Odd decisions and the consequences

The commerce ministry has restored the benefit of duty drawback at All Industry Rates (AIR) to deemed export, with retrospective effect from December 5, 2017. A welcome development but it raises some questions. 

Deemed export refers to supplies within India of goods made in India for specified purposes or to specified entities. 

The objective is a level playing field for domestic manufacturers in specified cases. For example, an export oriented unit may import its requirements duty-free. 

A domestic manufacturer can compete with such duty-free imports if relieved of the tax/duty burden on  inputs and finished products. So, the deemed export provisions, besides other dispensations, allow drawback i.e refund of the taxes/duties paid on the inputs. 

The notified AIR for various export products is based on the weighted averages of the consumption of imported/indigenous inputs of a cross-section of exporters and the average incidence of duties suffered on these. 

Deemed export is eligible for claim of drawback at AIR, without furnishing any evidence of actual duty incidence. In 2013, the Directorate General of Foreign Trade issued Policy Circular 9/(RE-2013)/2009-14, dated October 30, 2013, denying drawback at AIR on deemed export; it allowed drawback of only basic customs duty, against evidence of actual duty incidence. The next Foreign Trade Policy (FTP), notified on April 1, 2015, gave legal effect to the decision. 

That position was reiterated in the FTP revision on December 5, 2017. That decision has now been reversed with retrospective effect.   

For deemed export to be made, domestic producers will henceforth be better placed to compete with duty-free import. The requirement of making drawback claims only on the basis of documents evidencing payment will not be there in the coming days. To that extent, the latest change will help domestic producers. 

However, it is doubtful if most deemed exporters could claim the benefits for supplies made between December 5, 2017, and  October 31, 2019. For, they had taken note of the denial of drawback at AIR and did not bother to do the documentation that would have enabled them claim the benefit at a later date. In fact, many, with the denial of drawback at AIR, were not price-competitive and lost their orders against cheaper duty-free import. 

Also, many were denied their drawback at AIR even for supplies made between October 30, 2013, and March 31, 2015. 

The policy allowed the benefit but a policy circular denied it. 

Another issue is the time limit of 12 months from date of supply for making the drawback claim. 

The entitlement is now restored with retrospective effect. So, quite a few claims to be submitted in the coming days will be time-barred. Will the entitlements be cut due to the late submission?  The DGFT should clarify.  

What caused the ministry to deny the drawback at AIR for deemed export in 2013? And, what has now happened in 2019 to restore the benefit with retrospective effect? The reasons are far from obvious.  

It is also interesting that the benefit was restored when an additional secretary in the ministry was holding temporary additional charge as Director General of Foreign Trade (DGFT), and just a day or so before another officer, already appointed as DGFT a week earlier, was to take charge. 

E-mail: tncrajagopalan@gmail.com



Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel