Duty drawback is a system under which duties levied on imported input products are refunded. The refund is paid once the imported product is exported as a processed good.
As an alternative to duties being refunded, imported input products can also be stored duty free or at preferential rates in bonded warehouses, where they can be processed ready for export. These refund schemes must be supervised by the customs authorities.
The WTO-Agreement on Subsidies and Countervailing Measures allows duty drawback schemes as being WTO-compliant and does not class duty drawback as a subsidy. Since there are usually no tariff rates in free trade zones, duty drawback schemes have little relevance in regional and bilateral trade agreements.
It is not clear how duty drawback schemes impact on a country’s development process. Due to the ineffectiveness of the institutions in many developing countries, tax refund schemes are often unsuccessful, potentially leading to corruption, fraud and the high administration costs of the complicated refund system. Other problems include administrative difficulties, inadequate statistical records and a financial burden on the state. Nonetheless, duty drawback schemes can impact positively on exports and international competitiveness in countries with properly functioning institutions.
Duty-free imports of potential input products can be an effective alternative. Although no duties are levied regardless of whether the input product is consumed domestically or processed and exported, administration costs and fraud are reduced significantly. Export processing zones with discount schemes and export credit insurance schemes are alternative ways of strengthening a country’s export sector.
- A properly functioning country-wide administration and monitoring system with access to the relevant information and sufficient technical and human capacities for its design, implementation and monitoring
- Clear and coherent political strategy and targets for policy-makers and public authorities
- Close cooperation and knowledge sharing with research institutions
- Compatible regional and world trade law (WTO conformity)
- Constant market surveying and forecasting
- Efficient customs administration
- ICT infrastructure
- Market price information systems
- Skilled / specialised personnel to man the respective institutions / provide the respective services
Possible Negative Effects
- Market distortion
- Corruption and personal gain
- Discriminates against non-exporting processing industries
- Lower government revenues