Duty Drawback

In one line

Drawback is the repayment of duty on imported goods which are afterwards exported, either as they were or after being used to make something else. Precisely: section 74 allows drawback on the re-export of duty-paid goods; section 75 allows drawback on imported materials used in the manufacture of goods which are exported; section 75A provides interest on delayed drawback and on its recovery; and section 76 prohibits and regulates drawback in certain cases.

Why a country repays duty on goods it has taxed

Because a tax is meant to fall on domestic consumption, not on exports. Duty on an imported component is ultimately borne by the Indian consumer of the finished article. If the finished article is exported, the consumer is foreign, and the Indian duty embedded in its price makes it uncompetitive against goods from countries which do not export their taxes.

So the settled international principle is that taxes should not be exported. Drawback is India's principal instrument for giving effect to it: the duty is collected at import, when the goods' destination is unknown, and repaid on proof that they have gone abroad.

That explains why drawback is not a refund and must not be described as one. In a refund under section 27 the state took money it was not entitled to. In drawback the state was entitled to the money when it took it, and repays it because a later event, the export, has removed the reason for keeping it. The proviso to section 27(2) confirms the distinction by exempting drawback under sections 74 and 75 from the unjust enrichment test.

Section 74: drawback on re-export of duty-paid goods

Section 74(1) provides that where goods capable of being easily identified as imported goods, on which import duty has been paid, are entered for export and the proper officer makes an order permitting clearance and loading under section 51, or are to be exported as baggage and the owner declares them under section 77, or are entered for export by post under section 82, and are actually exported, then ninety-eight per cent of the duty shall be repaid as drawback, subject to the following conditions:

(a) the goods are identified to the satisfaction of the Assistant Commissioner or Deputy Commissioner as the goods which were imported;

(b) the goods are entered for export within two years from the date of payment of duty on their importation, extendable by the Board on sufficient cause being shown.

The two per cent retained is the state's charge for the transaction, and the figure should be quoted precisely: ninety-eight per cent, not the whole.

Section 74(2) deals with goods which have been used after importation. Where goods have been used after importation, drawback is allowed at such reduced rate as the Central Government may fix, having regard to the duration of use, depreciation in value and other relevant circumstances. The schedule of reduction is prescribed by rules and diminishes with the period of use, until after a stated period no drawback is allowed at all.