The Government of India, as part of its foreign trade policy, introduced the EPCG Scheme to support manufacturing exports. The EPCG Scheme provides the facility of a license for duty-free import of capital goods. However, exporters and manufacturers who use the EPCG Scheme must fulfil an export obligation.
You must discharge the Export obligation under the EPCG License. The DGFT can penalize the license holder if there is a failure to complete export obligations in the stipulated time.
What is Export Obligation Discharge Certificate?
Export Obligation Discharge Certificate (EODC) is granted by the local office of the Directorate General of Foreign Trade (DGFT) in ANF 5B after applying. Proof of completion of export obligation, such as shipping bill and bill of export, shall be produced to DGFT to close advance license upon completion of export obligation. This Export Obligation Discharge Certificate will be issued to the authorized holder by the regional authority after fulfilling all the advance license formalities1.
Export Obligation under EPCG Scheme
The Export Obligation period under the EPCG Scheme is six years. The export obligation is six times the duty saved on capital goods, which needs to be fulfilled within six years from the date of issue of the EPCG License. Exports made under Advance Authorisation, DFIA, Drawback, or incentive scheme shall be counted on to the fulfilment of ligation.
There are two types of export obligation under the EPCG scheme, as depicted in the picture; we will understand each one by one below –
Average Export Obligation(AEO)
Under AEO, the average turnovers of the same and similar goods in the last three financial years before the license issuance shall be maintained during each financial year till the Specific Export Obligation is satisfied.
Specific Export Obligation (SEO)
The exports must be six times the duty-saved value within six years from the date the EPCG License is issued. The export obligation is completed in parts. 1) Ist part: in the First four years of obtaining the license, the exporter shall complete a minimum of 50% of the Export Obligation. 2) 2nd part: the balance obligation shall be completed in the second part, namely in the 5th and 6th year of obtaining the license.
The EPCG scheme was introduced to enhance exports. The Average Export Obligation ensures that the average level of exports is maintained constant. The Specific Export Obligation must ensure exports increase after installing machinery imported under the EPCG Scheme.
At times, the license holders, under certain circumstances, cannot fulfil that export obligation within that period. In this article, we concentrate on the options available for the exporter in case such commitments are not fulfilled.
Non-fulfillment of Export Obligation under EPCG Scheme
The license holder has six years to meet the export obligation. It means that the completion of the export obligation is watched for six years. On or before 30th April, the license holder must send the export obligation fulfilment report to DGFT. We will see the options for the license holder if they fail to fulfil the Export Obligation in the section below.
If SEO is not fulfilled
- EPCG Scheme: For a grant of extension in an export obligation period of 2 years, only one request shall be made on payment of a composition fee equivalent to 2% of the proportionate duty saved.
- Offsetting To the customs, the Licensee holder shall pay, in case of failure to comply with the export obligation even after the expiration of the extended EO period, the entire customs duties plus 15% annual interest.
- DGFT may condone a shortfall of up to 5% in SEO arising from the duty-saved amount, but AEO should be 100%.
If AEO is not fulfilled
- If, after availing of the EPCG License, the ban on exporting goods is imposed, then EO will automatically be extended for the period of imposition. It is not required that AEO be mandatorily possessed for the time during which an export ban is imposed.
- If the license holder does not comply with AEO requirements within a reasonable period, he shall pay the customs duties with 15% annual interest to the Customs Authority.
- DGFT shall announce public notices listing products that show a drop in world trade of over 5% every year. If the HS code of the export product on which your company depends is on this list, you can apply a reduction of AEO to some extent for that specific calendar year. For this reason, the license holder must request a new Annual Average calculation.
What If AEO is fulfilled but SEO is not?
If the licensee has passed 100% of the AEO but could not pass the SEO, he shall be liable to pay an amount equal to proportionate duty saved together with 15% annual interest.
What If SEO is fulfilled but AEO is not?
The license holder must keep the AEO. If the AEO is unmet, the DGFT does not look at the SEO. They will tell you to pay the total Duty saved value plus Interest.
FAQs
Q1. Due to some delay in furnishing the evidence of discharge of export obligation against advance authorisations issued to us, our name has been put on the denied entities list (DEL) by our jurisdictional JDGFT. Does it mean we cannot carry on our import or export activities?
Ans: No. So long as you have an IEC and it is not suspended/revoked, your import and export activities can go on. When your name is put on the DEL list, you will not get licenses or authorisations or duty credit certificates from the offices of the DGFT, till your name is removed from the DEL list.
Q2. We want to procure certain inputs from an EOU against an ARO issued by invalidating our advance authorisation in accordance with Para 4.20 of FTP. The EOU says that they will charge the BCD and SWS that they reverse. How to disburden those taxes as we will be using the inputs in the manufacture of our finished goods that will be exported?
Ans: If the inputs you procure are goods manufactured by the EOU, then the supplies to you against ARO qualify as deemed exports. You or the EOU can claim deemed exports drawback of the BCD and SWS paid back to the government by the EOU, as allowed under Chapter 7 of the FTP. If the EOU supplies its imported inputs as it is, then no deemed exports benefits will be available as they are not goods manufactured in India. Then, the option available to you is to claim drawback of the BCD and SWS paid as mentioned in Para 4.15 of FTP.
