The annual supplement to the Foreign Trade Policy revamped the Export Promotion Capital Goods (EPCG) scheme, abolishing the 3 per cent EPCG scheme and extending the zero-duty EPCG scheme to all sectors. This useful simplification of the scheme will make investments in new projects, expansions and technological up-gradation cheaper but can have unintended consequences by making investments in Export Oriented Units (EOU) or Special Economic Zones (SEZ) units less attractive.
The revamped zero-duty EPCG scheme gets rid of the restriction that those availing the benefit of Technology Up-gradation Fund Scheme (TUFS) from the Ministry of Textiles cannot claim zero-duty EPCG authorisations.
The normal export obligation will be six times the duty saved to be fulfilled in six years but if capital goods are sourced domestically, the export obligation will be reduced to 90 per cent of the normal export obligation. For units located in Jammu & Kashmir, the export obligation will be 25 per cent of the normal export obligation, the same as that for units located in North East and Sikkim.
The period for import under the scheme will now be 18 months instead of nine months, earlier. Henceforth, services exporters can also claim annual EPCG authorisation.
The new restrictions under the scheme include a bar on import of second-hand capital goods. Export of alternative products as well as export of group companies will not be counted for exports under the revamped scheme. Import of vehicles for hotels, travel agents etc. will not be allowed under the scheme. These restrictions, however, will apply to EPCG authorisations issued after 18.04.2013 and not to EPCG authorisations issued before 18.04.2013. EPCG authorisations will not be issued for import of power generating equipment and the restriction that in the same year, benefits of Status Holder Incentive Scrip (SHIS) and zero-duty EPCG authorisation should not be claimed continues. Longer export obligation period available for EPCG authorisations for Rs 100 crore and above will not be available any more.
The dispensation for import of spares up to 10 per cent of the value of capital goods imported under EPCG scheme and up to 10 per cent of the book value of other imported goods against 50 per cent of normal export obligation continues. A new facility allows spares for imported capital goods exceeding the said limits against 100 per cent of normal export obligation. Strangely, the related Customs exemption notification no. 22/2013 dated 18.04.2013 does not mention this new facility. Also, why spares for capital goods procured from indigenous sources are not being allowed under EPCG scheme is difficult to understand.
Zero-duty EPCG scheme can entice more domestic tariff area (DTA) units to take up export obligation but it removes an important consideration for setting up EOU or SEZ units. Now, the tangible concession that EOU and SEZ units get but DTA unit does not, is the refund of Central Sales Tax besides the facility to import used capital goods at zero duty.
For SEZ units, the other tangible benefit is the income tax exemption. However, the SEZ units cannot get any benefits of reward schemes under Focus Product Scheme, Focus Market Scheme etc.
Thus, the unintended consequence of more duty concessions and duty credit benefits for the DTA units is that more manufacturers may prefer to exit from the EOU and SEZ schemes and fewer may prefer to opt for those schemes.