The Export Promotion Capital Goods (EPCG) Scheme plays a pivotal role in boosting India’s export capabilities. A crucial aspect of this scheme is the Export Obligation, which entails certain commitments that an EPCG authorisation holder must meet.
Export obligations are integral to enjoying the benefits of the scheme and contributing to the country’s export growth. In this comprehensive guide, we’ll get into the intricacies of calculating and maintaining the Average Export Obligation under the EPCG Scheme.
We’ll explore the different types of export obligations, provide a step-by-step guide on how to calculate the Average Export Obligation, and offer practical insights on maintaining compliance.
Additionally, we’ll illustrate the concepts with a real-world example and case study to provide a complete understanding of this vital aspect of the EPCG Scheme. Let’s get started!
Export Obligation is a fundamental requirement for EPCG authorisation holders. It refers to the commitment an importer makes to the Directorate General of Foreign Trade (DGFT) to export a specified value of goods or services, which is related to the imported capital goods.
The primary objective of this obligation is to ensure that the imported capital goods contribute to the export-oriented growth of the Indian economy.
Export Obligations come in various forms under the EPCG Scheme, each tailored to different circumstances and objectives, making it vital for participants to choose the most appropriate obligation type.
The three primary categories of export obligations are:
This is the most common and versatile form of export obligation. It requires participants to maintain a certain average level of exports over a specified period, typically six years from the date of the EPCG authorisation.
The flexibility of the Average Export Obligation allows businesses to distribute their export targets across multiple years, offering room for adjustments to align with market fluctuations and business strategies.
In contrast to the Average Export Obligation, the Specific Export Obligation sets a fixed value that must be achieved within a stipulated time frame.
This type is particularly suitable for businesses with a clear and immediate export goal. Meeting a fixed export target within a defined period ensures a focused approach and timely fulfilment of the obligation.
The NFE Obligation stands out for its unique approach, connecting export obligations to foreign exchange earnings and expenses. Participants have to uphold a specific level of Net Foreign Exchange earnings. This calculation involves subtracting the costs of imported and indigenous inputs from the foreign exchange earnings generated through exports.
This obligation is advantageous for businesses aiming to optimise their foreign exchange management while adhering to their EPCG commitments.
These various types of export obligations provide EPCG authorisation holders with the flexibility to choose the most suitable approach according to their business objectives, market conditions, and export strategies.
Each type of obligation comes with its own set of intricacies and challenges, and understanding them is crucial for successful compliance and continued benefit from the EPCG Scheme.
The main difference between these obligations lies in how they are quantified and over what time frame they need to be fulfilled.
Average Export Obligation is calculated as an average value over several years, Specific Export Obligation is a fixed value to be achieved, and NFE Obligation is linked to the earnings and expenses in foreign exchange.
Calculating the Average Export Obligation under the EPCG Scheme involves several steps. The Average Export Obligation is determined as a percentage of the total duty saved on the imported capital goods. Here’s a step-by-step guide to the calculation:
To calculate the Average Export Obligation, you must first establish the total duty saved on the imported capital goods. This is calculated using the following formula:
Total Duty Saved = (Basic Customs Duty Rate + Integrated Goods and Services Tax (IGST) Rate) x Capital Goods’ CIF Value
The export obligation percentage is specified in the EPCG authorisation issued by DGFT. This percentage determines the proportion of the total duty saved that you need to export.
Next, you must calculate the annual export obligations. This is done by dividing the Total Duty Saved by the export obligation percentage, using the following formula:
Annual Export Obligation = Total Duty Saved / Export Obligation Percentage
This calculation provides you with the amount that needs to be exported each year to meet your EPCG Scheme obligations.
The Average Export Obligation is computed as the sum of the annual export obligations divided by the number of years specified in the EPCG authorisation. It’s crucial to meet this Average Export Obligation at the end of each year.
Average Export Obligation = (Annual Export Obligations Year 1 + Year 2 + Year 3 + Year 4 + Year 5 + Year 6) / 6
To illustrate the concepts further, let’s consider a case.
Assume there’s a company: XYZ Ltd.
XYZ Ltd. holds an EPCG authorisation and imported capital goods with a:
Therefore, their Annual Export Obligation is calculated as follows:
Annual Export Obligation = Total Duty Saved / Export Obligation Percentage
Annual Export Obligation = 5,00,000 / 120% = 4,16,667 (approx.)
This means that XYZ Ltd. must export products or services equivalent to INR 4,16,667 each year to meet its EPCG Scheme obligations. The Average Export Obligation over the specified period (usually six years) will be the sum of the annual obligations divided by six.
Ensuring they meet this Average Export Obligation will allow XYZ Ltd. to continue benefiting from the EPCG Scheme, promoting their export capabilities and contributing to India’s export growth.
All clear right? Initially all this might sound quite technical but gradually you’ll get the hang of it, don’t worry.