Concerns on duty drawback rates

The Union ministry of finance has notified an increase in the All Industry Rates (AIR) of duty drawback and higher value caps for many items. The major beneficiaries are exporters of textiles, vehicles and automobile components.

The AIR are based on the concept of averages. The drawback rate itself, as well as its customs and excise portions, are based on weighted averages of consumption of imported/indigenous inputs of a representative cross-section of exporters and the average incidence of duties on such inputs. The rates are determined periodically, on the basis of broad parameters such as prices of inputs, standard input/output norms, share of imports in the total consumption of inputs, FOB value of export goods, the applied rates of central excise and customs duties, incidence of service tax on taxable services used as inputs in the manufacturing or processing of export goods, incidence of duty on high-speed diesel or furnace oil, etc. These rates have no relation to the actual input consumption pattern and actual tax incidence on inputs of a particular exporter or individual consignments exported by one.

When the AIR for 2013-14 were notified on September 14, 2013, exporters had expressed disappointment over the reduction in rates for many items, as well as the value caps that limited the drawback amount payable. Exporters of electronics goods had expressed concern on the sharp decline in drawback rates on their items. Exporters of engineering goods had reacted strongly and said the reduction would negate the positive impact of rupee depreciation. The exporters of textiles represented that averaging the duty incidence of many items at the four-digit levels resulted in anomalies. The latest increase in drawback rates through the notification dated January 21, 2014, responds partly to the complaints of exporters of textiles, vehicles and auto components but ignores concerns of the electronics sector.

The new notification introduces 18 new entries at the six-digit levels and seven at the eight-digit level for textile exporters, for items covered under the four-digit classifications 6002, 6004, 6116 and 6307. About 120 entries at the six-digit level covered under Chapter 87 (vehicles and auto components) get their customs allocation of drawback raised from 1.7 per cent to two per cent. About 80 of these entries also see a marginal increase in the value caps; three others see a marginal drop.

The other changes include a marginal increase in value caps for six entries in the leather sector, four in paper products and six in textiles. Besides, there are some corrections of obvious errors in description and value caps. Hopefully, the representations from other sectors will also receive due attention.

The main worry of exporters now is the delay in getting duty drawback. They apprehend that the government's efforts to keep the fiscal deficit down will result in blocking the disbursal of their legitimate dues. Such delays will not only disrupt their cash flow but result in additional costs in raising finance to fund their operations. The increase in repo rates by the Reserve Bank can make funds costlier and, to that extent, make them relatively uncompetitive. Their sources of comfort are prospects of better growth in developed economies and weakening of the rupee against the dollar.

email: tncr@sify.com