EPCG Scheme - A Comprehensive Discussion

EPCG stands for Export Promotion Capital Goods. EPCG Scheme is an initiative by DGFT which allows duty-free import of capital goods and machinery for export purpose. Under EPCG Scheme, the importer can import the capital goods at zero customs duty subject to the condition of fulfilment of certain export obligations. Such Capital Goods can be utilised for the production, pre-production, and post-production stages of goods. The objective of the EPCG Scheme is to facilitate import of capital goods for producing quality goods and services and enhance India’s manufacturing competitiveness. In this article we are going to discuss in detail about the EPCG Scheme.

The provisions related to EPCG schemes are covered under chapter-5 of FTP 2023. Import under EPCG Scheme shall be subject to an Export Obligation (EO) equivalent to 6 times of duties, taxes and cess saved on capital goods, to be fulfilled in 6 years reckoned from date of issue of Authorisation.
As per para 5.02 of FTP 2023, EPCG scheme covers manufacturer exporters with or without supporting manufacturer(s), merchant exporters and service providers, EPCG Scheme also covers a service provider who is certified as a Common Service Provider by the DGFT subject to certain conditions.

Further para 5.03 of FTP 2023 states that the imported capital goods shall be subject to Actual User Condition till export obligation is completed and Export Obligation Discharge Certificate (EODC) is granted. Also as per para 5.07 of FTP 2023 the indigenous sourcing of capital goods are also allowed in the EPCG Scheme. Accordingly, a person holding an EPCG Authorisation may source capital goods from a domestic manufacturer either through Invalidation Letter or through Advance Release Order. Such domestic manufacturer shall be eligible for deemed export benefits. Such domestic sourcing shall also be permitted from EOUs and these supplies shall be counted for purpose of fulfillment of positive Net Foreign Exchange by said EOU as provided in Para 6.08 (a) of FTP.

As we know that in case of EPCG scheme the export obligation is to be fulfiled. It is also important to know that Import/procurement under EPCG scheme shall also be subjected to Average Export Obligation (AEO). The provisions related to such average export obligation (AEO) are given under para 5.04(c) of FTP which states that the Export Obligation under the scheme shall be, over and above, the average level of exports achieved by the applicant in the preceding three licensing years for the same and similar products within the overall export obligation period including extended period, if any; except for categories mentioned in paragraph 5.12(a). Such average would be the arithmetic mean of export performance in the preceding three licensing years for same and similar products. The Average Export Obligation (AEO) shall be fulfilled every financial year, till export obligation is completed. Exports/supplies made over and above AEO shall only be considered for fulfillment of Export Obligation.

However, to provide relaxation to Handicrafts, Handlooms, Industries covered under Khadi and Village, Agriculture and many other industries, the exemption are provided for maintenance of average export obligation. Such provisions are contained in para 5.2 of FTP which laid down as follows;

“ 5.12 Exemption from maintenance of average export obligation
(a) In case of export of goods relating to the following, the EPCG Authorisation holder shall not be required to maintain average export obligation.

(i) Handicrafts, (ii) Handlooms, (iii) Industries covered under Khadi and Village Industries Commission (KVIC) (iv) Agriculture (v) Aquaculture (including Fisheries),Pisciculture, (vi) Animal husbandry and Dairying, (vii) Floriculture & Horticulture, (viii) Poultry, (ix) Viticulture, (x) Sericulture, (xi) Carpets, (xii) Coir, and (xiii) Jute

(b) However, this exemption from maintenance of average export obligation shall not be allowed for import of fishing trawlers, boats, ships and other similar items.

(c) Goods, excepting tools imported under EPCG scheme by sectors specified in sub-paragraph (a) above, shall not be allowed to be transferred for a period of five years from date of imports even in cases where export obligation has been fulfilled”.

Also there are specific provisions in respect of calculation of export obligation which are contained in para 5.08 of FTP and as per these provisions, in case of direct imports the export obligation shall be reckoned with reference to actual duty /taxes/cess saved amount and in case of domestic sourcing the export obligation shall be reckoned with reference to notional customs duty /taxes/cess saved on Freight on Road and Rails OR value as indicated in Advance Release Order / Invalidation letter.

To promote the export and to encourage the suppliers for fulfilment of the Export Obligation on timely basis, there is an incentive for early export obligation fulfillment which states that in cases where authorisation holder has fulfilled 75% or more of specific export obligation and 100% of average export obligation till date, if any, in half or less than half the original export obligation period specified, remaining export obligation shall be condoned and the authorisation redeemed by Regional Authority concerned.

In addition to the above the export obligation is reduced for exporters of Green Technology Products, Specific EO shall be 75% of EO and for manufacturing units located in Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Jammu & Kashmir and Ladakh, specific EO shall be 25% of the EO.

Till now we have understood the provisions of Foreign Trade Policy 2023 for EPCG Scheme. Now, we are going to discuss the relevant procedures applicable for the same, which are contained in chapter 5 of Handbook of Procedures 2023. Under Chapter-5 of HBP the relevant procedures relating to application of EPCG, related accounts & records and other formalities which are needs to be done under EPCG Scheme are given.

As per para 5.02 of HBP 2023, an application for grant of an authorisation may be made in ANF -5A along with documents prescribed therein to Regional Authority concerned.

The Authorisation holder shall also produce, within six months from date of completion of import, a certificate from the jurisdictional Customs authority or an independent Chartered Engineer, at the option of the authorisation holder, confirming installation of capital goods at factory/premises of authorisation holder or his supporting manufacturer (s). The RA may allow one time extension of the said period for producing the certificate by a maximum period of 12 months with a composition fee of Rs. 5000/-. Where the authorisation holder opts for independent Chartered Engineer’s certificate, he shall send a copy of the certificate to the jurisdictional Customs Authority for intimation/record. The authorisation holder shall be permitted to shift capital goods during the entire export obligation period to other units mentioned in the IEC and RCMC of the authorisation holder subject to production of fresh installation certificate to the RA concerned within six months of the shifting.
However, in the case of import of spares, the installation certificate shall be submitted by the Authorisation holder within a period of three years from the date of import.

In addition to the above, the authorisation holder shall submit to RA concerned by 30th June of every year, a report on fulfilment of export obligation through online. Such report shall contain a statement with details such as Shipping bill/GST invoice number, date of export/supply, description of product exported/supplied/service rendered and FOB/FOR value of export/supply for both specific as well as average export obligation. Any delay in filing such annual report shall be regularised on payment of a late fee of Rs. 5000/- per year for each authorisation.

The provisions relating to Export Obligation Discharge Certificate (EODC) are contained in para 5.20 of HBP 2023. Which states that;
(a) Authorisation holder shall apply for online EODC in ANF 5B with documents prescribed therein as a proof of EO fulfillment.
(b) On being satisfied, RA concerned shall issue EODC to the EPCG authorisation holder and an online copy will be forwarded to ICEGATE through API message exchange for further action by Jurisdictional Customs Authorities with whom BG /LUT has been executed.
(c) RA shall process such applications ordinarily within 30 days. Shortcomings, if any, shall be pointed out normally in one go. Once documents are complete in all respects, export obligation shall be discharged within 30 days of receipt of complete documents /information.

Further as per para 5.22 of HBP 2023, every EPCG authorisation holder shall maintain, for a period of 2 years from date of redemption, a true and proper account of exports/ supplies made and services rendered towards fulfillment of export obligation.

From the above detailed discussion about the EPCG scheme and their application and export obligation we can reach to the conclusion can be drawn;

Conclusion: EPCG is intended for promoting the exports and to provide financial support to the exporters. Heavy exporters could benefit from this provision. However, it is not advisable to go ahead with this scheme for those who don’t expect to manufacture in quantity or expect to sell the produce entirely within the country, as it could become almost impossible to fulfill the obligations set under this scheme.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.