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It’s an egg-chicken classic. No doubt a government should do all it can to encourage exports. But should it incentivise an exporter only after it has managed to export or should it hand-hold an exporter through the process of exporting? What if even after the necessary hand-holding, a prospective exporter fails to export what it had promised it will manage to do? On the other hand, if we lack the technology to compete in the global market in the first place, what’s the use of providing incentives after exports since anyway they are not going to happen because of our inferiority?
These are some of the existential issues that always seem to surround one of India’s flagship export promotion schemes – Export Promotion Capital Goods (EPCG) scheme. Simply put, it is a scheme where the government is ready to waive off customs duty for an importer of capital goods on the condition that he/she will meet a government set ‘export obligation’ (EO) within a pre-set timeframe. While this sounds more than fair and logical, implementation on the ground is an altogether different story.
Firstly, it’s one thing availing the benefits while importing capital goods, but an altogether different thing meeting the EO within the stipulated time frame. While the government has enough penal measures in place and one has to pay 18% interest on the duty saved in case one fails to meet the EO, the rate has been found to be lower than the cost of working capital for many firms, leading to numerous cases of intentional defaults. Secondly, after EOs were found to be too ambitious, the government has been relaxing them for companies in specific sectors/geographies etc. In fact, this has actually reached a stage where the actual EO comes down to just 25% of the normal EO, thereby almost defeating the very objective of the scheme, i.e., promote exports.
Further, in last year’s annual supplement to the FTP, a new post-export EPCG scheme was introduced that allows for getting the customs duty back in terms of duty credit scrip by meeting just 85% of the normal EO, provided full customs duty was paid at the time of importing capital goods. While one cannot really find any fault in this new scheme when seen on a standalone basis, it definitely blurs the difference between a pre-export and post-export scheme, thereby putting a big question mark over the government’s strategy for such schemes. Further, there is still lot of ambiguity when it comes to arriving at normal EO – should it be calculated as per the 3% or zero duty EPCG scheme or whether the exporter has the option to ask for normal EO calculation as per one of those schemes remains unclear to many. Lastly, just how difficult monitoring EPCG is can be judged from the fact that as per the scheme, the EO of a unit is over and above the average exports of that particular unit in the three years that precede the year in which EPCG scheme was availed – if this is not a monitoring nightmare, nothing is!
However, despite many such major issues, EPCG is one of the most popular schemes among Indian exporters. For, not only does it reduce capital outlay thereby making foray into a particular business that much easier, but it also makes Indian exporters that much more competitive in the global arena by giving easier access to the best of technologies. Even the critics of EPCG concede that it has indeed played an important role in increasing India’s exports, particularly in recent years. So, all that needs to be done now is to streamline the processes involved, simplify monitoring and not tinker with the EO beyond what is extremely important.
EPCG is a good pre-export mechanism and should be retained in the upcoming Foreign Trade Policy (FTP). However, there are several areas in EPCG which need to be streamlined. For example, there needs to be much more clarity in aspects like average export obligation, exchange rate, redemption, consolidation etc. I would also like to see more clarity when it comes to the disconnect between EPCG scheme and Status Holder Incentive Scheme (SHIS). As per the FTP, if in one particular financial year, the zero percent EPCG scheme is availed, SHIS cannot be obtained. The intention seems to ensure that on same exports, both the pre-export EPCG and post-export SHIS should not be claimed. However, customs notifications and interpretations, as of now, have not taken a view as to why SHIS cannot be obtained, if EPCG is also obtained. This should be clarified lucidly and the ambiguity done away with.
Although there is one school of thought that believes incentives should only be provided post-exports and not pre-exports, there already are several schemes like SHIS and SFIS that belong to the former category and hence, I strongly believe that EPCG should be retained as a pre-export scheme.
While reducing customs duty on the import of capital goods is theoretically a much better mechanism to access superior technology and boost exports, such a step would lead to several complications. Firstly, the reduced duties will be applicable not only to importers who would be exporting goods in the future, but also to those importers catering to the domestic market. This would defeat the primary motive of EPCG, which is to enable higher exports. Secondly, it would be a death knell to domestic capital goods manufacturers because the market is very competitive and reduction in customs duty would give an unfair edge to imported goods. Moreover, customs duty cut for capital goods would also have to be extended to components and spare parts of capital goods, else it would lead to inverted duty structure, which is contrary to the stated policy of the Indian government. There’s also a technical issue. The reduction of duty is a prerogative of the Ministry of Finance and hence cannot be reduced by the Ministry of Commerce and Industry, which announces the FTP. In fact, many a time, even after certain benefits are announced under the FTP, the effects are taken back by way of notifications under the Customs Act, which are issued by the Ministry of Finance.
Even though there have been several instances of EPCG being misused, it is still the most effective mechanism to support exporters in relation to their need for capital goods. What we need to work on is make the process of administration more stringent.
To the best of my knowledge and awareness, there has not been any serious misuse of EPCG scheme. Although there have been instances of exporters struggling to meet export obligations (EOs) and some issues in the past about the acceptability of exports or foreign exchange earned towards discharge of export obligation or compliance, EPCG continues to be a very popular scheme amongst exporters. India’s Foreign Trade Policy mandates extending duty/tax benefits on goods, including capital goods, which are exported. To that end, EPCG meets the purpose as it extends complete exemption from customs duty. Since the FTP allows duty/tax optimisation by using the same exports against more than one scheme, it’s only fair that we continue with EPCG.
While I agree it is much simple to monitor a post-export benefit scheme as compared to a pre-export benefit scheme like EPCG, one has to bear in mind that not all exporters are inclined to go for post-export benefits as they may prefer upfront exemption rather than a subsequent refund or scrip. At the same time, even EPCG has a post-export variant, which has not been used much to the best of my knowledge. I would also like to add that post-export schemes are attractive generally for their transferability feature. But, even they have issues.
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