How to calculate Average Export Obligation under EPCG Scheme

In contrast to the Average Export Obligation, the Specific Export Obligation sets a fixed value that must be achieved within a stipulated time frame. 

This type is particularly suitable for businesses with a clear and immediate export goal. Meeting a fixed export target within a defined period ensures a focused approach and timely fulfilment of the obligation.

The NFE Obligation stands out for its unique approach, connecting export obligations to foreign exchange earnings and expenses. Participants have to uphold a specific level of Net Foreign Exchange earnings. This calculation involves subtracting the costs of imported and indigenous inputs from the foreign exchange earnings generated through exports.

This obligation is advantageous for businesses aiming to optimise their foreign exchange management while adhering to their EPCG commitments.

These various types of export obligations provide EPCG authorisation holders with the flexibility to choose the most suitable approach according to their business objectives, market conditions, and export strategies. 

Each type of obligation comes with its own set of intricacies and challenges, and understanding them is crucial for successful compliance and continued benefit from the EPCG Scheme.

The main difference between these obligations lies in how they are quantified and over what time frame they need to be fulfilled. 

Average Export Obligation is calculated as an average value over several years, Specific Export Obligation is a fixed value to be achieved, and NFE Obligation is linked to the earnings and expenses in foreign exchange.

Calculating the Average Export Obligation under the EPCG Scheme involves several steps. The Average Export Obligation is determined as a percentage of the total duty saved on the imported capital goods. Here’s a step-by-step guide to the calculation:

To calculate the Average Export Obligation, you must first establish the total duty saved on the imported capital goods. This is calculated using the following formula:

Total Duty Saved = (Basic Customs Duty Rate + Integrated Goods and Services Tax (IGST) Rate) x Capital Goods’ CIF Value

Where:

• The Basic Customs Duty Rate is the applicable duty rate for imported capital goods.
• IGST Rate is the Integrated Goods and Services Tax rate for these goods.
• CIF Value is the Cost, Insurance, and Freight value of the capital goods.

The export obligation percentage is specified in the EPCG authorisation issued by DGFT. This percentage determines the proportion of the total duty saved that you need to export.

Next, you must calculate the annual export obligations. This is done by dividing the Total Duty Saved by the export obligation percentage, using the following formula:

Annual Export Obligation = Total Duty Saved / Export Obligation Percentage

This calculation provides you with the amount that needs to be exported each year to meet your EPCG Scheme obligations.

The Average Export Obligation is computed as the sum of the annual export obligations divided by the number of years specified in the EPCG authorisation. It’s crucial to meet this Average Export Obligation at the end of each year.

Average Export Obligation = (Annual Export Obligations Year 1 + Year 2 + Year 3 + Year 4 + Year 5 + Year 6) / 6

To illustrate the concepts further, let’s consider a case. 

Assume there’s a company: XYZ Ltd.

XYZ Ltd. holds an EPCG authorisation and imported capital goods with a:

• Total Duty Saved of INR 5,00,000 
• Export obligation percentage in their authorisation is 120%

Therefore, their Annual Export Obligation is calculated as follows:

Annual Export Obligation = Total Duty Saved / Export Obligation Percentage

Annual Export Obligation = 5,00,000 / 120% = 4,16,667 (approx.)

This means that XYZ Ltd. must export products or services equivalent to INR 4,16,667 each year to meet its EPCG Scheme obligations. The Average Export Obligation over the specified period (usually six years) will be the sum of the annual obligations divided by six.

Ensuring they meet this Average Export Obligation will allow XYZ Ltd. to continue benefiting from the EPCG Scheme, promoting their export capabilities and contributing to India’s export growth.

All clear right? Initially all this might sound quite technical but gradually you’ll get the hang of it, don’t worry.

Meeting the Average Export Obligation under the EPCG Scheme is not a one-time task, it’s an ongoing commitment over the specified period. This period is typically six years from the date of the EPCG authorisation. 

Ensuring compliance and consistently fulfilling export obligations is crucial for continuing to benefit from the scheme. Here’s how to maintain your Average Export Obligation to remain eligible:

To meet the Average Export Obligation, it’s essential to have a well-thought-out export strategy. This should include diversifying into new markets, exploring different product lines, and optimising your production processes. 

The key is to adapt to changing market dynamics and customer demands. A proactive approach helps in consistently achieving your export targets.

Maintaining meticulous records and performance tracking systems is vital. Regularly monitor your exports and measure your progress against the annual obligations. 

Any discrepancies should be identified early, allowing you to make timely adjustments to get back on track. Implement Key Performance Indicators (KPIs) to evaluate your performance regularly.

Proper and accurate documentation is not just about record-keeping, it’s also essential for demonstrating compliance. Ensure all your export-related documents, such as invoices, shipping bills, and certificates of origin, are up to date and readily accessible for audit purposes. 

Consistency in your documentation practices is key to avoiding any disputes or issues with authorities.

In certain situations, meeting the Average Export Obligation might be challenging due to unexpected market shifts, economic crises, or other external factors. In such cases, it’s advisable to engage with the Directorate General of Foreign Trade (DGFT) early. 

They can provide guidance and assistance, and in some instances, may consider modifications or extensions to your EPCG authorisation. This proactive approach demonstrates your commitment to meeting your obligations, even under adverse conditions.

Export regulations can be complex, and understanding them thoroughly is crucial. It’s wise to consult with trade experts, customs consultants, or legal advisors with experience in the EPCG Scheme. 

They can offer invaluable guidance on maintaining compliance, navigating potential challenges, and ensuring that you remain eligible under the scheme.

India offers various government assistance schemes and incentives to support exporters, such as the Merchandise Exports from India Scheme (MEIS) and the Remission of Duties and Taxes on Exported Products (RoDTEP). 

Exploring and utilising these schemes can complement your efforts in meeting your Average Export Obligation.

Often, innovation and the development of new products or services can open up new markets and increase your export potential. Consider investing in research and development to stay competitive and find opportunities to fulfil your export obligations.

Maintaining compliance with the Average Export Obligation under the EPCG Scheme is not just a regulatory requirement; it’s an opportunity to grow your business and enhance your competitiveness in international markets. 

By combining strategic planning, regular monitoring, and proactive engagement with relevant authorities, exporters can ensure that they consistently meet their obligations and continue benefiting from the EPCG Scheme’s incentives. 

It’s a commitment that can lead to substantial rewards and a stronger presence in the global trade arena!

The EPCG Scheme is a valuable tool for Indian businesses aiming to enhance their export capabilities. Understanding and calculating the Average Export Obligation is integral to maximising the benefits of the scheme.

By comprehending the obligations, diligently monitoring performance, and employing strategic planning, exporters can not only meet their obligations but also expand their global presence and contribute to India’s export growth. It’s a commitment that, when fulfilled, can lead to substantial rewards in the competitive world of international trade.