The EPCG Direct Import Scheme is administered by the Directorate General of Foreign Trade (DGFT) through its Regional Authorities and is governed by Chapter 5 of the Foreign Trade Policy (FTP) 2023. This scheme allows manufacturer exporters, merchant exporters and eligible service providers to import capital goods with zero customs duty, including machinery, equipment, spares, tools, jigs, fixtures and even computer software systems used for production.
In this scheme, the importer is required to fulfil the Export Obligation (EO), which equals six times the duty saved value on imports, within a period of six years.
Practical Illustration: PSR Enterprises
PSR Enterprises, a Chennai-based rice manufacturer, wants to import machinery from China worth ₹1 crore. The details are given below:
| SI No. | Facts of the Case | Amount ₹ | Note |
|---|---|---|---|
| 1 | Machinery Basic Value | 10,00,00,000 | New machinery, direct import |
| 2 | Customs Duty % | 7.5% | Assumption |
| 3 | Social Welfare Surcharge % | 10% | Nil where BCD is exempt |
| 4 | IGST | 18% | Assumption |
| 6 | Average Export Obligation | 12,00,00,000 | Assumption |
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Assumptions:
- The imported machinery is new, as second-hand machinery is not allowed to be imported under EPCG.
- No reduced EO categories apply.
- PSR Enterprises is not a first-time exporter.
Under the Export Promotion Capital Goods scheme (EPCG), PSR Enterprises can import machinery (capital goods) duty free, as shown in the table below:
With EPCG vs Without EPCG
| Particulars | With EPCG | Without EPCG |
|---|---|---|
| Assessable Value (CIF) | 10,00,00,000 | 10,00,00,000 |
| BCD @ 7.5% | Exempt | 75,00,000 |
| SWS @ 10% of BCD | Exempt | 7,50,000 |
| IGST @ 18% | Exempt | 1,94,85,000 |
| Cash paid at import | NIL | 2,77,35,000 |
To avail this exemption, PSR Enterprises is subject to two different types of Export Obligation (EO):
- Specific Export Obligation, which needs to be fulfilled in block-wise periods.
- Average Export Obligation, which needs to be fulfilled every year.
Export Obligation Calculation
| Obligation | Amount (FOB) | Time Period |
|---|---|---|
| Specific EO — 6 × Duty Saved Value | 16,64,10,000 | 6 years from the date of Authorisation |
| Block 1 — 50% | 8,32,05,000 | Year 1 to Year 4 |
| Block 2 — 50% | 8,32,05,000 | Year 5 to Year 6 |
| Average EO | 12,00,00,000 | Every year, separately |
To fulfil the SEO, exports made over and above the Average EO are considered for SEO calculation. So the annual export target is the sum of the two:
Annual Export Target
| Year | Exports Required | Increase in % over Average EO |
|---|---|---|
| Year 1 to 4 | 14,08,01,250 | 17.33% |
| Year 5 to 6 (each year) | 16,16,02,500 | 34.67% |
Assumption:
- PSR Enterprises' export performance is consistent over the period of six years.
If the export obligation is not met within the specified timelines, the importer must pay the customs duty that was exempted at the time of importing capital goods, along with applicable interest proportionate to the unfulfilled portion. There is a chance of enforcement action under the Foreign Trade (Development & Regulation) Act, and the bank guarantee executed can be encashed.
How Kireeti Consultants Helps
Kireeti Consultants can assist exporters with EPCG Direct Import, including eligibility assessment, EPCG Authorisation, capital goods import, export obligation planning, compliance monitoring and EODC/closure. Our team can also help businesses evaluate the appropriate EPCG route based on their import and export requirements.
