EPCG: capital goods now, an export obligation for years
EPCG is the longest promise in Indian trade policy. The duty saving is taken in one clearance and repaid in exports over six years, measured in blocks, and layered on top of an average the business already exports. Nothing about it goes wrong quickly, which is exactly the problem.
Chapter 5 of the Foreign Trade Policy 2023 states the objective plainly: to facilitate import of capital goods for producing quality goods and services and enhance India's manufacturing competitiveness. Paragraph 5.01(a) provides that the scheme allows import of capital goods, except those in the negative list in Appendix 5F, for pre-production, production and post-production at zero customs duty, and that capital goods imported for physical exports are also exempt from integrated tax and compensation cess leviable under sub-sections (7) and (9) of section 3 of the Customs Tariff Act, 1975.
What exactly counts as capital goods here?
More than the machine. Paragraph 5.01(a) of the Foreign Trade Policy 2023 provides that capital goods for the purpose of the scheme include capital goods as defined in Chapter 11 of the policy, including in completely knocked down or semi knocked down condition, computer systems and software which are part of the capital goods being imported, spares, moulds, dies, jigs, fixtures, tools and refractories, and catalysts for an initial charge plus one subsequent charge.
Two limits on the same paragraph decide whether the authorisation is usable at all. Paragraph 5.01(d) provides that the authorisation is valid for import for 24 months from the date of issue and that revalidation shall not be permitted, which makes the import window the one date in the scheme with no second chance. Paragraph 5.01(e) provides that where integrated tax and compensation cess are paid in cash on an EPCG import, that incidence is not taken into the computation of net duty saved, provided input tax credit is not availed, so the obligation is sized on the duty actually forgone.
How is the export obligation calculated?
Off the duty saved, not off the value of the machine. Paragraph 5.08 of the Foreign Trade Policy 2023 provides that in the case of direct imports the export obligation is reckoned with reference to the actual duty, taxes and cess saved amount, and that in the case of domestic sourcing it is reckoned with reference to the notional customs duty, taxes and cess saved on the free on rail value indicated in the advance release order or invalidation letter. Six times that figure, under paragraph 5.01(b), is the specific export obligation.
Sourcing domestically reduces it. Paragraph 5.04(d) provides that in the case of indigenous sourcing of capital goods the specific export obligation shall be 25 percent less than the obligation stipulated in paragraph 5.01, with no change in the average obligation. Paragraph 5.07 allows a holder to source from a domestic manufacturer through an invalidation letter or an advance release order, with the domestic manufacturer eligible for deemed export benefits under paragraph 7.03 of the policy.
What is the average export obligation, and why does it bite?
Because it is the obligation you were already meeting, and it does not count. Paragraph 5.04(c) of the Foreign Trade Policy 2023 provides 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 obligation period including any extension, that such average is the arithmetic mean of export performance in those three years, that the average shall be fulfilled every financial year until the export obligation is completed, and that only exports over and above the average are considered for fulfilment of the specific obligation.
That is the paragraph that turns a good year into an accounting problem. A business whose exports are flat is fulfilling the average and nothing else, no matter how large the shipments look. Paragraph 5.12(a) exempts a listed set of sectors from maintaining the average, among them handicrafts, handlooms, industries covered under the Khadi and Village Industries Commission, agriculture, aquaculture, animal husbandry and dairying, floriculture and horticulture, poultry, viticulture, sericulture, carpets, coir and jute, and paragraph 5.12(b) withholds that exemption for the import of fishing trawlers, boats, ships and similar items.
What does block-wise fulfilment mean?
The six years are not one deadline, they are two. Paragraph 5.13(a) of the Handbook of Procedures 2023 provides that the holder shall, while maintaining the average export obligation, fulfil the specific obligation over the prescribed block period in the proportions of 50 percent in the block of the first to fourth year and the balance in the block of the fifth and sixth year. Paragraph 5.13(b) requires the holder to intimate the Regional Authority on fulfilment of the export obligation, and of average exports, within three months of completion of the block.
Missing the first block has a price and a deadline of its own. Paragraph 5.13(c) provides that a request for extension of the first block period is to be submitted within 6 months from the date of expiry of that block along with a composition fee of 2 percent on the duty saved amount proportionate to the unfulfilled portion, and that where the first block obligation is not fulfilled and has not been extended, the holder shall within 6 months from the expiry of the block pay duties of customs, along with applicable interest as notified by the Department of Revenue, proportionate to the duty saved amount on the total unfulfilled obligation of that block.
What reduces the obligation, and can the reductions be combined?
Four routes reduce it, and only one of them may be used. Paragraph 5.09 of the Foreign Trade Policy 2023 provides that where the holder has fulfilled 75 percent or more of the specific export obligation and 100 percent of the average obligation to date in half or less than half the original obligation period, the remaining obligation shall be condoned and the authorisation redeemed. Paragraph 5.10 sets the specific obligation at 75 percent of the paragraph 5.01(b) figure for exporters of green technology products listed in paragraph 5.26 of the Handbook of Procedures.
Paragraph 5.11 sets it at 25 percent for manufacturing units located in Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Jammu and Kashmir and Ladakh. None of these reductions changes the average obligation. Paragraph 5.04(l) then closes the door on stacking: only one benefit specified in paragraphs 5.04(d), 5.09, 5.10 and 5.11 shall be admissible, so indigenous sourcing, early fulfilment, green technology and regional relief are alternatives rather than a menu.
What paperwork does the scheme run on year to year?
Two filings, and both are easy to forget because neither is a customs event. Paragraph 5.04(a) of the Handbook of Procedures 2023 requires the holder to produce, within six months from the date of completion of import, a certificate from the jurisdictional customs authority or an independent chartered engineer confirming installation of the capital goods at the premises of the holder or the supporting manufacturer, with a one time extension of a maximum of 12 months on a composition fee of Rs 5,000. Paragraph 5.04(b) allows three years from the date of import for the installation certificate covering spares.
Paragraph 5.14 then requires an annual report. The holder shall submit to the Regional Authority by 30 June of every year an online report on fulfilment of the export obligation, containing shipping bill or GST invoice number, date of export or supply, description of the product and free on board or free on rail value, for both the specific and the average obligation, and any delay in filing is regularised on payment of a late fee of Rs 5,000 per year for each authorisation.
What happens on a shortfall, and how does an exit work?
You buy the time or you pay the duty. Paragraph 5.16(b) of the Handbook of Procedures 2023 provides that beyond 6 years two extensions of one year each may be considered from the date of expiry on payment of a composition fee equal to 2 percent of the proportionate duty saved amount on the unfulfilled obligation for each year, with a minimum of Rs 10,000. Paragraph 5.16(c) requires the request within 6 months of expiry of the original period, permits a later request within the extendable validity on a late fee of Rs 10,000, and states that extension beyond 8 years from the date of issue shall not be allowed under that provision.
Where the obligation simply will not be met, paragraph 5.21(b) provides that the holder shall pay customs duty, taxes and cess in proportion to the shortfall in export obligation along with applicable interest as prescribed by the customs authority, and that the same facility can be used by a holder choosing to exit. Paragraph 5.21(a) allows an unutilised authorisation to be surrendered at any point with no penalty or fee, which is the cheapest outcome available and the one least often taken.
Where to go from here
EPCG is the same bargain as the input schemes, stretched over years, so the discipline that keeps it clean is calendar discipline rather than customs expertise.
- The same structure over eighteen months. Advance authorisation applies duty free import against an export obligation to inputs rather than to machinery.
- The route that pays duty back instead of waiving it. Duty drawback is the alternative where no authorisation is taken.
- What the machine costs at the gate. Landed cost at your gate builds the duty fold component by component, which is the figure the obligation is sized against.
- The annual dates in one place. The EXIM compliance calendar carries the 30 June annual report alongside the rest of the year.
- Why the import side goes wrong. Half of India's bills of entry get amended, and an amended bill of entry is where a duty saved figure moves.
Purser Inbound holds the duty saved figure, the authorisation date and the installation date on the import record, so the six month installation certificate, the 30 June report and the block boundaries are computed from dates the record already carries. Purser never submits to a government portal, and it never sends an outbound message without a recorded human approval event. The customs broker still files the bill of entry and registers the authorisation at the port: what changes is that the obligation is visible as a running balance rather than reconstructed in year five.
Frequently asked questions
What is the export obligation under the EPCG scheme?
Paragraph 5.01(b) of the Foreign Trade Policy 2023 provides that import under the EPCG scheme is subject to an export obligation equivalent to 6 times the duties, taxes and cess saved on the capital goods, to be fulfilled in 6 years reckoned from the date of issue of the authorisation. Paragraph 5.08 provides that in the case of direct imports the obligation is reckoned on the actual duty, taxes and cess saved, and in the case of domestic sourcing on the notional amount saved on the free on rail value in the advance release order or invalidation letter.
What is the average export obligation under EPCG?
Paragraph 5.04(c) of the Foreign Trade Policy 2023 provides that the export obligation is over and above the average level of exports achieved in the preceding three licensing years for the same and similar products, that the average is the arithmetic mean of export performance in those three years, that it must be fulfilled every financial year until the export obligation is completed, and that only exports over and above that average count towards the specific obligation. Paragraph 5.12(a) exempts a listed set of sectors from maintaining it.
How is the EPCG export obligation split into blocks?
Paragraph 5.13(a) of the Handbook of Procedures 2023 provides that the holder shall, while maintaining the average export obligation, fulfil the specific obligation in the proportions of 50 percent in the block of the first to fourth year and the balance in the block of the fifth and sixth year. Paragraph 5.13(b) requires the holder to intimate the Regional Authority of fulfilment of both the export obligation and average exports within three months of completion of the block.
When is the EPCG installation certificate due?
Paragraph 5.04(a) of the Handbook of Procedures 2023 requires the holder to produce, within six months from the date of completion of import, a certificate from the jurisdictional customs authority or an independent chartered engineer confirming installation of the capital goods at the premises of the holder or the supporting manufacturer. The Regional Authority may allow a one time extension of that period by a maximum of 12 months on a composition fee of Rs 5,000. For spares, paragraph 5.04(b) allows three years from the date of import.
What happens if the EPCG export obligation is not fulfilled?
Paragraph 5.21(b) of the Handbook of Procedures 2023 provides that where a holder fails to fulfil the prescribed export obligation, the holder shall pay customs duty, taxes and cess in proportion to the shortfall along with applicable interest as prescribed by the customs authority, and that the same facility may be used to exit the scheme. Paragraph 5.16(b) allows two extensions of one year each beyond six years on a composition fee of 2 percent of the proportionate duty saved amount for each year, subject to a minimum of Rs 10,000, and no extension beyond 8 years from the date of issue.