What is the EPCG scheme?
The Export Promotion Capital Goods (EPCG) scheme allows capital goods for pre-production, production and post-production to be imported at zero customs duty, except items on the negative list in Appendix 5F. For physical exports, imports under EPCG are also exempt from IGST and compensation cess. Capital goods may also be sourced from Indian manufacturers instead (FTP 2023, para 5.01(a)).
"Capital goods" here includes capital goods as defined in Chapter 11 of the FTP (including CKD/SKD), computer systems and software that are part of them, spares, moulds, dies, jigs, fixtures, tools and refractories, and catalysts for the initial charge plus one subsequent charge (para 5.01(a)).
An EPCG Authorisation is valid for import for 24 months from the date of issue and cannot be revalidated (para 5.01(d)). The imported capital goods are subject to the Actual User condition until the export obligation is completed and the Export Obligation Discharge Certificate (EODC) is granted (para 5.03).
How is the EPCG export obligation calculated?
There are two parts.
Specific export obligation. Exports worth 6 times the duties, taxes and cess saved on the capital goods, to be fulfilled within 6 years from the date the authorisation is issued (para 5.01(b)). For direct imports the duty saved is the actual amount saved; for domestic sourcing it is the notional customs duty, taxes and cess on the FOR value shown in the Advance Release Order or Invalidation Letter (para 5.08). The obligation is fixed in both US dollars and Indian rupees.
Example: capital goods with ₹50 lakh of duty, IGST and cess saved carry a specific export obligation of ₹3 crore, to be met within six years.
Average export obligation (AEO). The specific obligation is over and above the exporter's average exports of the same and similar products in the preceding three licensing years. The AEO must be met every financial year until the export obligation is completed, and only exports above the AEO count towards the specific obligation (para 5.04(c)). Some categories are exempt from AEO (para 5.12).
Block-wise obligation. The Handbook of Procedures also requires a minimum share of the specific obligation to be met in the first block of years, so progress has to be tracked block by block, not only at the end of the six years.
Can the export obligation be reduced?
Yes, in these cases (only one of them can be used per authorisation, para 5.04(l)):
| Situation | Specific export obligation | Source |
|---|---|---|
| Capital goods sourced from Indian manufacturers | 25% less than 6x (i.e. 4.5x) | para 5.04(d) |
| Exporters of Green Technology Products | 75% of 6x (i.e. 4.5x) | para 5.10 |
| Units in the North-East states, Jammu & Kashmir and Ladakh | 25% of 6x (i.e. 1.5x) | para 5.11 |
| 75% or more of specific EO and 100% of AEO met in half the EO period or less | Remaining EO condoned | para 5.09 |
The average export obligation is not reduced in any of these cases.
What counts towards the obligation?
- Exports of goods made by the authorisation holder or its supporting manufacturer, or services it renders, for which the authorisation was granted, exported directly or through third parties (para 5.04(a), (b)).
- Exports that also use Advance Authorisation, DFIA, duty drawback, RoSCTL or RoDTEP (para 5.04(e)).
- Physical and deemed exports (para 5.04(f)); only exports from DTA units count (para 5.04(g)).
- Certain receipts: royalties and R&D service income in free foreign exchange, rupee payments for services in Appendix 5D, and export proceeds realised in Indian rupees under para 2.52(d)(ii) (para 5.04(i)–(k)).
What happens if the obligation is not met?
If the obligation is not fulfilled in time, the holder must pay the duty saved, with interest, in proportion to the unfulfilled obligation, and the bank guarantee or bond can be invoked. In some cases DGFT can also stop issuing fresh authorisations, and the IEC can be placed in the Denied Entity List.
The obligation period can be extended as set out in the Handbook of Procedures. Under HBP 2023, para 5.16, the composition fee for extending the EPCG export obligation period depends on the duty saved under the authorisation.
Why is EPCG hard to track in practice?
- One company often holds many authorisations, each with its own issue date, six-year clock, AEO baseline and block targets.
- Each export shipping bill has to be allocated to the right authorisation, without double-counting across authorisations and schemes.
- AEO has to be checked every financial year, not only at the end.
- Closing an authorisation needs the import utilisation, installation certificate and export evidence (shipping bills, e-BRCs) assembled for redemption.
How do OptiEXIM and OptiEXIMc track EPCG?
- Specific, average and block-wise obligation are tracked for each EPCG authorisation, in US dollars and rupees.
- Import utilisation of each authorisation is tracked against the bills of entry for the capital goods.
- Installation certificate tracking for the imported capital goods.
- Export obligation fulfilment is built from the shipping bills and e-BRCs generated from SAP export documents.
- Early fulfilment is visible: when 75% of the specific obligation and 100% of the average obligation are met in half the period or less, the remaining obligation can be condoned (para 5.09).
- Redemption. The evidence for each authorisation is held together, and the redemption process is handled in the system.
Frequently asked questions
What is the EPCG export obligation?
Exports worth six times the duties, taxes and cess saved on the capital goods, within six years of the authorisation's issue date (FTP 2023, para 5.01(b)).
What is the average export obligation under EPCG?
The average of the holder's exports of the same and similar products in the previous three licensing years. It must be maintained every financial year, and only exports above it count towards the specific obligation (para 5.04(c)).
Is the obligation lower if capital goods are bought in India?
Yes. With indigenous sourcing the specific obligation is 25% less, i.e. 4.5 times the duty saved; the average obligation does not change (para 5.04(d)).
How long is an EPCG Authorisation valid for imports?
24 months from the date of issue; it cannot be revalidated (para 5.01(d)).
Do exports under RoDTEP or Advance Authorisation count towards EPCG?
Yes. Exports under Advance Authorisation, DFIA, duty drawback, RoSCTL and RoDTEP are also eligible for fulfilling the EPCG obligation (para 5.04(e)).
Is there a benefit for finishing early?
Yes. If 75% of the specific obligation and 100% of the average obligation are met in half the obligation period or less, for example within three years of a six-year period, the rest is condoned (para 5.09).
What happens if the EPCG obligation is not met?
The duty saved becomes payable with interest in proportion to the shortfall, and the bank guarantee or bond can be invoked. DGFT can also hold back new authorisations.
How do OptiEXIM and OptiEXIMc help with EPCG?
They track each authorisation's specific, average and block-wise obligation, import utilisation and installation certificate against SAP documents and e-BRCs, and handle the redemption process.
Sources
This guide summarises the rules for general information and is not legal advice. Check the current notifications before acting on them.