EPCG 'nexus' clause spells constraints

EXIM MATTERS

The fine print in the updated version of the foreign trade policy and procedures reveal many subtle changes and restrictions in the Export Promotion Capital Goods (EPCG) scheme that did not find detailed mention in the commerce minister's speech or in the annual supplement of April 8.

The application form for EPCG license calls for a chartered engineer certificate, explaining in detail the end use/nexus of the machinery sought for import in the pre-production/production/post-production activity of the export products/services.

Later on, however, the EPCG licence holder can plead inability to fulfil export obligation (EO) and ask to fulfil the obligation through export of any other product manufactured by him in any of his units or any of the group companies. He can even ask for clubbing the EPCG licence with any other EPCG licence against which some other product has been exported.

When such a flexibility is given, it is difficult to understand the 'nexus' stipulation in the first place.The EPCG licence holder can now ask for extension of EO up to two years, by paying a composition fee of 2 per cent of the total (not proportionate) duty saved for each year of extension.

In case the EPCG licence holder prefers to take up 10 per cent more of total EO (not unfulfilled) for each year of extension, instead of paying composition fee, he can do so.

He can ask for further EO period extension of 3 years by offering enhanced EO of 50 per cent or further 5 years extension by offering enhanced EO of 100 per cent. For all extensions, he has to give an additional bank guarantee to the extent of duty saved proportionate to enhanced EO.

The wording of this provision is quite confusing. The provisions in relation to clubbing of EPCG licences and re-fixation of export obligation are also worded confusingly. Policy circulars clarifying the provisions through examples should be issued.

The small-scale industries can import capital goods at 5 per cent duty under EPCG scheme with EO of only six times the duty saved but the value of their imports cannot exceed Rs 25 lakh.

The agri exporters get reduced EO of six times the duty saved to be fulfiled in 12 years, but they have to pay 5 per cent duty and also give a bank guarantee of 15 per cent of the duty saved.

Retailers having a minimum area of 1,000 sq m can import under the EPCG scheme but they must fulfil the EO through payments received in free foreign exchange through 'counter sales'.

The scheme for technology upgradation at 5 per cent duty through EPCG scheme is now available only once and minimum import to be made should be at least 10 per cent of the existing investment in plant and machinery.

In most cases, this condition rules out the use of EPCG scheme for merely getting more modern stand alone capital goods to increase efficiency. The EPCG licence holders can get their bonds redeemed if they fulfil 75 per cent of the stipulated EO within half the stipulated period, but they cannot ask for condonation of 5 per cent shortfall in value.

Another restrictive provision is that even after re-export of defective machine imported under EPCG scheme, the licence holder must fulfil the EO by exporting some other goods. Henceforth, the EPCG licence holder will have to file an annual return electronically but this must be done before every April 30, through the website of the Directorate-General of Foreign Trade.

tncr@sify.com