CBIC must re-examine, clarify on non-duty paid inputs for drawback

The Central Board of Indirect Taxes and Customs (CBIC) has asked the Customs field formations to follow scrupulously the clarification through its circular no.19/2005-Cus dated May 21, 2005, regarding admissibility of drawback on export products manufactured from non-duty paid inputs. Still, it would help if the CBIC clarifies a related point. 

Section 75(1) of the Customs Act, 1962, allows drawback of the Customs and Central Excise paid on the inputs used in the manufacture or processing of the export products. The government has notified the Customs and Central Excise Duties Drawback Rules, 2017, to carry out the provisions of the said Section 75(1). Rule 3 of the said rules empowers the government to notify the rates, known as All Industry Rates (AIR), at which drawback is granted on export of certain items. For items that are not covered under the AIR notification, the actual duty incidence can be claimed under Rule 6. Where the actual duty incidence is more than the notified AIR, drawback can be claimed under Rule 7 of the said Rules.  

Export goods can be produced with some or all inputs on which no duty is paid or duty is paid at concessional rate (e.g. goods imported under exemption notifications relating to free/preferential trade agreements) or part or full duty is rebated or allowed as credit. The first proviso to Rule 3 says that the drawback admissible on the said goods shall be reduced taking into account the lesser duty paid or the rebate, refund or credit obtained. “The intention of the first proviso to Rule 3 is essentially to provide a guideline to the Directorate of Drawback as to how AIR of drawback will be determined in certain situations. It is not intended for the field formations to use this rule for arbitrarily altering the AIR of drawback in the case of individual exporters for individual consignments”, said the CBEC Circular no.24/2001-Customs dated April 20, 2001. This position was again clarified through CBEC Circular no.19/2005-Cus dated March 21, 2005, and the same position has now been reiterated through CBIC Instruction no.1/2025-Cus dated 28 February, 2025, because the denial of drawback on goods manufactured using some inputs on which duty is not paid or paid at reduced duty rates came to the notice of CBIC. 

However, there is a second proviso to the said Rule 3, which deals with several situations when drawback can be denied.  One clause in the said proviso says that no drawback shall be allowed where the goods are produced or manufactured, using imported materials or excisable materials in respect of which duties have not been paid. Some Customs field formations take a view that the said Circulars 24/2001-Cus and 19/2005-Cus talk of only the first proviso to the said Rule 3. They contend that where all inputs are non-duty paid, the second proviso will apply and that the said circulars will not come into play. So, they ignore the said Circulars and deny the claim of drawback at AIR. The latest instruction does not address that issue. So, the CBIC should re-examine the matter and clarify whether the said second proviso can lead to denial of drawback, where all inputs used are non-duty paid.  Otherwise, the problem is likely to persist despite the latest instructions. 

Email : tncrajagopalan@gmail.com