EPCG Scheme – Export Promotion Capital Goods – Tax Benefits

EPCG  Scheme – Export Promotion Capital Goods – tax benefits.

How Rushdi Export House turned a 45 lakh duty burden into a growth story

A years ago Ranjan Mehta, who runs a small textile export unit in Shahuwadi, Maharashtra was stuck. He had imported a weaving machine for his factory that cost around 2 crore rupees.. The customs duty on it was nearly 45 lakh rupees. That was a quarter of his machines value and it ate into his working capital badly. He could not afford to upgrade his technology and his competitors abroad were already using better machines.

Then Ranjan learned about the EPCG scheme. The Export Promotion Capital Goods scheme is one of Indias powerful export incentives and it changed his business trajectory. Of paying 45 lakh duty upfront he got the same machine at zero customs duty under EPCG. The only condition was that he had to export goods six times the duty he saved within six years.

This is how the EPCG scheme works for thousands of Indian exporters today.

 

What is the EPCG scheme ?

The Export Promotion Capital Goods scheme allows Indian exporters to import capital goods at zero customs duty. These capital goods include machinery, equipment, spares, dies, molds and tools needed for pre-production, production and post-production activities. The scheme is available to manufacturer exporters merchant exporters tied to supporting manufacturers and even service providers like hotels, hospitals and IT firms.

The name itself tells you what it is about. EPCG is for capital goods that help you produce exports. By removing the customs duty burden the government wants Indian exporters to upgrade their technology without paying upfront costs.

 

The core benefit in numbers

Under the current EPCG scheme you can import capital goods at zero percent basic customs duty. Earlier there was an option to import at 5 percent duty. Today the zero duty facility is the main stream. On top of that exporters are also exempted from IGST on these imports subject to extensions by the government.

The duty saved on your capital goods becomes the base for your export obligation. Your export obligation is six times the duty saved. You must fulfill it within six years from the date the EPCG authorization is issued.

For example if your capital good costs 100 lakh rupees and the normal customs duty is 18 percent the duty saved is 18 lakh rupees. Your export obligation will be 6 times 18 lakh, which's 108 lakh rupees. You need to export goods 108 lakh within six years.

This is an advantage. Of blocking 18 lakh rupees as duty you use that money for raw materials, salaries or even buying another machine.

 

 Latest amendments that changed the game

 

In July 2024 the DGFT announced changes to the EPCG scheme through Public Notice No. 15. These changes were aimed at making the scheme easier to use and reducing the compliance burden on exporters.

 

1. The time limit to submit the installation certificate for imported capital goods was increased from six months to three years. Before this many exporters faced problems because their machines could not be installed within six months due to logistics or site issues. Now they have three years. They can even get a one-time extension up to the valid export obligation period by paying a composition fee.
2. The requirement to submit an installation certificate for imported spares has been completely removed. This saves exporters from paperwork.
3. A new provision allows EPCG authorization holders to opt for two extensions of one year each or two years in one go beyond the six-year period. The fee for this extension is 2 percent of the duty saved amount on the unfulfilled export obligation with a minimum fee of 10,000 rupees per year.

 Who can use the EPCG scheme ?

The scheme is not limited to big manufacturers. You can apply if you are:

1. A manufacturer exporter who produces goods and exports them
2. A merchant exporter who is tied to a supporting manufacturer
3. A service provider in sectors like hotels, hospitals, IT, tourism and other exportable services

exporters who are availing benefits under the Technology Upgradation Fund Scheme can also avail the zero duty EPCG scheme.

There are some restrictions though. Import of motor cars, SUVs and all-purpose vehicles by hotels, travel agents, tour operators or companies owning golf resorts is not allowed under EPCG.

 

Flexible ways to fulfill export obligation

Your export obligation can be fulfilled through channels. You can do exports of your manufactured goods. You can also fulfill it through deemed exports, supplies to SEZ or EOU units, third-party exports or even service exports.

If you source your capital goods instead of importing your specific export obligation drops by 25 percent. This is an incentive for supporting domestic manufacturers. For example if your duty saved on imported goods is 18 lakh your EO is 108 lakh.. If you buy the same machine from an Indian manufacturer your EO becomes 108 lakh minus 25 percent which is 81 lakh rupees.

Export obligations can also be fulfilled through exports from Agri zones over 12 years which is a longer timeline for those in the agricultural export sector.

 What happens if you don't meet the export obligation ?

If you do not fulfill your export obligation within the given time you must pay back the saved duty plus 15 percent interest per annum. This is a consequence so exporters need to plan their export targets carefully.

However the new amendments have made it easier to handle shortfalls. You can now get extensions by paying a composition fee and the policy relaxation committee decisions are implemented with a fee structure.

 

 Real impact on exporters

Let me give you another example. Suppose you run a leather products export unit in Maharashtra. You want to import a cutting machine for 50 lakh rupees. The normal customs duty is 18 percent, which's 9 lakh rupees. Under EPCG you get this machine at zero duty. Your duty saved is 9 lakh. Your export obligation is 54 lakh rupees.

Within six years you need to export leather products 54 lakh rupees. This is relatively easy if you are already exporting. The 9 lakh rupees you saved can be used to buy leather pay your workers or even market your products abroad.

For Ranjan Mehta from Shahuwadi the EPCG scheme meant he could upgrade his weaving machine without paying 45 lakh duty. He used that money to buy raw cotton and hire two more workers. Within four years he fulfilled his export obligation of 270 lakh rupees (6 times 45 lakh). His business doubled in size.

 

Why the EPCG scheme matters for India ?

The EPCG scheme is not about duty savings for individual exporters. It is about making Indian manufacturing competitive globally. When exporters can upgrade their technology without duty costs they produce better quality goods at lower costs. This helps India compete with countries like China, Vietnam and Bangladesh.

The scheme also supports the governments aim to increase Indias share in exports. By making it easier for exporters to modernize the EPCG scheme contributes to the growth of Indias manufacturing sector.

The recent amendments show that the government is listening to exporters. Extending the installation certificate timeline simplifying fee structures and allowing extensions are all responses to real challenges exporters face.

 

Tips for exporters considering EPCG .

If you are planning to use the EPCG scheme here are some tips. First calculate your export obligation carefully before applying. Make sure your export targets are realistic and achievable within six years.

Second keep all your documents ready. You will need your IEC number, chartered engineer certificate and bond or bank guarantee.

Third track your export obligation regularly through the DGFT portal. Do not wait until the year to check if you are meeting your target.

Fourth if you face delays in installation use the three-year timeline wisely. Do not rush the installation if your site is not ready.

Finally if you are sourcing capital goods domestically remember that your export obligation reduces by 25 percent. This can be an advantage.

 

The future of EPCG

The EPCG scheme has a future with the government continually making it more accessible and beneficial for exporters. As India aims to become a player in global trade schemes like EPCG will play a crucial role, in supporting exporters and fostering growth.

 

the dgft has been actively modernizing its systems since the new foreign trade policy was announced in april 2023. They are making processes system-driven with minimal human intervention. In the months even more epcg processes will be automated, making the epcg scheme easier to use.

the epcg scheme is getting better and better for exporters. With changes and a focus on ease of doing business indian exporters now have a better tool to compete globally. The epcg scheme is becoming more exporter-friendly.

if you are an exporter in maharashtra or anywhere in india the epcg scheme could help you upgrade your technology and grow your business. The zero duty benefit, flexible timelines and simple fee structures make it an attractive export incentive.

 

1. Common pitfalls in compliance that lead to high penalty costs and how to avoid them
2. Deep research
3. How to calculate the export obligation for my machinery
4. What are the consequences of failing to meet export obligations
5. Steps for applying for an authorization, via the dgft portal
6. How do recent amendments affect duty- import of spares