What is Duty Drawback Policy?

• Duty drawback can be understood as the refund of the duty that was paid for the imported raw material used in the production of the exported goods/products to the exporter.

• Sustained export growth is essential to maintain and accelerate GDP growth, increasing employment and reducing poverty. To encourage exports, government offers duty drawbacks to the exporters, which will make their products more competitive in the overseas markets.

Change in the Policy rates

• The following table shows the changes in the All Industry Rates (AIR) of Duty Drawback:

Item Old Rates (AIR) New Rates (AIR)

Cotton Garments 7.7% 2%

Garments containing cotton and man-made fiber

(MMF) blend

9.5% 2.2%

MMF Garments 9.8% 2.5%

Clothing items made of silk (HS codes 61 & 62),

except Noil silk

7.6% 4.8%

Woolen Garments 8.7% 3.5%

Wool & MMF blend garments N/a 3%

Other garments N/a 2%

Effect on Garment exports

• Global competition: India garment exporters are already facing severe competition in the global market from countries like Bangladesh, Sri Lanka, Cambodia, and Vietnam. This rate cut is going to further elevate the costs of Indian garments, which will push Indian exports further back.

• Working Capital Issue: GST shift required the industry to put in a huge working capital, where GST refunds are still not received, generating an overall liquidity crunch in the industry. To add to the uncertainties, appreciation of rupee against dollar is further causing around 7%-8% month-on-month drop in ready-made garment exports.

• Job Losses: Since 80% of the garment units in country belong to MSME category, this rate cut is expected to lead to huge job losses

Input Tax Credit (GST) to Balance Losses

• What exporters are looking ahead to now is to gain benefit or at least reduce their losses through the complete tax package, i.e. balancing their losses from the rate cut in duty drawback with the GST’s Input Credit.

• This step comes from the government, as under GST system, duty drawback is expected to lose its significance. Input tax credit provided as a refund under GST, is expected to provide the required boost to the export sector of the industry rather than reliance on duty drawback.

Conclusion

• Overall, the current global economic conditions, along with the local uncertainties are causing a huge turmoil in the India’s textile export industry; hence, cut in the duty drawback rates, when the exporters are still awaiting their input credits is creating unrest.

• In the long term, when the GST system is streamlined, these steps together might act as positive package for Indian textile exports.

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