The Government of India announced the EPCG scheme in the 1990s with a vision to facilitate capital goods import and improve the quality of production, enhancing India’s competitiveness as a manufacturer, globally.
Exporters and importers would have heard about the EPCG Scheme, but it’s also important to have an in-depth understanding of the scheme. Here is a complete guide of all you need to know about the EPCG scheme to enhance your export-import business and expand in the international trade arena.
EPCG Scheme is an initiative by DGFT which allows duty-free import of capital goods and machinery for export purposes. That means you can import capital goods at zero customs duty provided that you fulfil certain export obligations.
Capital Goods can be utilised for the production, pre-production, and post-production stages of goods. This initiative is also known as the zero-duty EPCG scheme.
The primary goal of the EPCG Scheme is to strengthen India’s manufacturing sector and its competitiveness internationally by reducing the import cost of capital goods.
Following are the goods/machinery that qualify to be imported under the EPCG scheme:
- All capital goods, (semi-knocked down and fully knocked-down conditioned items are also included).
- Refractories, moulds, dies, spares, jigs, fixtures, and tools.
- Catalysts for both the initial charge and one subsequent charge.
According to para 9.08 of FTP 2015-20, capital goods are defined as machinery, equipment, or accessories needed for manufacturing goods or providing services. This includes items for upgrading technology, expanding operations, or replacing old equipment. Capital goods cover a wide range of items like packaging machinery, refrigeration units, power generators, machine tools, testing equipment, and devices for quality control and pollution management. These goods can be used in various sectors such as manufacturing, mining, agriculture, animal husbandry, and services like research, testing, and pollution control.
The EPCG intends to promote exports, heavy exporters can gain several benefits under the scheme. The Government of India instigated this scheme to provide incentives and financially support the exporters.
We would advise the exporters not to claim and expect to gain benefits under this scheme if they aren’t manufacturing in a large quantity. Those expecting to sell the produce entirely within the country should also not go ahead with this scheme because it would be difficult to fulfil the obligations mentioned in the EPCG Scheme.
The advantages provided by the EPCG Scheme are accessible to any Exporter, regardless of their turnover. Manufacturer Exporters, Merchant Exporters with supporting manufacturers, and Service Providers can apply for EPCG Licenses.
Capital goods under the scheme must be used exclusively until export obligations are met. Merchant Exporters must endorse the supporting manufacturer’s details on the license and include them in shipping documents. Service providers like hotels, tour operators, and logistics companies can leverage the EPCG Scheme to reduce capital expenses by importing duty-free capital goods.
Under the EPCG Scheme, capital goods imported for use in the production of goods or services are exempt from customs duty. Additionally, the scheme also provides an exemption from IGST and Compensation Cess.
Alternatively, Capital Goods under the EPCG Scheme can be sourced from domestic suppliers. In such instances, the applicable GST for the supply would be waived.
Exporters also have the option to procure capital goods domestically from local manufacturers. Such domestic manufacturers would qualify for deemed export benefits under paragraph 7.03 of the Foreign Trade Policy (FTP).
Here we have explained the entire process you have to go through in order to get the benefits under the EPCG Scheme:
- Apply for EPCG License from DGFT.
- Clearly specify the export items to be manufactured using the imported machinery/capital goods.
- Obtain EPCG License from DGFT.
- Register the license with Customs and provide a bond or bank guarantee.
- Import machinery/capital goods at 0% import duty.
- Install the machinery and acquire the installation certificate.
- Fulfill the export obligation within 6 years.
- Submit a request to DGFT for EODC/Closure of License.
- Receive EODC from DGFT.
- Submit EODC/Closure letter to customs and cancel the bond/redeem the bank guarantee.
- Process ends.
The EPCG Online Application requires the following documents:
- Pro forma Invoice/Purchase order of the Capital Goods/Machinery.
- Copies of IEC, RCMC, MSME & Central excise registration & GST Certificate.
- Details of Capital Goods to be imported, including HSN code/Name, Model Number, and Technical Description.
- List of Products intended for export utilising the above machinery, along with corresponding HSN codes.
- Chartered Engineer Certificate demonstrating the connection between the Capital Goods and the products slated for export.
- CA Certificate indicating the turnover in USD & INR for the mentioned Export Products over the last three financial years.
- Factory Address where the machinery will be installed.
- Stepwise Process/Flow Chart illustrating the stages where the capital goods will be utilised.
- Explanation of the end-use of Capital Goods for export products, detailing the stages and methods of utilisation.
Export obligation refers to the commitment made by an exporter to fulfil certain predetermined targets or requirements related to exports within a specified period.
This typically involves exporting a certain value of goods or services within a specified timeframe, as determined by the terms and conditions of the scheme. Failure to meet these obligations may result in penalties or other consequences as outlined in the scheme guidelines.
Under the EPCG scheme, we have two types of Export Obligation, i.e., Average Export Obligation and Specific Export Obligation.
This is the primary export obligation within the EPCG Scheme. Essentially, it mandates that the average turnover maintained in the three years preceding the license acquisition must be sustained for each financial year until the designated export obligation is fulfilled.
This requirement is enforced to ensure that following the upgrade and incorporation of new machinery, the overall export levels do not dip below the established historical average turnover.
Rather, the aim is to see an increase in export turnover facilitated by the utilisation of new machinery. This obligation is to be upheld in addition to meeting the specified export targets.
The requirement entails that goods produced from the imported machinery must be exported, with a value six times that of the duties, taxes, and cess saved on the capital goods, within six years from the date of issue of the EPCG Authorisation.
When capital goods are domestically sourced, the Specific Export Obligation is set at 25% less than the aforementioned requirement.
- If the stipulated Export Obligation remains unfulfilled within six years, a single extension of two years may be granted on a case-by-case basis. Should the holder of the EPCG Authorisation fail to fulfil the Export Obligation, even after the extension period, the organisation is liable to pay all the Custom Duties, Cess, and taxes saved, along with a 15% annual interest charge, to the Customs Authority.
- The Export obligation can be satisfied through various means including direct exports, deemed exports, supplying to SEZs, EOU Units, third-party exports, and service exports for service providers.
Please note that if the EPCG License holder chooses to pay the IGST & Compensation cess during importation, the net duty saved amount would be adjusted accordingly, thereby reducing the obligation. However, this option is contingent upon the Exporter refraining from claiming tax credit for IGST.
Under the Key Provisions of FTP 2023, the following measures will be taken by the government:
The FTP 2023 aims to implement a rule-based IT system for various approvals under the EPCG scheme, eliminating the need for a manual interface and facilitating ease of doing business for exporters.
During FY23-24, all processes under the EPCG scheme, including issue, re-validation, and export obligation extension, will be covered in a phased manner through the new IT-based system.
The government is introducing a special one-time Amnesty Scheme under FTP 2023 to provide relief to exporters burdened by high duty and interest costs due to pending cases of default on Export Obligations, including under the EPCG scheme.
