[sbinews] What's EPCG scheme? (Economic Times)
- From: Rajendra S Pai <rspai@xxxxxxxxxxxxxxx>
- To: sbinews@xxxxxxxxxxxxx
- Date: Wed, 9 Feb 2005 20:29:06 -0800 (PST)
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What's EPCG scheme?
ET IN THE CLASSROOM
TIMES NEWS NETWORK[ MONDAY, FEBRUARY 02, 2004 01:54:56 AM]
The Export Promotion Capital Goods (EPCG) scheme was one of the
several export-promotion initiatives launched by the government
in the early â90s. The basic purpose of the scheme was to allow
exporters to import machinery and equipment at affordable
prices so that they can produce quality products for the export
market.
The import duty on capital goods â like all other items â was
high during that period, inflating the cost of capital goods
nearly 50%, so the government allowed exporters to import
capital goods at only 25% import duty. For waiver of the
remaining portion of import duty, exporters were supposed to
undertake an âexport obligationâ (a promise to export) which
was worked out on the basis of the duty concession obtained.
Exporters were given eight years to carry out their commitment
to export. Once the âexport obligationâ was fulfilled, the
owner of the capital goods concerned could sell them or
transfer them to another facility. Till the promised export
materialised, the owners of the machinery or equipment were
barred from even moving the goods concerned out of their
manufacturing unit.
Did liberalisation of imports have an impact on EPCG?
Gradual reduction in import duties, particularly in the case of
capital goods, has been rendering EPCG scheme less attractive.
However, till last year, EPCG was preferred by many since the
exemption also included 4% special additional duty of customs
(SAD) which has been abolished now. Textile machinery, for
example, attracted an import duty of only 5% but the 4% SAD
resulted in the duty burden going up to nearly 10%. This led
many textile units to prefer the EPCG, but the scenario may
change now in view of the governmentâs decision to abolish SAD.
The government has been modifying the EPCG scheme over the
years in line with the demands of the domestic industry. The
first change was the introduction of two windows â the first
one attracting 15% duty while the second one attracted 25%.
Those who preferred to pay higher duty under the second window
had a lower export obligation. In â95, the government offered
duty-free imports under the first window while the duty under
the second was 15%. This was the first time duty-free imports
were made available under EPCG.
Since the purpose of the scheme was to allow exporters compete
internationally, it was decided to allow them to buy machinery
at internationally-competitive rates. The pent-up demand for
imported machinery had peaked at this point and the domestic
industryâs initial trouble with competing imports had come to
an end. Thereafter, the government even reduced the import duty
on capital goods under the second window to 10% while the first
remained duty-free. Subsequently, the policy was changed in â00
to merge the two windows into one â import capital goods by
paying 5% and undertake uniform export commitment.
Who were the major beneficiaries of the EPCG?
The manufacturing industries, especially those who had to
import their capital goods, were the main beneficiaries over
the years. The service sector was nowhere in the picture till
last year. Now service industries like hotels can also avail of
EPCG imports and fulfil the export obligation through the
foreign exchange earned by them.
This is a major concession for service providers who were
ignored over the years. Since services now account for nearly
50% of the countryâs GDP, it is fair to allow service providers
to imports goods at internationally-competitive rates.
The attraction of EPCG has, anyway, diminished over the years
and it will be a question of time before the scheme becomes
redundant. Import duties will come down over the years,
especially in the case of capital goods.
It will be curtains for the EPCG scheme once the duty on
capital goods comes down to 5%. Going by the pace at which
India is signing free trade agreements, this possibility seems
nearer. Like other outdated instruments like the cash
compensatory scheme (CCS) for exporters and the quantitative
restrictions (QRs) on imports, the once-popular EPCG will also
exist only on records once the duty reduction materialises over
a period of time.
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