What is the Average Export Obligation in the EPCG Scheme
To encourage and facilitate exports, governments often introduce various schemes and incentives. One such scheme is the Export Promotion Capital Goods (EPCG) Scheme, which offers benefits to exporters in India. Within this scheme, the concept of the Average Export Obligation holds great significance.
The EPCG Scheme encompasses two distinct types of export obligations, which can be delineated as follows:
Specific Export Obligation, which is equivalent to six times the value of the duty saved.
Average Export Obligation.
Now, let's delve into the concept of Average Export Obligation within the framework of the EPCG Scheme.
What is the Export Promotion Capital Goods (EPCG) Scheme?
The Export Promotion Capital Goods (EPCG) Scheme is designed to promote the import of capital goods, enhancing India's manufacturing competitiveness and facilitating the production of high-quality goods and services.
This scheme permits the importation of capital goods with zero customs duty for pre-production, production, and post-production purposes. Furthermore, capital goods imported under the EPCG Scheme for physical exports were also granted exemptions from IGST and Compensation Cess until March 31, 2020.
Alternatively, exporters have the option to procure capital goods from the domestic market in accordance with the provisions outlined in paragraph 5.07 of the Foreign Trade Policy (FTP). Capital goods, within the context of the EPCG Scheme, encompass:
Capital goods as defined in Chapter 9 of the FTP.
Computer systems and associated software are integral to capital goods.
Spare parts, moulds, dies, jigs, fixtures, tools, and refractories.
Catalysts for initial charge along with one subsequent charge.
The EPCG Scheme extends its coverage to various categories, including manufacturer exporters, with or without supporting manufacturer(s), merchant exporters affiliated with supporting manufacturer(s), and service providers.
What is the Average Export Obligation?
Average Export Obligation refers to the average export performance achieved in the preceding three licensing years for identical or similar products. This average export obligation is determined and established at the time of issuance of the EPCG licence, taking into account the export turnover of the previous three years.
To adhere to the Average Export Obligation, an exporter must meticulously maintain accurate records of the average turnover for similar goods and services over the three preceding financial years, continuing this record-keeping until the specific export obligation is fulfilled.
The primary objective behind the Average Export Obligation is to ensure that the average export performance reaches a specified threshold.
Under this obligation, the Directorate General of Foreign Trade (DGFT) expects exporters to monitor and maintain a record of their export performance for all preceding years diligently.
Computation of Annual Average Export Obligation under EPCG
In accordance with the policy, the Authorization holder must uphold the average export levels attained in the three preceding licensing years for identical or similar products during the entire Export Obligation (EO) period, including any extensions. This average is determined as the arithmetic mean of export performance in the preceding three licensing years for the same and similar products.
Calculation of the annual average export obligation under the EPCG Scheme involves specific guidelines to ensure accuracy and fairness.
When considering EPCG authorizations issued within a given licensing year, it's important to note that any specific Export Obligations undertaken for the same or similar products under EPCG Authorizations in the preceding three years should not be factored into the calculation.
For entities with a track record spanning more than three years, the exports for each of the past three years (even if some years recorded zero exports) are totalled, and the resulting aggregate export value is divided by three. This method ensures that the annual average export obligation is based on a balanced assessment of recent export performance.
On the other hand, if an entity has been in operation for less than three years, the denominator in the calculation mentioned above will be the actual number of years in existence, rather than the standard three-year period. This adjustment accommodates newly established businesses and ensures that the calculation is equitable.
Penalties for Non-Compliance with Export Obligations
When dealing with the Average Export Obligation, there is no leniency granted. Exporters must fulfil the 100% requirement of the average export obligation. In cases where an EPCG licence holder fails to meet the criteria for average export obligation, they are obligated to remit the customs duties along with a 15% annual interest to the customs department.
Alternatively, if an authorization holder successfully meets the average export obligation but falls short of fulfilling the 100% specific export obligation, they will be required to pay the proportional amount of the duty saved, along with an annual interest rate of 15%.
Exemptions from Average Export Obligation under the EPCG Scheme
In the context of the EPCG Scheme, certain categories of goods are exempted from the requirement to maintain an average export obligation. These categories include:
(i) Handicrafts,
(ii) Handlooms,
(iii) Cottage & Tiny sector,
(iv) Agriculture,
(v) Aqua-culture (including Fisheries), Pisciculture,
(vi) Animal husbandry,
vii) Floriculture & Horticulture,
(viii) Poultry,
(ix) Viticulture,
(x) Sericulture,
(xi) Carpets,
(xii) Coir, and
(xiii) Jute.
Summary
The Average Export Obligation is a critical element of the EPCG Scheme in India, aimed at promoting consistent and sustained export performance among eligible exporters. While it imposes certain responsibilities on exporters, compliance is essential to unlock the benefits offered by the scheme.
By maintaining a strong export record and understanding the intricacies of the Average Export Obligation, exporters can leverage this scheme to expand their global reach and contribute to the growth of the Indian economy.