[sbinews] What's EPCG scheme? (ET in the Classroom- Economic Times)

  • From: "Rajendra S. Pai" <rs.pai@xxxxxxxxx>
  • To: <sbinews@xxxxxxxxxxxxx>
  • Date: Tue, 17 Feb 2004 10:14:49 +0530

What's EPCG scheme?

The Export Promotion Capital Goods (EPCG) scheme was one of the several
export-promotion initiatives launched by the government in the early '90s.
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 - like all other items - 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 'export obligation' (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 'export obligation' 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 government's 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 - 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 '95, 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

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 industry's 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
'00 to merge the two windows into one - 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 country's 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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