EPCG & AA Scheme
By CA Hunny Munjal
Agenda
Introduction of EPCG Scheme
Validity, operational conditions and conditions for installation of capital Goods under EPCG
Export Obligation, compliances and documentation under EPCG
Introduction of Advance Authorization(‘AA’) Scheme
Pre-import condition under AA Scheme
General provisions relating AA Scheme
Export Promotion Capital Goods (‘EPCG’) Scheme
Key Features
► Zero Customs Duty: Allows import of capital goods at zero customs duty for pre-production, production, and post-production phases.
► IGST and Compensation Cess Exemption: Imports for physical exports are exempt from IGST and Compensation Cess.
► Domestic sourcing allowed: Option to source capital goods domestically under specific provisions.
Mandatory Export Obligation (‘EO’) to be complied
► Specific EO: Equivalent to six times the duties, taxes, and cess saved on capital goods, to be fulfilled within six years
► Average EO : Maintained at average export levels of the preceding three licensing years.
Person can apply for Scheme
► Manufacturer exporters.
► Merchant exporters tied to supporting manufacturers
► Service providers such as hotels, tour operators, and logistics companies
Capital Goods Covered
► Machinery, equipment, and tools.
► Computer systems and software integral to capital goods
► Spares, molds, dies, jigs, fixtures, and refractories
► Catalysts for initial and subsequent charges
► List of items in Appendix 5F which are not allowed.
Validity, operational conditions and conditions for installation of capital Goods
Validity of authorization
► Authorization shall be valid for imports for 24 months from the date of issue
► No Revalidation is allowed under EPCG scheme.
Operational conditions
Conditions for Installation of capital goods
► Actual User Condition: Capital goods must be used by the actual user until the export obligation is met.
► Transfer Restrictions: Goods cannot be transferred for five years from the date of import, even if the EO is fulfilled.
► Submission of the requested details/documents in a timely manner to the tax authorities
► Installation Certificate: Required from an independent Chartered Engineer or Jurisdictional Customs within six months of import. One-time extension with a fee of Rs. 5,000/-.
In case of domestic procurement of capital goods
► Centrally interaction with GST authorities in respect of issues raised and follow-up inquiries
► Jurisdictional and Chartered Engineer's Roles: Verification of installation at the specified premises.
► In case of Movement and Reinstallation of machinery: : Allowed during export obligation period and fresh installation certificate within six months of shifting.
► In case of domestic procurement of capital goods, the supplier has option to classify such transaction as “deemed Export“ under Notification No. 48/2017Central Tax Dated 18-10-2017 and claim refund of GST charged.
► Also, if supplier charges the GST on the invoices, importer can claim refund of GST charged on the invoice under Rule 89 (4B) of CGST Rule
Export Obligation, compliances and documentation
Export obligation and discharge certificate (‘EODC’)
► Equivalent to six times the duties, taxes, and cess saved on capital goods, to be fulfilled within six years
► Further, Block-wise fulfillment of export obligation:
► 50% of export obligation in first 4 years
► Balance in 5th and 6th year
► In case, importer fulfills the 75% of the EO within 4 years, then, there would be waiver of 25% of EO.
► Export Obligation Discharge Certificate (‘EODC’): Post completion of EO, intimation to Regional Authority within three months of block completion
► In case of Domestic procurement: 75% of the EODC is required to be fulfilled i.e., Duty saved * 6 times *75%.
Compliance
► Annual Reporting Requirements:
► Submission by 30th June of each year
► Detailed export/supply statement
Documentation
ARE 1 certificate/Tax invoice for export
Lorry Receipt (LR) or transportation evidence
Financial proof of proceeds transfer
EPCG authorization number on shipping bills/invoices
Names of supporting manufacturer and exporter on export documents, if any
True account of exports/supplies and services rendered
Maintain records for 2 years post-redemption
Bank Guarantee and Bond
There is requirement of Bank guarantee 15% of duty saved, however, there are exceptions for Export customs entitlements like AEO which needs deep dive of facts.
Advance Authorization (‘AA’) Scheme
Background of the scheme
► Facilitates duty-free import of inputs, including fuel, oil, and catalysts, for the production of export goods
► This scheme covers (i) Manufacturer exporters (ii) Merchant exporters in collaboration with supporting manufacturers
► Notification No. 18/2015-Cus dated April 1, 2015 provides the complete code relating to the scheme
► The raw material imported/procured can be used for the manufacture of Goods and further, definition of manufacture provided in the scheme.
Duty Exemptions & Pre-import condition
► Provides exemptions of Basic Custom Duty (‘BCD’),
Additional Customs Duty, Education Cess, Antidumping duty, IGST only upto 30th June 2022. Currently, No exemption provided for IGST.
Allowed imports under Scheme
► AA would indicate name, description and items to be imported and exported/supplied, aggregate CIF value, FOB/FOR value of Exports
► Inputs can be imported with normal wastage allowance
► Various other duties on exemption not allowed -
National Calamity Contingent Duty (NCCD), Education Cess on NCCD, and specific Anti-dumping/Safeguard Duties, particularly for UN projects and EPCG imports.
► Duty free import of mandatory spares (up to 10% CIF value of authorization ) which is required to be exported along resultant product
► Warehouse clearances under valid authorization
Pre-import condition under AA Scheme
Legal background
► Under Advance Authorizations, vide notification No. 79/2017- Customs Dated 13.10.2017, Government introduced "pre-import condition" which meant that goods imported against a specific authorization had to be used to manufacture or production of final goods for export, fulfilling the export obligation of that authorization and basis thereto, exemption w.r.t IGST and compensation cess would be allowed
► The pre-import condition stipulated that raw materials imported under AA had to be physically incorporated into the final products manufactured in India, which were then exported.
► The aforesaid condition was applicable during the period 01st July 2017 to 10th January 2019. Post thereto, this condition has been removed 10th January 2019
Gujarat HC Judgment in Maxim Tubes Company Pvt Ltd Vs. UOI [2019] 102 taxmann.com 387 (Gujarat HC DB)
► The Hon’ble HC deemed the pre-import condition as "ultra vires," meaning it exceeded the legal authority
► Further, it ruled that the pre import condition was arbitrary and ultra virus
Madras HC Judgment in the case of Vedanta Ltd Vs, UOI 2018 (19)
G.S.T.L. 637 (Mad.)
► Took a different stance which upheld the validity of the preimport condition.
► The HC supported the Govt. position on pre-import condition was a legally valid requirement
SC Judgment in UOI Vs. Cosmo Films Ltd [2023] 149 taxmann.com 473 (SC)
► The UOI appealed against Gujarat HC Judgment
► The SC overturned the Gujarat HC ruling, upholding the validity of pre-import condition. Further, it clarified that distinction between the treatment of BCD and IGST, justifying the separate treatment of these levies. Further, they emphasized that the pre-import condition serves a legitimate purpose in preventing misuse of duty exemptions.
► It was clarified that DGFT has the authority to implement the pre import condition.
General provisions relating AA Scheme
Validity & Procedure for issuance of AA
AA License will be valid for 12 Months from the date of issue. Further, for deemed exports: Coterminous with project duration of project execution or 12 months, whichever is longer.
Annual Advance authorization & Export Obligation (EO)
► Available for exporters with a minimum two-year export performance:
► Based on SION or valid ad hoc norms.
Application for AA can be filed in Form ANF 4A to Concerned RA, all the supporting documents are required to uploaded as per appendix 4E
► Exporter is required to provide Bank Guarantee /LUT.
► Further, RA will endorse BG/LUT on reverse of AA
► The Advance authorization will contain the Name & description of items, quantity, CIF value, FOB/FOR value
► CIF value granted up to 300% of previous year’s FOB/FOR exports or Rs. 1 crore, whichever is higher
► Standard EO period depends on the SION
► Defence/aerospace: 24 months.
► Deemed export projects: Coterminous with contract execution or 18 months.
