What is a Duty Drawback?
A drawback or duty drawback refers to the whole/partial refund, reduction, or exemption of customs duties paid when importing goods into the US. This benefit can be availed only when the imported merchandise is subsequently exported from the US or destroyed.
To summarize, duty drawback is the refund of customs duties, taxes and fees paid on imported items that are matched with subsequently exported or destroyed items. Duty drawback also helps prevent double taxation as the import fee paid to the Customs and Border Prevention (CBP) can be reimbursed by the importers who are liable to receive a 99% refund of the duties under certain conditions.
The CBP supervises duty drawback in the US. It is codified under Title 19 of the United States Code 1313 (g).
Types of Duty Drawback
The main types of duty drawback are listed below:-
1. Manufacturing direct identification drawback
When an imported material is used to manufacture a product in the US and then the same is subsequently exported from the country, the import duty paid earlier can be recovered. It is necessary to track and trace the duty-paid imported material through manufacturing and export processes.
2. Manufacturing substitution drawback
When duty-paid, duty-free, or domestic materials of the same type, kind, and quality, as the duty-paid imported designated materials are used to produce an exported item, the import duty can be reclaimed. The same can be recovered even when none of the designated goods have been used to produce the exported products.
3. Unused merchandise direct identification drawback
The import duty can be recovered when a duty-paid material is imported into the US and subsequently exported unused. It is necessary to track and trace the duty-paid imported material through the export process.
4. Unused merchandise substitution drawback
The import duty may be recovered when any unused material that is commercially interchangeable with any imported duty-paid material is exported. For the import duty to be recovered, the imported duty-paid material doesn’t have to be exported if it exported the substituted merchandise.
Duty Drawback Process
The duty drawback program has undergone several changes over the years. The requirements and processes for applying for duty drawback have also been modified. According to the latest updates that came into effect under TFTEA of 2015, all duty drawback applications must be filed electronically. Also, business owners can now apply for duty drawback within five years from the date of import to the filing date. They must provide proof of export, among other proofs to claim the benefit.
To file a drawback claim with an accelerated payment request indicator, the importer must have a valid bond with the CBP. The claim won’t be rejected if the bond is insufficient, or has expired. Only the accelerated payment request indicator will be removed. The importer must work with a consultant or a specialist to rectify the bond issue and to add it again.
Given below are some points importers can keep in mind when claiming duty drawback:-
- Ensure accurate record-keeping of all data including invoices, shipment receipts, cash receipts, exportation documents, and transfers of merchandise.
- Maintain all the above records for an additional three years from the date of export.
- File for duty drawback within five years of the date on which the goods were imported.
- File an online application for claiming the duty drawback.
When the procedure is completed, the importer is liable to receive a 99% refund on duties, taxes, and fees.
Duty Drawback Application Form/Filing
While the duty drawback process might seem simple, it is important to convince the CBP of your eligibility to file for duty drawback. For this, a series of documentation processes must be complied with. It requires the importer as well as all the other entities involved in the supply chain to keep a record of all the documents for at least three years following the final export. These documents may vary depending on the kind of drawback scenario that best suits your business. Some of the vital forms that have to be submitted are listed below.
1. Proof of duties paid
Importers and manufacturers who purchased goods must produce a Delivery Certificate for Purposes of Drawback to prove that they received and paid the duties on the imported goods that were later exported. This customs form 7552 is regarded as proof of duties paid and that there is a case for recovery of the same.
2. Entry Summary form
The Customs Form 7501 - Entry Summary is used to gather relevant information about the shipment. The imported commodities are allocated an entry number that can be used by the CBP for tracking.
3. Proof of import
The proof of import can be shown through customs form 7551. It provides details of the shipment’s contents and tariff classification code which determines the duty amount paid. The invoice that accompanied your shipment must also be provided for the CBP. This will help them get an in-depth description of the shipment and its contents.
4. Proof of export
Proof of export can be provided through documents like a shipment invoice, shipment declaration, or a bill of lading. All the parties involved in the manufacturing and supply chain process must also retain other documents required for claiming duty drawback and should include the following:-
- Commercial/sales invoices
- Purchase orders
- Receiving reports
- Dated delivery records
- Payments documents
- Cash receipt records
- Inventory records
- Proof with dates that the items were used in manufacturing
- Possible proof of waste value
- Shipper’s export declaration
- Export invoices
- Export bills of lading
Even after you have accurately provided all the relevant documents on time, you may be contacted by the CBP agents for further documentation requests. They might wish for further clarification that has to be submitted by mail or even opt for an on-site compliance review under rare instances.
In short, business owners must be able to demonstrate every step of their importing, manufacturing, and exporting processes. Separate divisions and entities must work as a team when it comes to record-keeping.
The list of documents that are normally required for drawback documentary evidence is mentioned below.
- Purchase order, vendor confirmation
- Accounts payable, disbursement records, payment documents
- Import bills of lading, invoices, packing lists
- Customs form 7501-Entry Summary
- Import invoice and other entry documents
- Transportation document from the entry port to factory
- Importer factory dock receipts, warehouse/factory inspection reports
- Certifications regarding grade, specifications, or content
- Internal laboratory inspection reports
- Inventory records, transaction logs, stores control
However, the CBP may request more records for a specific case.
How is a Duty Drawback calculated?
You can arrive at your potential drawback refund estimate by considering the duty you paid on the imported merchandise that was/is to be exported. You can start the calculation with the exports and then work backward to the duty paid on the imported merchandise.
These calculations can be done in a few different ways:
- Annual duty paid percent of merchandise that is exported 99% = Drawback Potential
- Value of exported merchandise duty rate on imported merchandise 99% = Drawback Potential
OR (for manufacturing opportunities)
- Annual duty paid on components percent of components in exported articles 99% = Drawback Potential
Below is a hypothetical example to calculate drawback potential :-
Annual Duty: $20,000,000
Annual Export Sales: 40%
$20,000,000 x 20% = $8,000,000
$8,000,000 x 99% = $7,920,000
Many complexities based on various factors, including regulatory restrictions are involved while calculating the duty drawback. So, the best way ahead is to consult a drawback specialist to get an accurate drawback opportunity assessment.
When can a Duty Drawback be claimed?
According to the Trade Facilitation and Trade Enforcement Act (TFTEA), all types of duty drawbacks can be claimed within five years from the date of import to the date of filing the claim. This five-year window includes all the manufacturing details, information about the imports and exports, as well as the date of filing the claim.
Advantages and Disadvantages of Duty Drawback
A duty drawback program can boost a company’s revenue and improve its cash flow. If a company has never filed a drawback, it can do so retroactively on exports shipped within the past three years. This can bring in major windfalls to the company.
A duty drawback can also facilitate global competitiveness by providing all the companies with a level playing field. Any firm that recovers 99% of import duties when it exports is in a position to manufacture in the US virtually duty-free. A provision that is often overlooked is the ability of domestic suppliers of imported materials to transfer their drawback rights. This allows exporters to recover 99% of the duties paid.
There are several obstacles one might face while claiming duty drawback refunds. So, companies must follow stringent record-keeping practices and filing processes. Loss or misplacement of even a single document can create major hassles. This problem can be resolved by choosing a service provider of excellent standing and repute.
Tips for new businesses for claiming Duty Drawback
The following tips can be useful for an import and export business in the US who are claiming duty drawback for the first time.
- Maintain records accurately and in an organized manner. Your record-keeping must be impeccable.
- As only the exporting company of record is entitled to receive the drawback, you can endorse the drawback rights back to the manufacturer if you operate as two distinct and separate entities.
- You can receive the money faster by availing a pre-approval from the CBP by using the accelerated payment program. Pre-approvals help you get a refund as early as few weeks.
- You can use the services of experienced logistics professionals in making the duty drawback process as smooth and simple as possible. It can also help dismantle the potential barriers to getting your money back.
FAQs on Duty Drawback
How to check your duty drawback application?
You can visit the CBP website and check for the status/update on your duty drawback application. If you are filing through a consultant/agency, they will take care of the follow-up procedure.
What is the time limit for claiming duty drawback?
All types of duty drawbacks can be claimed within five years from the date of import to the date of filing the claim. This five-year window includes all the manufacturing details, information about the imports and exports, as well as the date of filing the claim.
Is duty drawback a government grant?
No, it is a refund, reduction, or exemption of customs duties assessed and collected when an item is imported into the US and then either subsequently exported from the country or destroyed.
How are duty drawback rates fixed?
Duty drawback rates are fixed based on the different types of products/materials/categories involved in the export process. The rates can be viewed on the CBP website.
Is duty drawback taxable?
A duty drawback is a refund on specific duties, fees, and taxes recovered for importing goods. Typically, imports and exports are taxed. Duty drawbacks help to alleviate the tax burden for US exporters.
- Power of Attorney (POA) In International Shipping
What is the difference between duty drawback and refund? ›
b) Refunds are paid in respect of duty or levy overpaid, or where goods are exported in the same condition as they are imported. c) Drawbacks are paid in respect of specified materials used in the manufacture, processing, packing, etc., of goods that are subsequently exported.What is export drawback refund? ›
Duty drawback refers to the refund of customs duties and internal taxes paid while importing goods, which in turn are used to manufacture final products exported from India. For instance, refund of custom duties and taxes paid on machinery imported that is used to manufacture textile products.Can import duty be refunded? ›
U.S. Customs and Border Protection (CBP) offers the opportunity to receive refunds, resulting from overpayment of Customs duties, taxes, and fees, electronically through Automated Clearinghouse (ACH). If you sign up for ACH Refund, your refund will automatically be deposited directly into your bank account.Is duty drawback allowed on re-export? ›
In the event imported merchandise is unused and later exported or destroyed, the exporter may claim a drawback not to exceed 99% of the duties initially paid on the imported merchandise.What are the two types of duty drawback? ›
The Duty Drawback is of two types: (i) All Industry Rate (AIR) and (ii) Brand Rate. The All Industry Rate (AIR) is essentially an average rate based on the average quantity and value of inputs and duties (both Excise & Customs) borne by them and Service Tax suffered by a particular export product.What are the conditions for duty drawback? ›
Any individual must be the legal owner of the goods at the time the goods are exported. You must have paid customs duty on imported goods. Duty drawback is available on most goods on which customs duty was paid on importation and which has been exported.What is the benefit of duty drawback? ›
The Duty Drawback Scheme provides exporters with a refund of customs duty paid on unused imported goods, or goods that will be treated, processed or incorporated into other goods for export.How do you calculate export duty drawback? ›
The drawback amount is greater than or equal to (export value) * (minimum percent of duty drawback/100)Under what circumstances export duty is refundable? ›
If any excess duty is paid on export goods, an application for refund of such duty should be made before the expiry of six months from the date on which the proper officer makes an order for clearance of goods for export. (Section 26 of the Customs act 1962).Who is the reimbursing authority of duty drawback to exporters? ›
In such cases, the amount of drawback is directly credited with exporter's bank by customs authorities. If the amount of drawback is not credited with exporter's bank within a stipulated period of time after export, he can contact customs department.
Which tax refund is eligible to exporters? ›
Refund of ITC paid on Exports of Goods and Services without payment of Integrated Tax.What is a duty drawback in US Customs? ›
Drawback is the refund of certain duties, internal revenue taxes and certain fees collected upon the importation of goods and refunded when the merchandise is exported or destroyed.What is a drawback example? ›
A drawback is a disadvantage or slight problem. Some drawbacks to adopting a puppy can include lost sleep, having your sneakers gnawed on, and spending too much money at the vet. When something is mainly positive but not perfect, those imperfections are drawbacks.What is the purpose of a drawback? ›
A drawback is a refund on specific duties, fees, and taxes, collected from U.S. companies for importing goods according to the U.S. Customs and Border Protection Agency. Typically, imports and exports are taxed. Drawbacks help to alleviate the tax burden for U.S. exporters.What is the process of duty drawback? ›
Duty drawback is a refund of duties, fees and taxes paid on goods imported into the U.S. that are subsequently exported from the U.S. Similar to how you are refunded sales tax when you return an item to a store, you can claim a duty refund when you export an item that was previously imported.What is the minimum amount of duty drawback? ›
The amount of drawback should not be less than Rs. 50/- as per Section 76-(1) (c) of the Customs Act.What is the time limit for claiming duty drawback? ›
The Re-export of Imported Goods (Drawback of Customs Duties) Rules, 1995, specifies the procedure to be followed for claiming the drawback. These rules mandated filing the drawback claim within three months from the date of 'let export' order by the Customs.What is the interest rate on DBK return? ›
8.1 Government notes that section 75A, read under section 27A of Custom Act 1962 provides for interest on delayed payment of drawback of duty at the rate of interest fixed by central Government under section 27A and Government has fixed the interest at 6% per annum.What is Section 75 of Duty Drawback? ›
Duty drawback under Section 75 of the Customs Act covers the cases where any goods are being exported and any imported material has been used in the manufacturing or processing of such goods or carrying out operations in such goods.Is Duty Drawback taxable? ›
So duty drawback is an incentive. Duty drawback or any other incentive provided by the Government of India under any scheme should be adjusted from cost of materials or services. It is not profit and is not taxable to income tax as Income from business.
Which duty is a refund of duty paid on inputs used in export production? ›
Duty Drawback is a trusted and time-tested scheme administered by CBIC to promote exports. It rebates the incidence of Customs and Central Excise duties, chargeable on imported and excisable material respectively when used as inputs for goods to be exported.What is export refund? ›
90% Refund of Integrated GST paid on Exports would be granted within 7 days and the balance within 60 days. The GST refund would always arise in case Export of Goods/Services is done without submission of Bond/LUT and IGST has been paid on such exports.What is refund under Rule 96? ›
Rule 96 of the CGST Rules, 2017 has been amended retrospectively w.e.f. 01st July, 2017 to provide for transmission of withheld IGST refunds, where the goods have been exported in violation of Customs Act or where the verification of exporter is considered essential before grant of refund, to the jurisdictional GST ...What does duty drawback mean? ›
Duty Drawback is a trusted and time-tested scheme administered by CBIC to promote exports. It rebates the incidence of Customs and Central Excise duties, chargeable on imported and excisable material respectively when used as inputs for goods to be exported.What is duty refund? ›
A To get refund of excess duty or interest paid, the importers should file a refund application in the prescribed format in duplicate before the Assistant Commissioner of Customs having jurisdiction over the customs port, airport, land customs or customs warehouse where the duty of customs/inertest was paid.How much do you get back in duty drawback? ›
Originally enacted in 1789 as part of the Original Tariff Act, Duty Drawback is the refund of 99% of the duties, taxes, fees and tariffs paid to Customs and Border Protection on merchandise imported into the United States that is subsequently exported or destroyed.Who can file duty drawback claim? ›
(1) Under 19 U.S.C. 1313(j)(1), the exporter (or destroyer) shall be entitled to claim drawback. (2) The exporter or destroyer may waive the right to claim drawback and assign such right to the importer or any intermediate party.Under what circumstances custom duty paid could be refunded? ›
A Customs duty is refunded when the goods are spoiled or damaged, or when the goods are raw materials for the manufacture of export goods, or raw materials used in the production of export goods at Hozei Manufacturing Warehouses, or claimed merchandise, or to be exported without any change in their nature and form ...What are the examples of drawback? ›
A drawback is a disadvantage or slight problem. Some drawbacks to adopting a puppy can include lost sleep, having your sneakers gnawed on, and spending too much money at the vet. When something is mainly positive but not perfect, those imperfections are drawbacks.