The Government should make a greater use of penalties covering ineligibility for duty drawbacks to those exporters who indulge in overinvoicing.
2) Export incentives that are misused to overinvoice exports are: duty drawbacks, concessional export finance, and income tax rebate.
An exporter is tempted to overinvoice exports (1) if (say) the duty drawback (2) rate is higher than the premium on foreign currency that he has to purchase from the kerb market to meet the export-earning surrender requirement of the State Bank.
This inference will be more certain if it can be established (i) that for these commodities the duty drawback rates are higher than the kerb market premium rate on foreign exchange and (ii) that these commodities are such that it is relatively easy to overinvoice them because of the nature of the products.
This system included: (i) exemption of exports from sales tax and central excise duty, (ii) duty drawback scheme covering sales tax, central excise duty, and customs duty on inputs used in the production of exports, (iii) taxation of export of domestically produced raw materials, (iv) concessionary export finance and export credit guarantee scheme, and (v) income tax rebates.
Out of the above list of incentives, three measures induce exporters to indulge in export overinvoicing: concessionary export finance, duty drawback on exports, and income tax rebate on profits from exports.
The customs duty drawback rate, as a percent of manufactured exports on which duty drawback is applied, was 12.
Duty drawback rates are not automatically adjusted to take account of additional taxes imposed by the government from time to time.
This argument can be supported with the evidence of significant differences between the duty drawback rate and the premium on the kerb market foreign exchange rate, which turned out to be 8 percent.