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An Overview of EPCG Scheme
[Submitted by Mr. Girish D.,
Consultant in Indirect Taxes,
Bangalore, Karnataka]
June 19, 2008
Introduction
- The world is heading towards the global market concept, which has
increased the competition among the nations to sell their goods and
services in the global market and the nation which do not support its
exports will on one fine day find its economy deteriorating. Thus the
policy of the Government of India relating to foreign trade is very
clear on the aspect of promoting the exports of our country and the main
mantra of the day is "only goods and services shall be exported and not
the taxes".
-
Towards this objective the government has introduced
various schemes to promote the export of goods, including EOU/EHTP/STP,
SEZ, Advance Authorisation Scheme, DEPB Scheme, Drawback Scheme, CENVAT
Credit scheme, excise duty and service tax rebate schemes etc., Export
Promotion Capital Goods Scheme (popularly known as EPCG scheme), is one
among such schemes which allows for the import of capital goods at the
concessional rate of duty, with the condition that such capital goods
are used for the production of goods to be exported.
-
Since under the EPCG scheme duties are exempted on the
import of capital goods, the import is also promoted simultaneously!!
which is not a favorite situation for any nation (because the
businessmen loves their sales rather than purchases). Hence the scheme
also provides for local procurement of the capital goods without payment
of duty.
-
Hereinafter an attempt is made to provide an overview of
the basic elements of EPCG scheme. Since the article deals with the
basics of EPCG scheme, the advanced topics such as EPCG scheme for SSI
units, agro units, large scale importers, industry or product specific
EPCG schemes, and in-depth analysis of the provisions etc., are not
discussed.
Structure of the scheme
-
EPCG scheme allows the import of capital goods for pre
production, production and post production at the concessional rate of
3% customs duty. However the importer shall fulfill the export
obligation by exporting goods which is equivalent to 8 times of duty
saved on the capital goods and this export obligation shall be fulfilled
within 8 years reckoned from the Authorisation issue-date.
Export obligation
-
Wherever figures are involved, mathematics can better
explain the topic than words. For that reason the manner of computation
of export obligation is explained with the help of a simple illustration
as follows,
Illustration:
- Let the value of the capital goods is Rs. 5,00,000.
- Therefore the customs duty payable without EPCG is Rs. 1,29,862 [@ BCD
= 7.5% + CVD =16% + Edu Cess and SHE Cess on CVD = 3% + ACD = 4% + Edu
Cess and SHE Cess on overall duty = 3%]
- Therefore the customs duty payable with EPCG is Rs. 15,000 [@ 3%].
- Therefore the amount of duty saved is Rs. 1,14,862 [Rs. 1,29,862 - Rs.
15,000].
- Therefore the value of goods to be exported is Rs. 9,18,899 [Rs.
1,14,862 X 8].
The facilities provided for fulfilling the export
obligation
-
The export obligation can be fulfilled during the tenure of
8 years.
-
Apart from physical exports, the deemed exports such as
removal to advance authorisation holder, SEZ units/Developers of SEZ,
EOU/EHTP/STP units/BTP units, UN agencies etc., will also be considered
for computing the export obligation.
-
Export of services will also be considered.
-
Upto 50% of export obligation can be fulfilled by exporting
the other goods manufactured or services provided by the group company.
-
Shipments under Advance Authorisation, DFRC, DFIA, DEPB or
Drawback scheme, or incentive schemes would also count for fulfillment
of the export obligation.
-
Royalty payments received in freely convertible currency
will also be counted for the discharge of export obligation
-
Foreign exchange received for R&D services shall also be
counted for the discharge of export obligation
-
Goods may be exported directly or through third party.
-
If value of capital goods imported is less than the
permitted limits of the EPCG authorisation, then the export obligation
also gets reduced proportionately.
-
The regional authority may extend the export obligation
period upto a period of 2 years, subject to the payment of composition
fee or increasing the export obligation at the choice of the EPCG
holder.
-
Export obligation can be extended by the regional authority
upto 4 years also, but this is subject to the payment of at least 50% of
the duty payable on the unfulfilled portion of the export obligation.
-
Waiver of export obligation may be considered where,
because of force majeure or other unforeseen circumstances / reasons
which are beyond the control of the exporters (like steep fall in
international prices, technological obsolescence etc.), and the exporter
is unable to fulfill export obligation.
-
The regional authority may also condone the shortfall upto
5% in export obligation arising out of duty saved amount.
Other plus points of the EPCG scheme
-
Second hand capital goods can also be imported
-
Spares and tools for the existing capital goods (which were
earlier imported under EPCG scheme), can also be imported
-
EPCG authorisation can also be used for importing the
technological upgradation for the existing capital goods (which were
earlier imported under EPCG scheme)
-
In case the capital goods are procured locally, the
supplier of such goods can claim the following benefits,
- CENVAT Credit on the inputs, capital goods and input services used in
or in relation to the manufacturing of the capital goods.
- deemed export drawback,
- inputs required for the manufacture of such capital goods can be
imported without payment of duty under the advance authorisation;
- refund of duty paid on the removal of the capital goods to EPCG holder
[this aspect is little further elaborated in the subsequent discussion]
[Note: it is clarified that, DEPB scheme is available only to the EPCG
holder and not to the supplier of capital goods. That is, the export of
goods produced by using the capital goods procured under the EPCG
license is considered for the fulfillment of export obligation under
EPCG scheme, but the removal of capital goods to the EPCG holder will
not be considered as eligible for DEPB scheme].
-
Capital goods imported under EPCG can be transferred to
other group company even before 8 years from the date of its imports,
provided the export obligation is fulfilled. However intimation shall be
given to the regional authority and the jurisdictional central excise
authority.
-
If the authorization issued has actually been utilized for
import of a value in excess, upto 10% of the amount of EPCG
authorization, then authorization shall be deemed to have been issued
for such excess amount and no further permission from the customs and
regional authority is required.
-
Clubbing of two or more EPCG authorizations of same
authorization holder would be permitted. However the export obligation
period for clubbed authorization shall be reckoned from first
authorization issue-date.
Tough side of the EPCG scheme
-
Therefore at the first look it appears that, fulfilling the
export obligation is not a difficult task, since for the import of
capital goods worth Rs. 5,00,000, export obligation to be fulfilled with
all the aforesaid flexibilities, is only Rs. 9,18,899.
-
However if the following provisions are considered, your
opinion that, fulfilling the export obligation is simple and
uncomplicated, may change.
-
Import of capital goods shall be subject to actual user
condition till export obligation is completed. That means, the capital
goods shall be installed in the premises specified in the EPCG
authorisation (however such premises may pertain to the EPCG
authorisation holder or group company or in case the EPCG holder is a
merchant exporter, then the premises pertaining to the supporting
manufacturer) used for manufacturing the goods to be exported,
-
Export obligation under the scheme shall be, over and
above, the average level of exports achieved by him in the preceding
three licensing years for the same and similar products within the
overall export obligation period. To understand this better, we will
continue with our earlier mathematical illustration, as follows,
- Let us assume that the capital goods are imported in the financial
year 2008-09.
- If the exports during the preceding financial years are follows,
| Year |
FOB value of exports |
| 2005-06 |
Rs. 25,00,000 |
| 2006-07 |
Rs. 35,00,000 |
| 2007-08 |
Rs. 45,00,000 |
| Totals |
Rs. 1,05,00,000 |
- Then the average exports is Rs. 35,00,000. [Rs.
1,05,00,000 / 3]
- Therefore the export obligation to be fulfilled during the year
2008-09 is Rs. 44,18,899 [Rs. 35,00,000 + Rs. 9,18,899] and not Rs.
9,18,899 as computed in earlier.
-
Similarly, if the capital goods are installed in the group
company or in the premises of the supporting manufacturer (where EPCG
holder is a merchant exporter), then the export obligation to be
achieved is over and above the average level of exports achieved by such
group company or the supporting manufacturer.
-
Even though export obligation is fulfilled, the capital
goods imported should not be transferred to third parties (ie., other
than group company) during the period of first five years of its
imports.
-
Out of the total export obligations, atleast 50% shall be
fulfilled within the first 6 years of import of the capital goods. If
the export obligation for the aforesaid block of years if not fulfilled,
then unless permitted by the regional authority, the EPCG holder shall
pay the applicable customs duties on such capital goods along with
interest, within 3 months from the end of the aforesaid block of 6
years. In addition to this a composition fee of 2% shall be paid on the
unfulfilled portion of the export obligation. However to the extent of
exports already made, duty payable would be reduced proportionately.
-
In case of failure to fulfill export obligation or any
other condition of authorization, authorization holder shall be liable
for action under Foreign Trade (Development & Regulation) Act, 1992,
Orders and Rules made there under, provisions of Foreign Trade Policy
and Customs Act, 1962.
-
Bank guarantee shall be executed to the customs
authorities, which will be an additional cost.
-
Further the following cost is inevitable for enjoying the
benefits of the EPCG scheme.
- Cost involved in getting the Import and Export Code (IEC)
- Cost involved in getting the Registration Cum Membership Certificate (RCMC)
- Cost involved in submitting the Certificate from the Chartered
Accountant/Company Secretary/Cost Accountant.
- Cost involved in submitting of the installation certificate from the
Chartered Engineer/Central excise range officer.
- Cost involved in maintaining additional records
- Cost involved in the legal compliance such as salary of the additional
staff or consultants etc.,
Provisions relating to local procurement of capital goods
-
As mentioned earlier, instead of importing the capital
goods, the EPCG holder may procure the same locally.
-
For this purpose the EPCG holder shall apply to the
regional authorities in the prescribed form, for invalidating the EPCG
authorisation and based on this invalidation letter goods can be
procured locally.
-
Since the exemption notification issued deals only with the
exemption from the customs duties, the local suppliers have no option
but to pay duty on the removal of capital goods to the EPCG holder.
-
However the excise duty so paid need not be recovered from
the EPCG holder, but instead such excise duty paid can be claimed as
refund from the Government.
-
The export obligation to be fulfilled in this case shall be
reckoned with reference to notional customs duties saved on free on road
value of the capital goods. Therefore for computing the amount of duty
saved, the methodology prescribed under the customs valuation rules
shall be adopted and not the one prescribed under central excise law.
-
In case of local procurements, the supplier of the capital
goods will get the deemed export benefits. Further the EPCG holder can
get the deemed export benefits by getting a disclaimer certificate from
the local supplier, to the extent that the local supplier has not
claimed any deemed export benefits.
Records and returns
-
There is an old saying that the people will believe in what
it appears to them rather than what it is really! and the taxation
authorities are not free from this. Consequently presenting the
compliance with the legal provisions of EPCG scheme in the proper books
of records and informing the same to the Government authorities in the
form of periodically prescribed returns/reports is essential.
-
Apart from the usual financial and inventory records,
maintaining of the following records and filling of the following
returns are also required.
- Within 30 days from the end of each financial year, a report on
fulfillment of the export obligation shall be filled to the regional
authority. Based on this report, the regional authority will provide the
partial export obligation fulfillment certificate.
- Every EPCG authorization holder shall maintain, for a period of 3
years from date of redemption, a true and proper account of
exports/supplies made and services rendered towards fulfillment of
export obligation.
Redemption of EPCG authorisation
-
On fulfilling the export obligation the EPCG holder may
apply to the regional authority in the prescribed form, for redemption
of the EPCG authorisation.
-
On being satisfied, within a period of 90 days, the
regional authority shall issue a certificate of discharge of export
obligation to the EPCG authorization holder and send a copy to customs
authorities.
Premature exit from the scheme
-
An exporter may exit from the EPCG scheme before fulfilling
the export obligation, by paying the applicable duties with interest.
Other provisions
-
Instead of claiming the exemption, if the EPCG
authorisation holder decides on paying the CVD, then to the extent of
CVD paid, the amount of 'duty saved/foregone' will be reduced and
consequently the export obligation to the extent of 8 times of the CVD
paid will get reduced. However in this option the EPCG holder cannot
avail the CENVAT Credit of CVD paid.
-
Capital Goods imported under EPCG scheme, which are found
defective or unfit for use, may be re-exported back to foreign supplier
within three years from the date of payment of duty on importation
thereof, with permission of regional authority/customs. Consequently,
the export obligation would be re-fixed.
-
Capital Goods imported and found defective or otherwise
unfit for use may be exported, and Capital Goods in replacement thereof
be imported under EPCG scheme. In such cases, while allowing export, the
Customs shall credit the duty benefit availed which can be debited again
at the time of import of such replaced Capital Goods.
I hope that the article has provided some useful information
about the EPCG Scheme.
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