Duty Drawback (Customs Act 1962, Sections 74 & 75)

By Priya Sharma | Updated March 2026

What Is Duty Drawback?

Duty Drawback is a refund mechanism under the Customs Act, 1962 that allows exporters to recover customs duties paid on imported goods. It operates through two distinct provisions: Section 74 covers re-export of imported goods (where goods are sent back out of India in the same or substantially the same condition), and Section 75 covers exports of manufactured goods that incorporate imported inputs on which duties were paid. The scheme is governed by the Customs and Central Excise Duties Drawback Rules, 2017, which replaced the earlier 1995 Rules.

For foreign companies operating manufacturing units in India, duty drawback is one of the most effective tools to reduce input costs and improve export competitiveness. If your Indian subsidiary imports raw materials, processes them, and exports finished goods, Section 75 drawback directly reduces your landed cost of materials. If you need to return imported capital equipment or unsold inventory, Section 74 ensures you recover nearly all the duty paid.

India's drawback scheme disbursed over INR 5,000 crore annually to exporters in recent years, making it one of the largest export incentive programs alongside RoDTEP. Unlike RoDTEP (which covers embedded taxes not otherwise refundable), duty drawback specifically neutralises customs duties on imported inputs.

Legal Basis

• Section 74 of the Customs Act, 1962 — Provides for drawback of customs duties when imported goods are re-exported. Up to 98% of the duty paid is refundable if goods are exported without use within 2 years of import.
• Section 75 of the Customs Act, 1962 — Provides for drawback when imported materials are used in manufacturing or processing goods that are subsequently exported. Rates are fixed by the Central Government as All Industry Rates (AIR) or determined on a case-by-case Brand Rate basis.
• Section 75A of the Customs Act, 1962 — Governs interest on delayed drawback payments (payable to the exporter) and interest on excess drawback recovered (payable by the exporter).
• Customs and Central Excise Duties Drawback Rules, 2017 — Prescribes procedures for AIR fixation (Rule 3), Brand Rate determination (Rule 6), Special Brand Rate (Rule 7), time limits, and documentation requirements.
• Annual AIR Notification — The Central Government publishes the All Industry Rates schedule covering 3,900+ tariff items, typically revised annually.

Section 74 vs Section 75: Key Differences

The two drawback provisions serve fundamentally different scenarios. Understanding which applies to your situation determines the refund amount, documentation, and timeline.

Section 74: Depreciation Schedule for Used Goods

When imported goods are used before re-export, the drawback percentage reduces based on duration of use. This schedule applies to all goods except motor vehicles (which have a separate 4-year declining scale):

Motor vehicles follow a separate depreciation schedule: 98% for immediate re-export, declining by 4%, 3%, 2.5%, and 2% per quarter over four years. No drawback is allowed after 4 years of use.

All Industry Rates (AIR) vs Brand Rate

Under Section 75, the government determines drawback rates through two mechanisms:

All Industry Rates (AIR)

AIR is a standardised drawback rate published annually by the Central Government for over 3,900 export products. The rate is calculated based on the average incidence of customs duties on imported inputs, average wastage, and average proportion of imported vs domestic inputs across the industry. The Drawback Schedule specifies both a percentage rate (applied to FOB value) and a cap amount per unit for each tariff item.

AIR claims are straightforward: the exporter declares the drawback serial number on the shipping bill, and the amount is calculated automatically through the EDI system at the port. Processing typically takes 7 to 15 days for EDI-filed claims.

Brand Rate (Rule 6 of Drawback Rules, 2017)

When no AIR exists for a product, the exporter applies to the Principal Commissioner or Commissioner of Customs for fixation of an individual Brand Rate under Rule 6. This requires detailed disclosure of imported inputs, duties paid, manufacturing process, and wastage. Brand Rate determination typically takes 2 to 3 months.

Special Brand Rate (Rule 7 of Drawback Rules, 2017)

When an AIR exists but covers less than 80% of the actual customs duties paid by the exporter (because the exporter's import intensity or duty profile differs from the industry average), the exporter can apply for a Special Brand Rate under Rule 7. The application must be filed within 30 days from the date of the Let Export Order. The eligibility threshold is clear: the AIR fixed must be less than 80% of the duties actually paid by the exporter on imported inputs.

Calculation Methodology and Claim Process

AIR Calculation

The formula is straightforward:

Duty Drawback = AIR Percentage x FOB Value of Export (subject to the cap per unit specified in the Drawback Schedule)

For example, if the AIR for a product is 5% of FOB value with a cap of INR 25 per kg, and the exporter ships goods worth INR 10,00,000 weighing 5,000 kg:

• Percentage-based drawback: 5% x INR 10,00,000 = INR 50,000
• Cap-based drawback: INR 25 x 5,000 kg = INR 1,25,000
• Drawback payable: INR 50,000 (lower of the two)

Minimum Thresholds

A drawback claim must be at least 1% of FOB value or INR 500 per shipment, whichever is higher. The minimum eligible amount is INR 50. The drawback amount cannot exceed one-third of the market price of the export product.

Filing Timeline

• AIR claims: Filed at the time of export through the Shipping Bill. The drawback serial number is declared on the bill, and processing is automatic through EDI.
• Brand Rate application (Rule 6): Must be filed within 3 months from the date of the Let Export Order, extendable by up to 12 months with fee payment.
• Special Brand Rate application (Rule 7): Must be filed within 30 days from the Let Export Order date.
• Section 74 claims: Goods must be entered for export within 2 years from the date of duty payment.

Interest Provisions (Section 75A)

If the customs department delays drawback payment beyond one month from the filing date, the exporter is entitled to interest at rates ranging from 5% to 30% per annum. Conversely, if excess drawback has been paid and the exporter fails to return it within 2 months of demand, interest at 10% to 36% per annum is recoverable.

How This Affects Foreign Investors in India

Duty drawback is particularly valuable for foreign companies with manufacturing operations in India through a wholly-owned subsidiary or joint venture. Key considerations:

• Export-oriented manufacturing: If your Indian subsidiary imports components and exports finished goods, Section 75 drawback directly reduces material costs. For a unit importing inputs worth INR 10 crore annually with average customs duty of 15%, AIR drawback at even 3-5% of FOB value can translate to INR 30-50 lakh in annual refunds.
• Interaction with GST: Post-GST, the AIR rates were bifurcated into a customs duty component and a central tax/IGST component. If the exporter claims IGST refund separately, only the customs duty component of AIR applies.
• FEMA considerations: Drawback is payable only when export proceeds are received within the FEMA-prescribed timeframe (currently 9 months from shipment). Non-realisation of export proceeds within this period can trigger drawback recovery.
• Interaction with other schemes: Drawback under Section 75 is not available if the exporter has availed duty exemption on imports through SEZ benefits, Advance Authorization, or EPCG scheme for the same inputs. You must choose between duty drawback and these alternative schemes.
• Transfer pricing: For related-party exports, the FOB value used for drawback calculation must reflect arm's length pricing. Undervalued exports to reduce transfer pricing adjustments will correspondingly reduce your drawback entitlement.

Common Mistakes

• Missing the 30-day deadline for Special Brand Rate applications under Rule 7. Many exporters discover only after several shipments that the AIR covers less than 80% of their actual duties. By then, the 30-day window from the Let Export Order has lapsed for earlier shipments, and those claims are lost permanently.
• Not bifurcating the customs duty and IGST components of AIR post-GST. If you claim IGST refund through the GST return and also claim the composite AIR rate (which includes a central tax component), you face dual benefit recovery proceedings. Always use the lower customs-duty-only AIR rate when claiming IGST refund separately.
• Failing to maintain input-output correlation records for Brand Rate applications. The Commissioner requires detailed process documentation linking specific imported inputs to exported products, including wastage certificates from a Chartered Engineer. Generic production records without batch-level traceability result in Brand Rate rejections.
• Exporting through merchant exporters without proper documentation. When a foreign-invested manufacturer sells to a merchant exporter who then exports, the drawback claim is filed by the merchant exporter. Without a clear agreement allocating the drawback benefit, the manufacturer (who paid the import duty) may not receive any refund.
• Ignoring the one-third market price cap. For high-duty products where the drawback amount could exceed one-third of the export product's market price, the claim is automatically reduced. Exporters who price products aggressively for market entry may find their drawback capped below expectations.

Practical Example

PrecisionTech GmbH, a German industrial components manufacturer, operates a wholly-owned subsidiary in Pune that imports specialised steel alloys and exports precision-machined automotive parts. Here is how duty drawback applies across a financial year:

• Annual imports: Specialised steel worth INR 8 crore (CIF), attracting 10% Basic Customs Duty = INR 80 lakh in duties paid
• Annual exports: Machined parts worth INR 15 crore (FOB) to European and US customers
• AIR applicable: 2.5% of FOB value with a cap of INR 18 per kg

Scenario A — AIR claim: 2.5% of INR 15 crore = INR 37.5 lakh. This is processed automatically via EDI within 15 days of each shipment. Simple, fast, but covers only 47% of the INR 80 lakh duty paid.

Scenario B — Special Brand Rate (Rule 7): Since AIR (INR 37.5 lakh) is less than 80% of actual duty paid (80% of INR 80 lakh = INR 64 lakh), PrecisionTech qualifies for Special Brand Rate. After submitting detailed input-output declarations and a Chartered Engineer's wastage certificate, the Commissioner fixes a Brand Rate of 4.8% of FOB value. New drawback: 4.8% of INR 15 crore = INR 72 lakh — recovering 90% of duties paid.

The difference between the two approaches: INR 34.5 lakh per year. Over three years, PrecisionTech recovers an additional INR 1.03 crore by investing in the Brand Rate application process.

Had PrecisionTech needed to return a CNC machine imported at INR 50 lakh (with INR 5 lakh customs duty) after 8 months of use, Section 74 drawback at 75% would have yielded a refund of INR 3.75 lakh.

Key Takeaways

• Duty drawback under Section 74 refunds up to 98% of customs duty on re-exported goods; Section 75 refunds duties on inputs used in manufactured exports via standardised AIR or individual Brand Rates
• AIR claims are fast (7-15 days via EDI) but may under-compensate — apply for Special Brand Rate under Rule 7 if AIR covers less than 80% of actual duties paid
• Section 74 drawback declines with use: 95% within 3 months down to nil after 18 months
• The 30-day deadline for Special Brand Rate applications under Rule 7 is strict and commonly missed
• Drawback cannot exceed one-third of the export product's market price, and is unavailable if you already claim duty exemption through Advance Authorization, EPCG, or SEZ benefits on the same inputs
• For foreign manufacturers in India, the choice between drawback and upfront duty exemption schemes (Advance Authorization, EPCG) is a critical cost optimisation decision — drawback is simpler but post-facto, while exemption schemes eliminate duty payment upfront

Need help claiming duty drawback or choosing the right export incentive scheme for your Indian operations? Beacon Filing provides IEC registration, drawback advisory, and export compliance support.