How to Calculate Duty Saved Under EPCG Scheme?
As you may know, the EPCG program permits the duty-free importation of capital goods/machinery used to manufacture high-quality export items. The government’s EPCG scheme was created for one reason: to boost Indian exports.
The Government of India is providing you with a job by allowing you to import goods tax-free. It’s up to you to boost export sales. An export requirement is that you complete a specific assignment. You will not be given the option to fulfill your export quota under the EPCG program. If an exporter does not meet their export quota, DGFT might penalize them.
Export Obligation of EPCG
The Export Obligation in the EPCG Scheme lasts for a full six years. The only way for the license holder to meet their Export Obligation is to ship products made with the authorized equipment overseas. Alternative products not listed on this EPCG License cannot be exported to satisfy the export quota.
Any direct, third-party, or presumed export can satisfy the requirement. By the 30th of April of each year, the EPCG Authorization holder must submit a hard copy report to DGFT RA detailing how they’ve met their Export Obligation.
Only when EPCG License information is included on a shipping bill may the shipment be used to satisfy an Export Obligation, even if it was paid using an incentive program such as Advance Authorization, DFIA, MEIS, or others.
There are two forms of Export Obligation under the EPCG Scheme:
SEO- Specific Export Obligation
Within six years of the EPCG license’s issuance date, the exporter must meet the Specific export obligation by shipping out an amount of merchandise equivalent to six times the exact duty saved amount.
The Export Obligation in SEO should be implemented in stages:-
First Blocks- The first four years after the license is issued are referred to as the First Block, and it is required that the exporter execute at least 50 percent of the total Export Obligation during this time.
Second Block- The exporter has until the end of the second block, which spans years 5 and 6 from when the license was issued, to fulfill any outstanding Export Obligation.
Suppose the Authorization holder cannot meet the Export Obligation after the expired first block. In that case, he may request an extension by paying 2% of the composing charges on the tax-saved value in proportion to the amount of the obligation that has not been met.
AEO- Average Export Obligation
Every year until we meet the Specific Export Obligation, our AEO turnover must be at least as high as it was in the three fiscal years before license issuance. For this requirement, the DGFT is looking for you to keep up the same level of export success as in the prior fiscal year.
Since boosting exports is a primary motivation behind the EPCG scheme’s implementation, it makes sense that AEO would work to keep the status quo while SEO would seek to boost exports.
Calculating Your Export Duty Under EPCG Scheme
With this example, we can see how to Calculate Duty Saved Under EPCG Scheme:
Let us assume that XYZ Pvt. Ltd. exports “Toothbrushes” and is planning to bring a CNC tufting machine to attach the bristles to the handles. They purchased an EPCG license with a CIF value of around INR 38,000.
The CIF value is INR 29,50,700, and the total asset value is INR 29,80,207. The basic customs duty is INR 2,23,515.50, and the SWS, @10% value, is INR 22,351.60. IGST at 18% value is INR 5,80,693.33, and the duty saved is INR 8,26,560.41.
The calculations above show that they avoided paying INR 8,26,560 in duties to import their fixed assets. This duty-savings value is multiplied by six to determine the required export volume: 8,26,560 times six is 49,59,360 Indian Rupees, and the deadline for meeting this obligation is six years.
Since they requested authorization in FY 2020-21, they need to look at the export turnover of “Toothbrush” in FYs 2019, 2018, and 2017 to determine their AEO. Let’s assume the mean is 1 Cr. Therefore, their annual export obligation is 49,59,360 INR over six years, and they must also maintain a 1 Cr yearly export of toothbrushes over that period.
Extending the EPCG export obligation
If the holder of an Authorization does not meet the Export Obligation during a 6-year grace period, the holder may request an extension of the Export Obligation duration.
Duration of DGFT Request:
The Authorization Holder may submit a RA request to the DGFT 90 days before the end of the Export Obligation term. For an extra Rs. 5,000/-, the RA will grant a request for a 180-day extension.
If you need additional time to complete your exports, the DGFT RA may grant you two one-year extensions, each of which will incur a composition cost of 5% during the first and 10% in the second year of the proportionate duty saved value.
The lowest possible charge for a composition is Rs. 10,000. In the event of a Ban on Export Products, the Export Obligation Period will be automatically Extended.
Paragraph 5.20 of the Foreign Trade Policy and Program for 2015-2020 states that if an export product is banned after a license has been issued, the Export Obligation will be extended for a length of time equivalent to the duration of the ban. The Authorization holder is not obligated to keep up the average level of exports throughout the suspension period.