Need to clarify export obligations

EXIM MATTERS

The Director General of Foreign Trade (DGFT) has made a change in the Export Promotion Capital Goods (EPCG) scheme by way of explanatory note to Para 5.7.4 of the Handbook of Procedures (HB).

Under the EPCG scheme, capital goods can be imported at 5 per cent duty against export obligation of eight times the duty saved to be fulfilled in eight years, with certain deviations regarding the quantum and period of export obligation in certain cases. However, the export obligation must be above the previous three annual average exports, except for some sectors.

Exporters were complaining that the scheme penalises better export performance because the more they export, the more annual average exports they have to maintain. The commerce minister seemed to understand this problem and had said that wherever more than one concurrent EPCG authorisation has been issued, the fresh EPCG licence would build upon the last required average export obligation only, notwithstanding the actual achievements of the previous year. Whatever this meant, the actual text of the related provisions were as clumsily worded to be given any effect.

The latest DGFT Circular (no. 28/2007 dated 22.01.2008) says that if, say, three EPCG licences are issued in 2007-08 with previous three years' annual average exports of Rs 20 crore, and duty saved happen to be Rs 1 crore, Rs 1.5 crore and Rs 2 crore, besides the requirement of maintaining annual average, the "additional export obligation" against the first licence will be Rs 8 crore, the "previous additional export obligation" against the second licence will be Rs 12 crore and for the third licence "previous additional export obligation will be Rs 20 crore plus "additional export obligation" of Rs 16 crore". It appears that the circular is not correctly worded and that in respect of the second licence, the correct position would be to impose "previous additional export obligation" of Rs 8 crore plus "additional export obligation" of Rs 12 crore.

The circular says that fulfilment of "additional exports obligation" against the first licence shall also subsume "previous export obligation" of the second and subsequent licences to that extent. For example, if the licence holder fulfils an average export of Rs 20 crore annually and additional export obligation of Rs 8 crore, it will subsume the "previous additional export obligation" imposed on the second and subsequent licences to the extent of Rs 8 crore. The "previous export obligation" on the second licence shall stand fulfilled and "previous export obligation" on the third licence shall stand reduced to Rs 12 crore.

It still amounts to the earlier position that exports against a shipping bill could either be counted for maintaining annual average or for discharge of export obligation against any one EPCG licence. However, the circular says that after redemption of an EPCG licence, the exports made against such licences shall be added to arrive at the average of the preceding three licensing years. This provision might bring in some relief.

Para 5.7.4 of HB indicates that the explanatory note will apply for all previous EPCG licences, which have not been redeemed. The DGFT should clarify the procedures to re-fix the additional export obligation and annual average exports for unredeemed licences already issued.

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