EPCG scheme explained

What is the EPCG Scheme?

The EPCG Scheme is an authorization granted by the Directorate General of Foreign Trade (DGFT) that permits an exporter to import certain capital goods at Zero Customs Duty (Basic Customs Duty and, currently, the IGST/Compensation Cess is also typically exempted for physical exports).

The central idea is a commitment: Import duty-free today, export more tomorrow.

In exchange for saving on the Customs Duty, the exporter undertakes a mandatory Export Obligation (EO)—a commitment to achieve a specific export value over a fixed period.

Capital Goods Covered Under EPCG

“Capital Goods” under this scheme is broadly defined and includes:

• Machinery, equipment, and accessories required for pre-production, production, and post-production.

• Spares, moulds, dies, jigs, fixtures, and tools.

• Computer systems and software that are a part of the capital goods.

• Catalysts for the initial charge plus one subsequent charge.

Who is Eligible for the EPCG Scheme?

The scheme is accessible to various players in the export ecosystem:

• Manufacturer Exporters: Exporters who produce the goods themselves.

• Merchant Exporters: Traders who source goods from supporting manufacturers.

• Service Providers: Including Common Service Providers (CSPs) like hotels, hospitals, and logistics firms, to import equipment necessary for rendering their services which earn foreign exchange.

The Core Mechanics: Export Obligation (EO) Explained

The entire scheme is balanced by the Export Obligation (EO). If you save duty on importing machinery, you must utilize that machinery to generate foreign exchange.

1. Specific Export Obligation (SEO)

This is the primary obligation directly linked to the duty saved on the imported capital goods.

• The Rule: The exporter must fulfill an EO equivalent to 6 times the total duty saved on the imported capital goods.

• The Period: This obligation must be fulfilled within 6 years from the date of issue of the EPCG Authorisation.

• Block Period: The 6-year period is divided into two blocks:

  • 1st Block: First 4 years, where 50% of the SEO must be achieved.

  • 2nd Block: Remaining 2 years (total 6 years), where the balance 50% must be achieved.

2. Average Export Obligation (AEO)

This obligation ensures that utilizing the new machinery does not replace your existing export performance; it must increase it.

• The Rule: You must maintain the average level of exports achieved for the same and similar products in the three preceding financial years prior to the issuance of the EPCG Authorisation.

• The Period: The AEO must be maintained for the entire 6-year EO period.

Key Benefits of Availing EPCG

1. Zero/Concessional Duty Imports: The most direct and significant benefit is eliminating the high Customs Duty and IGST/Cess on high-value machinery. This drastically cuts down the initial capital investment.

2. Technological Upgradation: Access to advanced, state-of-the-art global machinery allows for enhanced efficiency, higher production quality, and scale, making Indian goods globally competitive.

3. Domestic Sourcing Incentives: If you choose to procure capital goods from a domestic Indian supplier under EPCG:

   • The domestic supplier receives Deemed Export benefits (like Advance Authorisation or Duty Drawback benefits).

   • The exporter enjoys a 25% reduction in the Specific Export Obligation (SEO), making the EO target easier to achieve.

4. Flexibility in Fulfillment: The EO can be fulfilled through direct exports, deemed exports (supplies to EOU/SEZ/Advance Authorisation holders), or third-party exports (subject to conditions).

What Happens If You Fail to Meet the Obligation?

Failing to meet the Export Obligation is serious and can lead to financial penalties:

• Duty Repayment: The exporter is required to pay the entire duty amount saved on the imported capital goods.

• Interest: This duty must be paid along with interest (as per Customs rules, currently 15% per annum) from the date of import.

This is why meticulous planning and accurate calculation of the EO are critical before applying for the scheme.

Globax Solutions: Your EPCG Compliance Partner

The benefits of the EPCG scheme are huge, but the compliance requirements are rigorous. Failure to monitor and report your Specific and Average Export Obligations can turn a massive advantage into a severe liability.

At Globax Solutions, we specialize in managing the entire EPCG lifecycle:

1. Feasibility Study: Assessing your past export performance and future capacity to ensure the Export Obligation is practically achievable.

2. Authorisation Filing: Preparing and submitting the complex online application (ANF 5A) to the DGFT, including the critical Chartered Engineer Certificate (CEC).

3. EO Monitoring & Reporting: Quarterly tracking of your exports against the specific and average obligations to ensure timely fulfillment.

4. Closure/EODC: Timely filing for the Export Obligation Discharge Certificate (EODC) upon fulfillment, which officially closes the license and frees your company from the bond/guarantee with Customs.