Failure to meet export obligations under EPCG Scheme | DGFT

To promote exports in the manufacturing sector, the Government of India introduced the Export Promotion Capital Goods (EPCG) scheme under the Foreign Trade Policy (FTP). During EPCG scheme permits are issued to allow duty-free importation of capital goods. In turn, the Export Obligation (EO) is imposed on exporters/manufacturers who take advantage of the EPCG system.

It is mandatory to fulfill the export obligation under the EPCG license, DGFT has the right to take action against the licensee who fails to fulfill the export obligation within the specified period.

[If you are planning to import capital goods/machinery, curious to know all the procedures of issuance and redemption of the license under EPCG Scheme click on – EPCG License Procedure | How to Obtain & Close an EPCG License – Ultimate Guide]

Watch this short introductory video about the EPCG scheme; which explains the complex concept of EPCG in an easy to understand manner. It explains what EPCG scheme is and its application process; details of export obligation & redemption of EPCG license; the full summary and step-by-step procedures included in the EPCG scheme.

Export obligation according to EPCG Scheme

In the EPCG Scheme, the export obligation period is 6 years. The export obligation is equivalent to six times the duty saved on capital goods to be fulfilled in six years from the date of issue of the EPCG license. The exports made under Advance Authorization, DFIA, Drawback or Incentive Scheme would count towards fulfillment of export commitments.

There are two types of export obligations under the EPCG system as shown in the figure, we will understand each below –

Average Export Obligation (AEO)

According to the AEO, the average turnover of the same and similar goods during the three preceding financial years prior to the date of issuance of the license should be maintained in each financial year until the specific export obligation is met.

Specific Export Obligation (SEO)

The exporter must export goods equal to 6 times the duty saved value within 6 years from the date of issue of EPCG license. The specific export obligation is fulfilled in blocks, 1) 1st block: During the first four years after the license is issued, the exporter must fulfill at least 50% of the export obligation and 2) 2nd block: The remaining EO must be completed in 2^n.d block i.e. 5^Th and 6^Th years from the license issue date.

The EPCG system was introduced to increase exports, therefore the Average Export Obligation (AEO) ensures that average exports are maintained and the Specific Export Obligation (SEO) ensures that there is an increase in exports after installation of machinery that was imported under the EPCG system.

In some cases, there are possibilities that license holders cannot, for certain reasons, fulfill the export obligation during the said period. In this article, we will discuss the options available to exporters in the event of non-compliance.

Failure to meet export obligations under EPCG Scheme

In order to fulfill the export obligation (EO), the license holder is given a six-year period, i.e. the export obligation must be monitored over a six-year period. Compliance report on export obligation must be submitted to DGFT no later than 30^Th April each year by the permit holder. Below we will understand the options available to the licensee in the event of non-compliance with the EO.

If SEO is not met

• The EPCG system allows a request for the grant of an extension of the export commitment period of 2 years against the payment of a lump sum equal to 2% of the proportional duty saved amount.
• If the licensee fails to fulfill the export obligation even after the extension of the EO period, the company has to pay all customs duties plus 15% annual interest to the customs.
• DGFT can tolerate a shortfall of up to 5% in SEO on account of duty saved amount, but AEO should be 100%.

If the AEO is not met

• If there is an export ban after the issuance of the EPCG license, the EO is automatically extended according to the ban period. The licensee is not obliged to maintain the AEO during the prohibition period.
• If the licensee fails to comply with the AEO for a certain period, he is liable to pay customs duties with 15% interest per annum to the customs authority.
• DGFT issues annual circulars, notifying the list of products for which global trade has declined by more than 5%. If your HS code for export products falls under the list, you can reduce your AEO by a proportional % for that year. In such cases, the permit holder must apply for a refixation of the annual average.

What if AEO is fulfilled but SEO is not?

• If the Licensee has met 100% AEO but cannot meet SEO, he is liable to pay proportional duty saved amount with 15% annual interest.

What if SEO is fulfilled but AEO is not?

• The AEO is the first thing the licensee has to maintain. If AEO is not fulfilled, DGFT does not check SEO. They will direct you to pay the full customs value saved + interest.

How Afleo can be the best service provider for EPCG related issues

We at Afleo consultants are India's leading import-export consultants, with rich experience of 10+ years in the same domain. We specialize in all DGFT and customs related matters – Export Incentive Schemes like RoDTEP, MEIS, SEIS, Import Permits like Advance License, EPCG, Status Certification AEO/Star Export House Certification, Duty Drawback, etc.

Afleo Consultants is a professional EPCG consultancy firm providing the following services under the EPCG Scheme –

• Help with documentation to obtain the EPCG license,
• Online application for issuance,
• Change/Amendment in EPCG License. [For Example addition of export products or services]
• Invalidation / certificate of accessories for EPCG authorization.
• Clubbing of EPCG permits.
• Submission of installation certificate to DGFT.
• Application for EOP Extension/Blockwise Extension.
• Handling / Submission of EPCG Committee matters.
• Application for redemption of EPCG license
• EPCG License Registration at Customs/Bond Execution
• Representation before government authorities for exporters and importers.
• Bond cancellation in customs

[Not sure whether your company is taking all the Export incentives notified by the Govt? – Refer to our article on “18 latest Export promotion schemes/Export Incentives in India“]

We have a presence in PAN India.

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