EPCG Scheme: A Step-by-Step Guide for Manufacturers and Service Providers

The Export Promotion Capital Goods (EPCG) Scheme is a flagship initiative introduced by the Directorate General of Foreign Trade (DGFT) under Chapter 5 of the Foreign Trade Policy (FTP) 2015-20. It is designed to boost India’s manufacturing competitiveness in the global market by facilitating the import of high-quality capital goods at zero customs duty. These imported goods are then used in pre-production, production, and post-production activities to manufacture export-ready products.

Let’s delve deeper into the EPCG scheme, its features, benefits, and how you can leverage it effectively as a manufacturer or service provider.

What is the EPCG Scheme?

The EPCG Scheme was introduced to encourage Indian exporters to enhance the quality of their goods by giving them access to advanced technology and equipment. This scheme permits the import of capital goods, such as machinery, tools, and equipment, at zero customs duty, provided that certain conditions, such as fulfilling the Export Obligation (EO), are met.

Capital goods covered under the EPCG Scheme include:

• Machinery and tools in their semi-knocked down (SKD) or completely knocked down (CKD) condition.
• Computer systems and software used as components or parts of capital goods.
• Moulds, dies, fixtures, jigs, catalysts, and other related items.
• Spare parts required for the initial setup or an additional charge.

This provision is instrumental in empowering Indian manufacturers with the necessary resources to produce export-quality goods while saving significantly on import costs.

EPCG Scheme under GST

When the Goods and Services Tax (GST) was implemented, some services previously included in the EPCG scheme were discontinued. However, under FTP 2015-20, capital goods imported under EPCG authorization for physical exports are exempted from Integrated GST (IGST) and Compensation Cess until March 31, 2020.

This exemption is provided under specific sections of the Customs Tariff Act, 1975, allowing businesses to enjoy tax savings on imports meant for export production. However, exporters must stay updated on changes in policies to understand how GST impacts their eligibility and benefits under the EPCG scheme.

How Does the EPCG Scheme Work?

The EPCG scheme allows the duty-free import of capital goods during pre-production, production, or post-production stages. However, in return, the importer must fulfill an Export Obligation (EO) equal to six times the duty that would have been paid if the scheme weren’t availed.

Key Features of the Scheme

Eligibility:

• Manufacturing exporters.
• Merchant exporters working with supporting manufacturers or service providers.
• Common Service Providers (CSP) designated by DGFT.

Duration of Authorization:

• The EPCG license remains valid for 18 months from the date of issuance and is non-renewable.

Export Obligations:

• EO must be fulfilled within six years.
• Deemed exports and royalty payments in foreign exchange are also considered toward EO compliance.
• Special concessions for exporters from the Northeastern states and Jammu & Kashmir.

Domestic Sourcing:

• Manufacturers can procure capital goods domestically and still claim deemed export benefits.

Export Obligation (EO) Under EPCG Scheme

Export Obligation is the cornerstone of the EPCG scheme. It ensures that beneficiaries contribute to India’s export economy in exchange for the import duty waiver.

Conditions for EO Fulfillment:

The EO must be met through the export of products manufactured by the authorization holder or a supporting manufacturer/service provider.

1. Shipments under other export schemes like Advance Authorization or Duty-Free Import Authorization (DFIA) are considered while calculating the EO.
2. Only 25% of the EO needs to be fulfilled by exporters from select Northeastern states and green technology product manufacturers.
3. Early completion of 75% of the EO within half the stipulated time results in a waiver of the remaining 25%.

Application Process for EPCG License

To avail of the EPCG scheme benefits, exporters must apply to the DGFT by submitting the Ayat Niryat Form 5B (ANF 5B) along with requisite documents.

Required Documents:

• Permanent Account Number (PAN).
• Import Export Code (IEC).
• GST Registration Certificate.
• Digital Signature Certificate.
• Chartered Accountant’s Certificate and Chartered Engineer’s Certificate for verification.
• Proforma Invoice and Company Brochure.

Applicants must ensure that all documents are self-certified and meet DGFT’s guidelines.

Benefits of EPCG Authorization

Cost Savings:

By exempting customs duty on capital goods imports, the scheme reduces the overall production costs for exporters.

Access to Advanced Technology:

Importing state-of-the-art machinery improves production efficiency and the quality of goods, enabling manufacturers to meet international standards.

Flexibility in Sourcing:

Capital goods can be sourced domestically or from export-oriented units without forfeiting scheme benefits.

Encourages Technological Upgradation:  

Authorization holders can opt for upgrades on previously imported machinery to keep up with market demands.

Boost to Green Technology:

Exporters dealing in green technology products enjoy relaxed EO requirements, promoting sustainable practices.

EPCG Scheme for Manufacturers and Service Providers

The scheme caters not only to manufacturing exporters but also to service providers, including Common Service Providers (CSP).

CSP Guidelines:

• CSPs must meet their EO obligations as per the scheme’s terms.
• A bank guarantee equivalent to the customs duty saved is required.
• They must notify the relevant authorities about their activities before initiating exports.

This flexibility ensures that even service providers can benefit from the scheme, contributing to India’s diverse export portfolio.

Challenges in Implementing EPCG Scheme

Strict Export Obligation:

Meeting the EO, especially in volatile global markets, can be challenging for small exporters.

Documentation and Compliance:

The application process requires multiple certifications, which can be tedious for new entrants.

Limited Awareness:

Many small and medium enterprises (SMEs) are unaware of the scheme’s benefits, resulting in underutilization.

Why the EPCG Scheme Matters?

The EPCG scheme plays a crucial role in making Indian exports globally competitive by reducing production costs and enhancing product quality. By providing easy access to modern capital goods, the scheme aligns with the government’s vision of Make in India and Atma Nirbhar Bharat.

Conclusion

The Export Promotion Capital Goods (EPCG) Scheme is an invaluable tool for Indian exporters to save costs, upgrade technology, and expand their global footprint. While the scheme requires adherence to strict obligations and procedures, the long-term benefits far outweigh the challenges. Whether you are a manufacturer looking to scale your production or a service provider aiming to go global, the EPCG scheme offers a structured pathway to achieve your export goals.

By understanding the finer details of this scheme and staying compliant with its requirements, Indian exporters can significantly enhance their competitiveness in international markets. If you’re planning to apply for EPCG authorization, ensure you have a clear roadmap for fulfilling your Export Obligation to fully reap its benefits.

Also Read: Export Incentives in India 2024 | Schemes, Benefits and Types