How Does the EPCG Scheme Work? A Detailed Guide

For any manufacturer, the cost of machinery is often the biggest barrier to scaling up. Whether you are importing a CNC machine from Germany or a textile loom from China, the Customs Duty (Basic + Social Welfare Surcharge) can add 25% to 30% to your capital cost.

The Export Promotion Capital Goods (EPCG) Scheme is the government’s answer to this problem. It allows you to import capital goods at zero customs duty.

However, zero duty is not as smooth as it sounds. It comes with a conditional promise known as the EPCG export obligation. If you fail to meet this, you face heavy penalties with interest.

This guide covers all you need to know about the EPCG scheme’s application process and the strategy to close your EPCG licence without legal complexities.

The EPCG Scheme is a duty exemption scheme administered by the DGFT (Directorate General of Foreign Trade). It allows the import of capital goods (machinery) for pre-production, production, and post-production at 0% customs duty.

Who is eligible?

• Manufacturer Exporters (with or without a factory).
• Merchant Exporters (tied to a supporting manufacturer).
• Service Providers (Hotels, Logistics, etc.).

Under GST, you can also procure capital goods domestically using an EPCG Authorisation. This gives you a Deemed Export benefit, which we will discuss below.

This is the most important part of the scheme. The DGFT EPCG rules mandate two types of obligations that you must fulfil simultaneously.

This is the “price” you pay for the duty saved.

• Formula: 6 times the Duty Saved amount.
• Timeline: To be fulfilled within 6 years from the date of license issuance.

This ensures you don’t just “replace” your old exports with new ones.

• Formula: Average turnover of the preceding 3 financial years for the same and similar products.
• Rule: You must maintain this average every year in addition to the specific EO.

Here’s an example of how to calculate EPCG Export Obligation.

Yes, and it is often a smarter strategic move.

If you buy the machine from an Indian manufacturer instead of importing it, the Specific Export Obligation is reduced by 25%.

• Revised Formula: 4.5 times the Duty Saved (instead of 6 times).

This promotes “Make in India” and lowers your export burden significantly.

The EPCG application process is entirely online under the DGFT EPCG module.

• Prerequisites: You need a valid IEC (Import Export Code) and RCMC (Registration Cum Membership Certificate).
• Form ANF 5A: Login to the DGFT portal and file the application form ANF 5A.
• Nexus Declaration: You must submit a “Nexus Certificate” from an Independent Chartered Engineer certifying that the machine you are importing is capable of manufacturing the export product.
• Issuance: Once approved, the EPCG licence (Authorisation) is issued digitally. You must register this with Customs (Port of Registration) before the goods arrive.

You cannot wait until the 6th year to start exporting. The EPCG obligation must be fulfilled in blocks to ensure consistent performance.

NOTE: If you fail to meet the 50% target by the end of the 4th year, you may have to pay the proportionate duty with interest to extend the block period.

Once you have fulfilled your export targets, the final step is obtaining the EPCG certificate of discharge, legally known as the Export Obligation Discharge Certificate (EODC).

The Process:

• ANF 5B: Submit the redemption application form ANF 5B on the DGFT portal.
• Proof of Export: Link your Shipping Bills and e-BRC (Bank Realisation Certificate) to show that payment has been received in foreign currency.
• Installation Certificate: Submit proof that the machine was installed at your factory within 6 months of import.
• EODC Issuance: The Regional Authority (DGFT) will audit your file and issue the EODC.
• Bond Cancellation: Take this EODC to Customs to cancel the Bond/Bank Guarantee you executed at the time of import.

Managing the 6-year lifecycle of an EPCG licence requires diligent tracking. A single missed installation certificate or a shortfall in “Block 1” can lead to demand notices.

DGFT Guru assists you with:

• Feasibility Analysis: We calculate your exact epcg export obligation before you apply.
• Application Filing: Error-free filing of ANF 5A with correct ITC(HS) codes.
• EODC Closure: We handle the complex redemption process to get your EPCG certificate (EODC) quickly.

The EPCG Scheme is a powerful leverage tool for capital-intensive businesses. However, the complexity lies in maintaining the Average Export Obligation year after year. Many exporters default because they forget that a drop in global demand doesn’t automatically excuse them from their “Average” commitment.

Before filing your EPCG application, calculate your export projections conservatively. A saved duty of ₹25 Lakhs is not worth a penalty of ₹40 Lakhs later.

Que: Can I sell the machine imported under EPCG?

Ans: No. The capital goods imported under EPCG cannot be sold or transferred for a period of 10 years from the date of import. They must remain installed at your factory premises.

Que: What happens if I fail to fulfil the export obligation?

Ans: If you fail to fulfil the epcg obligation, you must pay the Customs Duty saved (proportionate to the shortfall) along with 15% annual interest to the Customs department.

Que: Can I extend the export obligation period?

Ans: Yes. If you cannot meet the target in 6 years, you can request an extension. The DGFT EPCG policy allows for extensions subject to the payment of a “Composition Fee” (penalty).

Que: Is EPCG valid for service providers?

Ans: Yes. Service providers like Hotels, Hospitals, and Logistics firms can use EPCG to import equipment. Their obligation is calculated based on the foreign exchange earned from services rendered.

Que: What is the Amnesty Scheme for EPCG?

Ans: The government occasionally announces Amnesty Schemes for exporters who have defaulted on their obligations. This allows them to close old cases by paying the duty without the heavy interest burden (capped amount). Check with DGFT Guru for the latest status on this.