Acquiring an EPCG licence is a straightforward process, but fulfilment of the Export Obligation (EO) is a whole different story. It requires a commitment to exporting goods and services in exchange for the duty saved on the import of capital goods — for instance, plant and machinery.
The Export Obligation journey requires a detailed monitoring process for every EPCG holder, since the obligation itself is structured block-wise rather than as a single end-of-term target.
This article will help you understand how the export obligation is calculated, how it is accounted for towards fulfilment of EO, and what your options are if you are at risk of not honouring the obligation. If you're new to the scheme or want to understand its eligibility, benefits, and application process, start with our EPCG scheme overview before learning how export obligations are calculated and managed.
What is the EPCG export obligation?
The Directorate General of Foreign Trade (DGFT) issues an EPCG licence for direct import or indigenous purchase of capital goods at concessional or nil customs duty, subject to fulfilment of the export obligation. In other words, the licence holder commits to exporting goods or services manufactured using the machinery or capital goods acquired through the EPCG licence.
Generally, the export obligation must be fulfilled over a 6-year period, at 6 times the Duty Saved Value (DSV). The obligation is further split into two blocks as per Chapter 5 of the Handbook of Procedures (HBP).
Block-wise EO structure
| EO Period | Minimum EO to be fulfilled |
|---|---|
| 1st Block (1–4 years) | 50% |
| 2nd Block (5–6 years) | Balance EO |
How is the export obligation calculated?
At the licence level, the calculation works off two parts.
The first is the Duty Saved Value (DSV): the difference between the standard customs duty payable on the capital goods and the concessional or nil rate charged under the EPCG authorisation. This calculation depends on the applicable customs tariff and HSN classification of the capital goods.
The second is the Export Obligation (EO) itself: as per the applicable provisions of the Handbook of Procedures, EO is generally 6 times the duty saved value.
Illustration 1 — Calculating DSV and EO
Assume the value of the capital goods is ₹100, and per the HSN classification of plant & machinery, Basic Customs Duty is 7.5%, the Social Welfare Surcharge is 10%, and IGST is 18%.
| Sl No | Particulars | % | Amount (₹) |
|---|---|---|---|
| 1 | Capital Goods Value | – | 100 |
| 2 | BCD | 7.5 | 7.5 |
| 3 | SWS on BCD | 10 | 0.75 |
| 4 | Total | – | 108.25 |
| 5 | IGST | 18 | 19.485 |
| 6 | DSV | – | 27.735 |
| 7 | EO | 6x | 166.41 |
The export obligation is then split into two blocks over the 6-year period, each carrying its own minimum export performance target — not a single figure due at the end. Fulfilment must follow this block structure.
Illustration 2 — Block-wise split (continuing Illustration 1)
| Sl No | Block | % | Calculation (₹) |
|---|---|---|---|
| 1 | 1st Block (1–4 years) | 50% | 83.205 |
| 2 | 2nd Block (5–6 years) | 50% | 83.205 |
If the licence holder fails to fulfil the export obligation for the 1st block, the authorisation holder is required to regularise and complete the balance during the 2nd block period.
If the licence holder already has export turnover from preceding financial years, they are further required to maintain the Average Export Obligation (AEO), which is calculated based on exports made during the 3 preceding financial years.
Monitoring your export obligation
Fulfilment of the export obligation happens over many years and requires detailed monitoring against actual Shipping Bills. This is regular tracking, not a once-a-year job. Monitoring requires detailed reconciliation against shipping bills and export realisation against the licence, and needs to be done against both the overall EO and the block-wise EO.
This also means keeping the required documentation organised and audit-ready for compliance checks. Documents such as e-BRCs (electronic Bank Realisation Certificates), shipping bills, and other export-related records serve as evidence of export and must be submitted at the time of closure of the EPCG licence. Regular monitoring helps you spot early if actual export performance is falling short, so you can act in time — it works as a precaution rather than a cure.
What happens if you miss the export obligation?
Lower exports leading to a missed block target or overall export obligation does not automatically mean the licence is void or suspended. Depending on the situation, the licence holder has a few options:
- Regularising the shortfall by paying customs duty along with interest, in proportion to the unfulfilled portion of the export obligation.
- Applying for an EPCG export obligation extension (requesting additional time), in accordance with the Foreign Trade Policy and subject to DGFT approval and applicable conditions.
- Seeking relaxation from DGFT's committee in eligible cases.
There's also the question of bond and bank guarantee exposure: since EPCG licences are backed by a bond and, depending on the case, a bank guarantee, an unresolved default can affect the release of that bond and bank guarantee.
Illustration 3 — Partial shortfall and extension
Assume the export obligation is ₹166.4. The licence holder completed the Block 1 target, but in Block 2 only 30% of the required exports were completed. They availed a 2-year extension after paying the prescribed extension fee, tried to cover the balance EO, and again fell short — leaving 10% balance EO.
| Sl No | Particulars | % | Amount (₹) |
|---|---|---|---|
| 1 | Export Obligation | – | 166.4 |
| 2 | 1st Block (1–4 years) | 50% | 83.2 |
| 3 | 2nd Block (5–6 years) | 30% | 50.0 |
| 4 | Balance EO | -20% | -33.2 |
| 5 | Extension (2 years) | 10% | 16.6 |
| 6 | Final Balance EO after Extension | 10% | 16.6 |
Illustration 4 — Regularisation payment on the balance EO
With an unfulfilled EO of 10% and a DSV of ₹27.735, the balance amount works out to ₹2.7735. Interest is charged at 15% per annum, over 8 total years (6 years of blocks plus a 2-year extension) — a cumulative 120% on the DSV portion. This gives the final amount payable to DGFT before the bond and bank guarantee can be released by Customs.
| Sl No | Particulars | % | Amount (₹) |
|---|---|---|---|
| 1 | Balance EO | 10% | 16.6 |
| 2 | Actual DSV | – | 27.735 |
| 3 | DSV × Balance EO % | – | 2.7735 |
| 4 | No. of years (6 + 2) | – | 8 |
| 5 | Interest per year | – | 15% |
| 6 | 8-year cumulative percentage | – | 120% |
| 7 | Interest Amount | – | 3.3282 |
| 8 | Total Payable | – | 6.1017 |
Closing out the obligation
Once the export obligation is fulfilled as per the prescribed block targets and the overall EO, businesses should complete the EPCG closure and surrender process by applying for the Export Obligation Discharge Certificate (EODC). This formally closes the EPCG licence with DGFT and enables the release of the bond or bank guarantee from Customs.
For a detailed understanding of the documentation and application process, refer to our EODC guide.
