Advance Authorization versus Duty Drawback - Which Scheme to Opt for?

When engaging in international trade, particularly in the export of goods, exporters often have access to different schemes designed to promote export growth, reduce the cost burden, and enhance competitiveness in global markets. Two prominent schemes available under the Indian Foreign Trade Policy (FTP) are Advance Authorization and Duty Drawback. Each scheme offers different benefits and has its own set of advantages and disadvantages. Choosing the right one depends on the nature of the business, export goals, and the type of goods being exported.

Below is a comparative analysis of the two schemes, outlining the key aspects, advantages, and drawbacks.

1. Advance Authorization Scheme

Overview:

The Advance Authorization Scheme allows exporters to import inputs (such as raw materials, components, or intermediate goods) without paying customs duty, provided they export the finished product in a specified time frame. This scheme is primarily for manufacturers who are involved in the export of goods and want to avail of duty exemptions on inputs that are used in the production of export goods.

Eligibility Criteria:

• Exporters must be registered with the Directorate General of Foreign Trade (DGFT).
• The exporter must have export obligations—the finished product must be exported within the prescribed time period (typically 12 months).
• The input(s) imported must be used in the manufacture of export goods.

Key Features:

• Duty-Free Imports: Exporters can import raw materials and inputs without paying customs duties.
• Export Obligation: Exporters need to fulfill an export obligation in proportion to the duty saved.
• Value Addition Requirement: There must be a certain percentage of value addition on the exported goods.

Pros of Advance Authorization:

• Cost Savings on Inputs: The most significant advantage is the exemption from customs duties on raw materials, intermediate goods, or components that are used in the production of export goods. This directly lowers the overall cost of production.
• Improved Competitiveness: With reduced costs, exporters can price their products more competitively in the international market.
• No Export Obligation on Capital Goods: Advance Authorization can also be availed for capital goods (if they are used in the production of export goods), making it beneficial for large exporters.
• Re-export of Duty-Free Inputs: In certain cases, if the inputs are not used for manufacturing, they can be re-exported, ensuring flexibility.

Cons of Advance Authorization:

• Complex Documentation and Compliance: There is a need for extensive documentation, including the submission of an application to DGFT, proof of export, and maintaining records of inputs.
• Export Obligation Compliance: The export obligation must be fulfilled within the stipulated time. Failing to do so may lead to penalties or the imposition of customs duties.
• Time-Consuming: Obtaining Advance Authorization approval can take time, and exporters must plan their imports and exports accordingly.
• Local Sourcing Limitation: Only inputs that are directly used in the export product can be imported duty-free, which can limit flexibility in sourcing.

2. Duty Drawback Scheme

Overview:

The Duty Drawback Scheme is a refund mechanism under which exporters can claim a refund on customs duties (such as Basic Customs Duty, Additional Customs Duty, and Special Additional Duty) paid on imported goods that are used in the manufacturing of exported products. Under this scheme, exporters can receive either a brand rate (determined on a case-by-case basis) or a generic rate (fixed for certain categories of goods) of drawback.

Eligibility Criteria:

• Exporters must have paid duty on the imported goods used for export.
• Goods must be exported within a specified time frame (usually 12 months).
• The exported goods must comply with all regulations and quality standards.

Key Features:

• Refund of Duties Paid: The exporter can claim a refund on customs duties paid on imported materials or goods that have been used in the manufacturing of exported products.
• Simpler Procedure: The Duty Drawback process is generally simpler and less paperwork-intensive compared to Advance Authorization.
• Available to All Exporters: Unlike Advance Authorization, this scheme is available to a broader category of exporters, including those who don’t manufacture the goods but are engaged in the export of finished products.

Pros of Duty Drawback:

• Simplicity and Ease of Use: The application process is typically straightforward and easier to administer than Advance Authorization.
• No Export Obligation on Input Quality: There is no obligation on the exporter to specify the exact use of the imported input goods, making it more flexible.
• No Export Obligation on Finished Product: Duty Drawback does not have the stringent export obligations that the Advance Authorization Scheme requires. As long as the duty on imported goods is paid and goods are exported, the refund is due.
• Cash Flow Benefit: Exporters receive a refund of duties paid, which helps in improving their cash flow, reducing working capital needs.
• Applicable to All Exporters: This scheme is available to all exporters, not just manufacturers, so traders and intermediaries can also benefit from it.

Cons of Duty Drawback:

• Not Entirely Duty-Free: Duty Drawback does not exempt the exporter from paying duties on inputs initially; they must first pay customs duties and then claim a refund. This could impact working capital.
• Refund Rates Can Be Lower: In many cases, the amount refunded under the Duty Drawback scheme may be less than the total duty paid, especially if the product does not qualify for the maximum allowable drawback rate.
• No Refund on Local Taxes: Duties on locally sourced materials or domestic taxes like GST are not refunded under this scheme.
• Limited Coverage for Some Inputs: Some inputs or goods may not qualify for duty drawback or may face specific restrictions based on product category.

Comparative Analysis of Advance Authorization vs Duty Drawback

Conclusion: Which Scheme to Opt for?

The choice between Advance Authorization and Duty Drawback depends largely on the nature of the exporter’s operations, the type of goods being exported, and their cash flow preferences.

• Choose Advance Authorization if:
  • The business involves manufacturing goods for export and utilizes a significant amount of imported inputs.
  • You want to avoid upfront duty payments and save on raw material costs.
  • You have a structured production process and can manage export obligations.
• Choose Duty Drawback if:
  • You are engaged in trading or exporting finished goods without significant manufacturing involvement.
  • You want a simpler process with less documentation and dont mind paying the duties upfront.
  • You have difficulty meeting the stringent export obligations of Advance Authorization.

Final Thought: For large manufacturers with substantial export obligations and complex production processes, Advance Authorization is typically the better choice due to the significant cost savings on input duties. However, for traders or businesses with a simpler export model, Duty Drawback offers a more flexible and easier-to-manage alternative.