A brief note on export promotion capital goods scheme

Introduction:

The Export Promotion Capital Goods (EPCG) scheme was one of the several export-promotion initiatives launched by the Government in the early '90s. The basic purpose of the scheme was to allow exporters to import machinery and equipment at affordable prices so that they can produce quality products for the export market. Under EPCG scheme of Foreign Trade Policy, import of capital goods which are required for the manufacture of resultant export product specified in the EPCG Authorization is permitted at nil/concessional rate of Customs duty. The Export Promotion Capital Goods scheme under FTP enables up gradation of technology of the indigenous industry. EPCG Authorizations are issued by Regional Licensing Authority of Director General of Foreign Trade on the basis of nexus certificate issued by an independent chartered engineer. An application for grant of an authorization may be made to RA concerned in ANF 5A along with documents prescribed therein. Application for import License for EPCG Authorization is One per thousand or part thereof subject to a minimum of INR 500/- and maximum of INR 1,00,000/- on CIF value/duty saved amount of Authorization. In cases, where a new Advance Authorization, EPCG and Duty Credit Scrip is issued by RA in lieu of the earlier Authorization (which has been cancelled by RA, on the request of the firm, on account of non registration at the Customs Port), the application fees paid in the earlier Authorization will be adjusted by the RA for the new Authorization. However, a minimum application fee of Rs.200/- shall be paid for the new Authorization.  Before proceeding with the amendments brought therein in FTP 2015-2020, it would be relevant to note some more facts of the Scheme stated here-in-below for ease of understanding:

• Imports upto 10% more than value of EPCG Authorisation are permitted without any endorsement from RA subject to payment of additional fee. In this regard, it must be noted that ‘Export Obligation’ will be automatically enhanced proportionately.

• Certificate of Installation of Capital goods from ‘Jurisdictional Excise Authority’ shall be produced within 6 months to RA & Customs. However, in case of ‘spares’ the time period is 3 years from date of import. Besides these it has been clarified by DGFT Circular No 26/2009 that Installation Certificate in not required for imported ‘movable’ capital goods under EPCG.

• EPCG authorisation can be clubbed for discharge of Export Obligation but the same should be permissible before the expiry of Export Obligation period.

• On fulfilment of Export Obligation, the same should be reported by filing ANF 5B electronically on DGFT website. On verification, RA will issue Certificate of discharge of export obligation, then Customs Department will release Bank Guarantee/LUT.

• It may so happen that ‘Export Obligation’ is not fulfilled or partially fulfilled, custom duty with interest @15% is payable proportionate to export obligation not fulfilled. In this connection, custom duty can be paid through Duty Credit Scrips.

• Relief has provided to the exporters as the extension for fulfillment of export obligation upto 2 years can be obtained on payment of composition fee of 2% of proportionate duty saved on unfulfilled obligation.

EPCG Authorization holder is required to file a bond with or without bank guarantee with the Customs prior to commencement of import of capital goods:

After the introduction of Export Promotion Capital Goods scheme by Foreign Trade Policy and subsequent amendments and supplements ordered in different circulars till 18th January, 2011, the EPCG Authorization holder is required to file a bond with or without bank guarantee with the Customs prior to commencement of import of capital goods. Bank guarantee equal to 100% of the differential duty in case of merchant exporters and 25% in case of manufacturer exporters is required to be submitted except in case of a few exempted categories to ensure fulfillment of specified export obligation as well as to secure interest of revenue.

Export Promotion Capital Goods (EPCG) scheme under Export Import Policy 2015-2020

• EPCG Scheme under Import Export Policy 2015-20 allows import of capital goods for pre-production, production and post-production at Zero customs duty. Alternatively, the Authorization holder may also procure Capital Goods from indigenous sources in accordance with provisions of paragraph 5.07 of FTP. In order to boost up the domestic cpital goods manufacturing industry, EPCG Scheme has been extended to include within its ambit the procurement of Capital Goods indigenously, by reducing the Export Obligation by 25%. Capital goods for the purpose of the EPCG scheme shall include:

i. Capital goods for pre-production, production and post-production

ii. Capital goods in Semi Knocked Down (SKD) / Completely Knocked Down (CKD) conditions to be assembled into capital goods by the importer

iii. Spare parts of goods specified at Serial Nos.1 and 2 as actually imported and required for maintenance of capital goods so imported, assembled, or manufactured

iv. Spare parts required for the existing plant and machinery of the importer

v. Computer software systems

vi. Spares, moulds, dies, jigs, fixtures, tools & refractories for initial lining and spare refractories

vii. Catalysts for initial charge plus one subsequent charge

The afore-mentioned goods may be exempt from whole of the duty of Customs & whole of the additional duty leviable thereon under section 3 of the said Customs Tariff Act, when specifically claimed by the importer. The exemption can be claimed subject to the conditions as mentioned here-in-below for the ease of reference:

• Import of capital goods for Project Imports notified by Central Board of Excise and Customs is also permitted under EPCG Scheme.

Import under EPCG Scheme Import Export Policy 2015-20 shall be subject to an export obligation equivalent to 6 times of duty saved on capital goods, to be fulfilled in 6 years reckoned from date of issue of Authorization.

• Authorization shall be valid for import for 18 months from the date of issue of Authorization. Revalidation of EPCG Authorization shall not be permitted.

• In case countervailing duty (CVD) is paid in cash on imports under EPCG, incidence of CVD would not be taken for computation of net duty saved, provided CENVAT is not availed.

• Second hand capital goods shall not be permitted to be imported under EPCG Scheme under Exim Policy 2015-20.

• In case of import of spares, the installation certificate shall be produced within three years from the date of import.

• Where the goods specified in the Table 1 are found defective or unfit for use, the said goods may be re-exported back to the foreign supplier within three years from date of clearance of said goods.

• Authorization under EPCG Scheme as per IMPEX Policy 2015-20  shall not be issued for import of any Capital Goods (including Captive plants and Power Generator Sets of any kind) for

· Export of electrical energy (power)

· Supply of electrical energy (power) under deemed exports

· Use of power (energy) in their own unit,

· Supply/export of electricity transmission services

· Import of items which are restricted for import shall be permitted under EPCG Scheme Import Export Policy 2015-20 only after approval from Exim Facilitation Committee (EFC) at DGFT Headquarters.

• If the goods proposed to be exported under EPCG authorization are restricted for export, the EPCG authorization shall be issued only after approval for issuance of export authorization from Exim Facilitation Committee at DGFT Headquarters.

• Export Obligation (EO) as per Indian Foreign Trade Policy 2015-20: Following conditions shall apply to the fulfillment of EO:

a. EO shall be fulfilled by the authorization holder through export of goods which are manufactured by him or his supporting manufacturer / services rendered by him, for which the EPCG authorization 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 Para 5.01.

d. Shipments under Advance Authorization, DFIA, Drawback scheme or reward schemes under Chapter 3 of FTP; would also count for fulfillment of EO under EPCG Scheme Import Export Policy 2015-20.

e. Export shall be physical export. However, deemed exports 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 Authorization 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 3E shall also be counted towards discharge of export obligation under the EPCG scheme.

i.  In case of export of goods relating to handicraft, handlooms, cottage, tiny sector, agriculture, animal husbandry, floriculture, horticulture, pisciculture, viticulture, poultry, sericulture, carpet, coir and jute, the importer shall not be required to maintain the average level of exports.

j.  In case of export of goods relating to aquaculture (including fisheries), the importer shall not be required to maintain the average level of exports subject to the condition that EPCG authorisation has been obtained for goods other than fishing trawlers, boats, ships and other similar items.

k. The goods, excepting tools, imported under this notification by the aforesaid sectors, shall not be allowed to be transferred for a period of five years from the date of imports even in cases where export obligation has been fulfilled.

l. Exports against only such shipping bills which mention the authorisation number and date of the authorisation shall be counted for the fulfillment of the export obligation.

m. Leasing of Capital Goods - An EPCG authorization holder may, source capital goods from a domestic leasing company. In such cases, the Bill of Entry of imported capital goods or commercial invoice of indigenous capital goods, shall be signed jointly by EPCG authorization holder and leasing company. However, EPCG authorization holder shall alone be fully responsible for fulfillment of export obligation. 

• Deemed Export as per Indian Foreign Trade Policy 2015-20:  Notification No. 16/ 2015 – Customs

a. Supply of goods against Advance Authorisation or Advance Authorisation for annual requirement or Duty Free Import Authorisation Scheme;

b. Supply of goods to Export Oriented Units or Software Technology Parks or Electronic Hardware Technology Parks or Biotechnology Park;

c. Supply of goods to projects financed by multilateral or bilateral agencies or funds as notified by Department of Economic Affairs, Ministry of Finance under International Competitive Bidding (ICB) in accordance with the procedures of those agencies or funds, where legal agreements provide for tender evaluation without including customs duty;

d. Supply and installation of goods and equipment (single responsibility of turnkey contracts) to projects financed by multilateral or bilateral agencies or funds as notified by Department of Economic Affairs, Ministry of Finance under ICB in accordance with the procedures of those agencies or funds, where bids may have been invited and evaluated on the basis of Delivered Duty Paid (DDP) prices for goods manufactured abroad;

e.  Supply of goods to any project or purpose in respect of which the Ministry of Finance, by Notification No. 12/2012-Customs dated 17-3-2012, as amended from time to time, permits import of such goods at zero customs duty subject to conditions specified in the said Notification and the supply is made under ICB procedure;

f.  Supply of goods required for setting up of any of the mega power projects specified in the list 32A at Sl. No. 507 of Notification No. 12/2012- Customs dated 17.03.2012, as amended from time to time, provided the mega power project conforms to the threshold generation capacity specified in the  said Notification. The supply should be made under ICB procedure. The ICB condition shall not be mandatory if the requisite quantum of power has been tied up through tariff based competitive bidding or if the project has been awarded through tariff based competitive bidding;

g. Supply of goods to nuclear power projects through National Competitive Bidding (NCB) or through ICB as provided in clause(h) of para 7.02 of Foreign Trade Policy.

• 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 under Export Import Policy 2015-20: With a view to accelerating exports, in cases where:

a. Authorization holder has fulfilled 75% or more of specific export obligation &

b. 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 Authorization 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.

• Reduced EO for Green Technology Products: For exporters of Green Technology Products, Specific EO shall be 75% of EO as stipulated in Para 5.01. There shall be no change in average EO imposed, if any, as stipulated in Para 5.04. The list of Green Technology Products is given in Para 5.29 of HBP. Following are green technology products, namely, equipment for solar energy decentralised and grid connected products, bio-mass gassifier, bio-mass or waste boiler, vapour absorption chillers, waste heat boiler, waste heat recovery units, unfired heat recovery steam generators, wind turbine, solar collector and parts thereof, water treatment plants, wind mill and wind mill turbine or engine, other generating sets - wind powered, electrically operated vehicles – motor cars, electrically operated vehicles – lorries and  trucks, electrically operated vehicles – motor cycle and  mopeds, and solar cells.

• Reduced EO for North East Region and Jammu & Kashmir: For units located in Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Jammu & Kashmir, specific EO shall be 25% of the EO, as stipulated in Para 5.01. There shall be no change in average EO imposed, if any, as stipulated in Para 5.04.

• Duty credit scrip :

a. Duty credit scrip issued under Focus Market Product Scheme, Focus Product Scheme and Vishesh Krishi and Gram Udyog Yojana can be used for payment of service tax on procurement of services

b. Scrip holder entitled to avail drawback or CENVAT credit of service tax debited in the scrips

c. Original duty scrip holders can use the scrip for payment of DGFT fees for obtaining any authorization under the FTP, for payment of composition fee and for payment of shortfalls in EO

• Post Export EPCG Duty Credit Scrip(s) as per Export Import Policy 2015-20:  

a. Post Export EPCG Duty Credit Scrip(s) shall be available to exporters who intend to import capital goods on full payment of applicable duties in cash and choose to opt for this scheme.

b. Basic Customs duty paid on Capital Goods shall be remitted in the form of freely transferable duty credit scrip(s), similar to those issued under Chapter 3 of FTP.

c.  Specific EO shall be 85% of the applicable specific EO under the EPCG Scheme. However, average EO shall remain unchanged.

d. Duty remission shall be in proportion to the EO fulfilled.

e. All provisions for utilization of scrips issued under Chapter 3 of FTP shall also be applicable to Post Export EPCG Duty Credit Scrip (s).

f.  All provisions of the existing EPCG Scheme shall apply insofar as they are not inconsistent with this scheme.

Regards,
Aditya Singhania