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Understanding the Export Promotion Capital Goods (EPCG) Scheme: Benefits and Application

The Export Promotion Capital Goods (EPCG) Scheme allows Indian exporters to import capital goods at zero customs duty to enhance production for international markets. This scheme mandates an export obligation, requiring businesses to generate foreign currency earnings equivalent to six times the duty saved within six years. It offers significant advantages for high-volume exporters, supporting technological upgrades, but necessitates strict compliance to avoid penalties like duty repayment and interest.

📖 3 min read read🏷️ Export Promotion Capital Goods (EPCG) Scheme

The Export Promotion Capital Goods (EPCG) Scheme is designed to boost India's export competitiveness by allowing manufacturers to import essential capital goods at zero customs duty. This initiative supports the production of high-quality goods for international markets, covering equipment used across pre-production, production, and post-production phases.

The Export Promotion Capital Goods (EPCG) Program

This program allows export-focused businesses to import capital goods without paying customs duties. A key condition of this scheme is an export obligation: the importer must achieve export earnings equivalent to six times the customs duty saved on the imported goods. This obligation must be fulfilled within a six-year period from the date the authorization is granted, effectively requiring businesses to generate foreign currency inflow equal to 600% of the waived duty.

Defining Export Promotion Capital Goods

Capital goods eligible under this scheme are those specifically utilized in manufacturing products destined for international markets. This category encompasses both machinery and necessary spare parts. To qualify, the goods produced in India using these imported capital goods must ultimately be exported.

Eligible Capital Goods for the EPCG Scheme

The EPCG scheme permits the import of various capital goods, including spares (even reconditioned or refurbished items), fixtures, jigs, tools, molds, and dies. Notably, there are no age restrictions on importing second-hand capital goods. This provision within the Foreign Trade Policy (FTP) facilitates the import of essential equipment at reduced or zero duty rates for manufacturing export-oriented products, thereby supporting technological advancement in domestic industries. Authorization for EPCG is granted by the Director General of Foreign Trade (DGFT), contingent upon a certificate from an independent chartered engineer.

Advantages of the EPCG Scheme

The primary objective of EPCG is to boost exports, with the Indian government providing incentives and financial aid to exporters through this program. Businesses with substantial export volumes can significantly benefit. Conversely, this scheme may not be suitable for companies not expecting high production volumes or planning to sell their entire output domestically, as meeting the stringent export obligations could prove challenging.

Obtaining an EPCG License

To secure an EPCG license, applicants must submit an application to the Director General of Foreign Trade (DGFT), the designated licensing authority. The submission needs to include comprehensive company and personal details, alongside all mandatory supporting documents.

Required Documents for an EPCG License Application

The Director General of Foreign Trade (DGFT) is responsible for issuing EPCG licenses. Applicants must complete Form ANF 5B and provide self-certified copies of the following documents:

  • Import Export Code (IEC)
  • Registration cum Membership Certificate (RCMC)
  • Digital signature
  • Registration certificate from the Tourism Department (if applicable)
  • Permanent Account Number (PAN) Card
  • Excise Registration (if applicable)
  • Goods and Services Tax (GST) Registration Certificate
  • Proforma Invoice
  • Product Brochure
  • Self-Certified Copy and Original Certificate from a Chartered Accountant
  • Self-Certified Copy and Original Certificate from a Chartered Engineer

Export Obligation under the EPCG Scheme

Importing capital goods through the EPCG scheme carries a mandatory export obligation: exporters must achieve exports worth six times the customs duty saved. This must be fulfilled within six years from the EPCG authorization issue date. Failure to meet this obligation requires the importer to pay the original customs duties plus applicable interest.

Important Considerations for EPCG Compliance

Extending the Time Limit

Extensions to the export obligation deadline are granted only in extraordinary circumstances, where exporters can demonstrate with compelling evidence that the inability to meet the deadline was due to factors beyond their control.

Penalties for Non-Compliance

Should an EPCG license holder fail to satisfy the prescribed export obligation, they will be required to remit the customs duties that were originally waived, in addition to an annual interest charge of 15% to the customs authority.

Sales in the Domestic Tariff Area (DTA)

Businesses are permitted to sell goods in the Domestic Tariff Area only after successfully fulfilling their export obligation under the scheme.

IGST and Compensation Cess Exemption

Under the Goods and Services Tax (GST) framework, merchant exporters typically pay Integrated GST (IGST) and then seek a refund. However, through Notification No. 54/2015-20, the Directorate General of Foreign Trade (DGFT) modified the Foreign Trade Policy (FTP) to extend the exemption from IGST and Compensation Cess for the EPCG Scheme until October 1, 2018. This provided significant relief to exporters grappling with GST refund complexities.

Illustrative Case of EPCG License Non-Compliance

Consider a scenario where ABC Inc., a manufacturer of semi-combed hosiery yarn, mistakenly relied on a consultant, Mr. X of XYZ Pvt. Ltd., who provided fraudulent shipping bills. These bills were presented to the DGFT by ABC Inc. to satisfy their export obligation, a common practice involving third-party exports, and were initially accepted. Subsequent investigation, however, revealed that the goods were never actually exported, leading to a violation of ABC Inc.'s EPCG license terms. Despite ABC Inc. pleading guilty, further review confirmed that their manufactured goods were not the final products. Consequently, the imported capital goods, valued at INR 6.05 Crore, were confiscated under Section 108 of the Customs Act, 1962, due to the scheme violation. The previously saved customs duty of INR 1.38 Crore became immediately payable, along with accumulated interest, and repayment of other prior benefits like drawback and TED refunds. This case highlights the critical importance of thoroughly understanding and accurately fulfilling export obligations under the EPCG scheme, as non-compliance can lead to severe financial penalties and legal repercussions, despite the scheme's potential profitability for well-managed businesses.

Frequently Asked Questions

What is GST (Goods and Services Tax) in India?
GST is an indirect tax in India that replaced multiple cascading taxes levied by central and state governments. It is a single tax on the supply of goods and services, from the manufacturer to the consumer.
What are the different types of GST in India?
There are four main types of GST in India: Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST).
Who is required to register for GST?
Businesses whose aggregate turnover exceeds a specified threshold limit (which varies by state and type of goods/services) are generally required to register for GST. Certain categories of businesses, like interstate suppliers, must register irrespective of turnover.
What is an HSN code in GST?
HSN (Harmonized System of Nomenclature) is an internationally recognized product-coding system used in GST for classifying goods. It helps in systematic classification of goods and uniform application of GST rates.
How is the GST refund process handled?
Businesses can claim GST refunds for various reasons, such as export of goods/services (including deemed exports), inverted duty structure, excess tax paid, etc. The refund process typically involves submitting an online application on the GST portal with supporting documents.