[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)

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 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

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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