Export Promotion Capital Goods Scheme (EPCG Scheme) can be
explained as “Duty-Free (Zero Customs Duty) Import of Capital Goods/Machinery for the manufacture of products meant for Export.” The Capital Goods may be used for production, pre-production & post-production stages of goods. This scheme is also known as zero duty EPCG scheme. EPCG Scheme was introduced by the Government of India to facilitate the Import of Capital Goods/Machinery for producing high-quality goods and services. The main aim of the EPCG Scheme is to improve India’s competitiveness in the manufacturing sector.
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.
(a) EPCG Scheme allows import of capital goods (except those specified in negative list in Appendix 5 F) for pre-production, production and postproduction at zero customs duty. Capital goods imported under EPCG Authorisation for physical exports are also exempt from IGST and Compensation Cess upto 31.03.2020i only, leviable thereon under the subsection(7) and subsection (9) respectively, of section 3 of the Customs Tariff Act, 1975 (51 of 1975), as provided in the notification issued by Department of Revenue. Alternatively, the Authorisation holder may also procure Capital Goods from indigenous sources in accordance with provisions of paragraph 5.07 of FTP. Capital goods for the purpose of the EPCG scheme shall include:
(i) Capital Goods as defined in Chapter 9 including in CKD/SKD condition thereof;
(ii) Computer systems and software which are a part of the Capital Goods being imported;
(iii) Spares, moulds, dies, jigs, fixtures, tools & refractories; and (iv) Catalysts for initial charge plus one subsequent charge.
(b) Import of capital goods for Project Imports notified by Central Board of Excise and Customs is also permitted under EPCG Scheme.
(c) Import under EPCG Scheme shall be subject to an export obligation 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. Authorisation shall be valid for import for 18 months from the date of issue of Authorisation. Revalidation of EPCG Authorisation shall not be permitted.
(d) In case Integrated Tax and Compensation Cess are paid in cash on imports under EPCG, incidence of the said Integrated Tax and Compensation Cess would not be taken for computation of net duty saved provided Input Tax Credit is not availed.
(g) Import of items which are restricted for import shall be permitted under EPCG Scheme only after approval from Exim Facilitation Committee (EFC) at DGFT Headquarters.
(h) If the goods proposed to be exported under EPCG authorisation are restricted for export, the EPCG authorisation shall be issued only after approval for issuance of export authorisation from Exim Facilitation Committee at DGFT Headquarters.
(a) EPCG scheme covers manufacturer exporters with or without supporting manufacturer(s), merchant exporters tied to supporting manufacturer(s) and service providers. Name of supporting manufacturer(s) shall be endorsed on the EPCG Authorisation before installation of the capital goods in the factory / premises of the supporting manufacturer (s). In case of any change in supporting manufacturer (s) the RA shall intimate such change to jurisdictional Customs Authority of existing as well as changed supporting manufacturer(s) and the Customs at port of registration of Authorisation.
(b) Export Promotion Capital Goods (EPCG) Scheme also covers a service provider who is designated / certified as a Common Service Provider (CSP) by the DGFT, Department of Commerce or State Industrial Infrastructural Corporation in a Town of Export Excellence subject to provisions of Foreign Trade Policy/Handbook of Procedures with the following conditions:-
(i) Export by users of the common service, to be counted towards fulfillment of EO of the CSP shall contain the EPCG Authorisation details of the CSP in the respective Shipping bills and concerned RA must be informed about the details of the Users prior to such export;
(ii) Such export will not count towards fulfillment of specific export obligations in respect of other EPCG Authorisations (of the CSP/User); and
(iii) Authorisation holder shall be required to submit Bank Guarantee (BG) which shall be equivalent to the duty saved. BG can be given by CSP or by any one of the users or a combination thereof, at the option of the CSP. 5.03 Actual User Condition Imported capital goods shall be subject to Actual User condition till export obligation is completed and EODC is granted.
Export Obligation (EO) Following conditions shall apply to the fulfillment of EO:-
(a) EO shall be fulfilled by the authorisation holder through export of goods which are manufactured by him or his supporting manufacturer / services rendered by him, for which the EPCG authorisation has been granted.
(b) EO 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 EO period including extended period, if any; except for categories mentioned in paragraph 5.13(a) of HBP. Such average would be the arithmetic mean of export Performance in the preceding three licensing years for same and similar products.
(c) In case of indigenous sourcing of Capital Goods, specific EO shall be 25% less than the EO stipulated in Para5.01.
(d) Shipments under Advance Authorisation, DFIA, Drawback scheme or reward schemes under Chapter 3 of FTP; would also count for fulfillment of EO under EPCG Scheme.
(e) Export shall be physical export. However, supplies as specified in paragraph 7.02 (a), (b), (e), (f) & (h) of FTP shall also be counted towards fulfillment of export obligation, along with usual benefits available under paragraph 7.03 of FTP.
(f) EO can also be fulfilled by the supply of ITA-I items to DTA, provided realization is in free foreign exchange.
(g) Royalty payments received by the Authorisation holder in freely convertible currency and foreign exchange received for R&D services shall also be counted for discharge under EPCG.
(h) Payment received in rupee terms for such Services as notified in Appendix 5D shall also be counted towards discharge of export obligation under the EPCG scheme.
Export Obligation under EPCG Scheme is of two types i.e. Average Export Obligation & Specific Export Obligation.
Export Obligation under EPCG Scheme is of two types i.e. Average Export Obligation & Specific Export Obligation
Export obligation under EPCG Scheme
Export Obligation under EPCG Scheme should only be fulfilled by the export of goods manufactured from the Imported/Domestically procured Machinery.
What is the Average Export Obligation under EPCG scheme? – It is the most important of the two export obligation under the EPCG Scheme. It basically means that the Average turnover maintained in the past 3 years before obtaining the license should be maintained for each FY until the specific export obligation is completed. It is imposed with a view that after upgradation and induction of new machinery, the overall export should not fall below the past average of turnover achieved i.e., there should be a rise in the export turnover with the help of new machinery. It is to be maintained over and above the specific export obligation.
What is Specific Export Obligation under EPCG scheme? – Goods manufactured from the imported machinery to be exported worth 6 times of the duties, taxes, and cess saved on the capital goods within 6 years from the date of issue of EPCG Authorization. In the case of indigenous sourcing of Capital Goods, specific EO shall be 25% less than the above Export Obligation.
If the required Export Obligation is not fulfilled in 6 years, one extension of 2 years can be obtained, based on case to case basis. If the EPCG Authorization holder fails to achieve the Export Obligation (even after extension), the Organisation has to pay all the Custom Duties, Cess, taxes, saved plus 15% annual interest to the Customs Authority.
The Export obligation can be fulfilled by direct exports, deemed exports, supply to SEZ, EOU Units, etc., Third Party exports, service exports in case of service providers.
Note: If the EPCG License holder intends to pay the IGST & Compensation cess while importing, then the net duty saved amount would be reduced accordingly, which will, in turn, reduce the obligation. However, this facility can only be availed on the condition that tax credit of IGST will not be taken by the Exporter.
Indigenous Sourcing of Capital Goods and benefits to Domestic Supplier
A person holding an EPCG authorisation may source capital goods from a domestic manufacturer. Such domestic manufacturer shall be eligible for deemed export benefits under paragraph 7.03 of FTP and as may be provided under GST Rules under the category of deemed exports. Such domestic sourcing shall also be permitted from EOUs and these supplies shall be counted for purpose of fulfilment of positive NFE by said EOU as provided in Para 6.09 (a) of FTP.
Calculation of Export Obligation
In case of direct imports, EO shall be reckoned with reference to actual duty saved amount. In case of domestic sourcing, EO shall be reckoned with reference to notional Customs duties saved on FOR value.
Incentive for early EO fulfillment
With a view to accelerating exports, 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 RA concerned. However no benefit under Para 5.21 of HBP shall be permitted where incentive for early EO fulfillment has been availed.
The main benefit of the EPCG Scheme is importing capital goods with zero customs duty.
- Eligibility Criteria for applying under EPCG Scheme–
Benefits under EPCG Scheme can be applied by any Exporter irrespective of his turnover. EPCG License can be issued to the following category of Exporters:
- Manufacturer Exporter.
- Merchant Exporter with a supporting manufacturer.
- Service Provider (who is exporting services) For Example. Hotel Industry.
- Duties Exempted under EPCG Scheme–
Capital Goods under EPCG Scheme can be imported at zero customs duty. However, it must be noted that IGST and Compensation cess is exempted only up to 31.03.2021. The Government may extend the date through a notification issued from time to time. Capital Goods under EPCG Scheme can also be procured from indigenous sources (i.e., from domestic suppliers). In such cases, applicable GST for the supply would be exempted.
- Indigenous Sourcing of Capital Goods–
The Exporter can also indigenously procure capital goods from a domestic manufacturer. Such domestic manufacturers shall be eligible for deemed export benefits under paragraph 7.03 of FTP.
EPCG scheme for Manufacturer Exporters
Manufacturer Exporter is eligible to apply for EPCG License. But Capital Goods imported under EPCG scheme comes with an actual user condition till the export obligation is completed. It means that the capital goods cannot be sold or transferred until the obligation is completed.
EPCG scheme for Merchant Exporters
Merchant Exporter tied with supporting manufacturer is eligible to apply for EPCG License. Supporting Manufacturer’s Name and his factory address where the capital goods are proposed to be installed should be endorsed on the EPCG License. Merchant exporter while discharging his export obligation should indicate the name & address of supporting manufacturer in all his shipping documents i.e. Shipping bill, Custom Invoice etc.
EPCG scheme for Service Providers
The Service provider is also eligible to apply for EPCG License. Various service exporters can take EPCG License to reduce capital cost. Service Exporter like Hotels, Tour Operators, Taxi Operators, Logistics Companies, Construction Companies can utilize the EPCG Scheme by importing / procuring domestically capital goods duty-free.
- Import of Capital Goods has to be completed within 18 months of obtaining the EPCG License. The Revalidation of EPCG Authorization will not be permitted.
- At the time of Import, a bond or bank guarantee has to be executed with customs authorities, as per applicable provisions.
- After the Installation of the Capital Goods, it is mandatory to obtain the installation Certificate of the imported Machinery by an independent Chartered Engineer, and the same has to be submitted to DGFT.
- In order to incentivize fast-track exporters, if 75% of Specific Export obligation & 100% average export obligation is fulfilled in half or less than half of the export obligation period, than the remaining obligation shall be condoned and the EPCG License shall be closed by the concerned authorities.
- After completion of export obligation, a redemption letter has to be obtained from the concerned regional authority of DGFT.
After a successful application, DGFT will issue the EPCG License
Documents required to obtain EPCG license from DGFT.
The following documents will be required for EPCG Online Application:
- Pro forma Invoice/Purchase order of the Capital Goods/Machinery.
- Copy of IEC, RCMC, MSME & Central excise registration & GST Certificate.
- Details of Capital Goods sought to be imported with HSN code/Name, Model Number, and Technical Description.
- List of Products to be exported using the above machinery with HSN code.
- Chartered Engineer Certificate showing the nexus between the Capital Goods and the products to be exported.
- CA Certificate indicating the last three financial year turnover in USD & INR only for the above mentioned Export Products.
- Factory Address where the machine will be installed.
- Stepwise Process/Flow Chart indicating the stages where the capital goods are to be used.
- End-use of Capital Goods for Export products and stage where and how to be used. (Detailed Explanation)
How can we help you with EPCG scheme?
Our team experts help you in getting EPCG Scheme Benefits from DGFT & Customs as under:
- First of all, we explain you about the terms and conditions of the EPCG scheme with respect to export obligation, so that you don’t default in the future and make a well informed decision.
- We help you in preparing documents for application of EPCG License.
- Obtaining EPCG License from Director General of Foreign Trade.
- Guiding regarding the procedural requirement & Compliances to be followed by the Client after issuance of EPCG Authorization.
- Obtaining Amendment, Revalidation or EOP Extension for the EPCG License.
- Getting Redemption Letter from DGFT RA and release of Bond/BG after fulfilling the export obligation from Customs.
- Public Notice No. 01/2015-20 dated 07.04.2020-
As per the above public notice, one-time condonation under the EPCG Scheme-Extension till 31.03.2021 – Condonation given for Non-submission of Installation Certificate, Delay in filing application for EO Period Extension, etc.
- Trade Notice No. 20/2019-20 dated 26.06.2019-
As per the above trade notice, Issuance of Multiple Deficiency Letters and in Piecemeal manner during redemption of AA/EPCG is not allowed. DGFT officers will have to issue only one Deficiency letter covering all the errors at once.