawback be refunded on time! Or, are they?!