Export Promotion Capital Goods - Average Export Obligation - Correction
The Directorate General of Foreign Trade (DGFT) released a Policy Circular no. 11/2024-25 dated 21st Jan 2025, which provides major export relaxation to those Exporters under the Export Promotion of Capital Goods (EPCG) scheme during the financial year 2023-24. The said circular gives effect to the Average Export Obligation (AEO) Reduction System mentioned under para 5.17(a) of Handbook of Procedures (FTP 2023) for those product categories which saw a steep fall in exports.
Background - How AEO relief works under Para 5.17
As part of the EPCG scheme, there is a requirement to preserve an average export obligation, which is the average of exports of similar products over a period of three years, along with a specific export obligation, which is fixed at six times the duty saved.
Being aware that adverse external economic conditions or sector-specific challenges may affect exports, para 5.17(a) of the HBP allows the DGFT to lower the Average EO value for the year if the total exports of that particular sector or group of products reduce by over 5% in comparison to the immediately preceding financial year.
This relief is made applicable through Policy Circulars that identify the sectors and products impacted and require the Average EO for EPCG authorization to be suitably re-fixed by the DGFT Regional Authorities (RAs).
What Policy Circular 11/2024-25 provides
This Policy Circular, number 11/2024-2025, reviews the performance on exports during the FY ended 2023-2024 as compared to the FY ended 2022.
It has emerged that there are 469 product categories where the decline in export has been over 5% in FY2023-24.
In this regard, the DGFT has instructed all the Regional Authorities that the Annual Average Export Obligation for the holders of authorization under the aforementioned product groups for the FY 2023-24 has to be cut proportionately in sync with the percentage of decline.
Practically, if it is observed from the Annexure of the circular that there is a decline of 12% in the export of a particular group of goods, then the Average EO for FY 2023-24 is reduced by 12% for all eligible EPCG licences within that group.
Which exporters and sectors benefit
The advantage under Policy Circular 11/2024-25 is available to the holders of EPCG who are:
- Have an Average Export Obligation fixed, and.
- Export products pertaining to any of the 469 product groups based on the HS notified through the annexure in the circular.
Various industry associations have also reported that this list comprises a broad spectrum of pharmaceutical, chemical, and other industries that were major manufacturers, whose decline in global demand and subsequent pricing trends influenced the reduction in EPCG-backed exports in FY 2023-24. Average EO for such exporters has been eased substantially to prevent Average EO Shortfall at EPCG Redemption.
How RAs will implement the AEO correction
The EPCG Authorisation must correspond to the Product Groups notified via Product Descriptions and HS Code.
For each eligible licence, Average EO for FY 2023-24 would also require a recalculation based on the percent reduction approved for the applicable product category. This revised Average EO must be authenticated on the EPCG authorisation or amendment page and later updated on the online DGFT system, thereby ensuring that these lower values are taken into account during the issuance of the EODC or EO shortcoming assessment.
The circular further requires RAs to have consideration for the above relaxation in the AEO before making demand notices, or denying applications for the EODC, in such a manner that penal measures are not taken against the exporter under Para 5.17(a) due to the reduction in exports on a sector-wide basis.
Action points for EPCG exporters
So, to make full use of Policy Circular 11/2024-25, it
- Verify if their exported goods are included in one of the listed “469 product groups” referred to in Annexure for FY 2023-24.
- Ensure that their EPCG authorizations are correctly assigned to the corresponding product group according to HS codes and product descriptions in RA records.
- Where there is a lack of or no clarity on the map, the simplified representation is to be submitted to the RA concerned with the details of the EPCG licence and the grounds for the HS code to get the endorsement on the reduced Average EO.
- Use the re-calculated Average EO on the overall compliance management and while preparing the papers for EPCG redemption, and in case of queries regarding the EOs.