Foreign Trade Policy Exemption Schemes: A Complete Guide for Exporters

[Pradeep Reddy]

Introduction

Exporting products globally is a lucrative yet challenging endeavor for businesses. To remain competitive in international markets, Indian exporters must minimize production costs while maintaining high-quality standards. Recognizing this need, India’s Foreign Trade Policy (FTP) offers several exemption schemes to ease financial burdens and encourage exports. Among them, two key schemes— Advance Authorization (AA) Scheme and Export Promotion Capital Goods (EPCG) Scheme—enable businesses to import inputs and capital goods duty-free. This article explores these schemes in detail, highlighting their benefits, compliance requirements, and strategic importance for exporters.

1. Export Promotion Capital Goods (EPCG) Scheme

Overview

The EPCG Scheme facilitates the duty-free import of capital goods, such as machinery and equipment, required for export production. This scheme helps businesses modernize their production processes by reducing capital costs, ultimately boosting export performance.

Key Features

• Duty-Free Import: Capital goods, including machinery and equipment, can be imported at zero customs duty.
• Eligibility: Available to manufacturers and service provider exporters, including those with supporting manufacturers.
• Validity: The authorization is valid for 24 months from the date of issuance.
• Export Obligation (EO): Exporters must achieve six times the customs duty saved within six years.

Export Obligation Fulfillment

• Specific Export Obligation (SEO): The export value must be six times the duty saved.
• Annual Export Obligation (AEO): The total export performance over six years must meet this requirement.
• EO Fulfillment Timeline:
  • 50% within the first four years
  • Remaining 50% within the fifth and sixth years

Conditions and Compliance

• Actual User Condition: Imported capital goods cannot be sold or transferred.
• Nexus Requirement: The goods must be used specifically for the approved export activity.
• Penalty for Non-Compliance: If EO is not met, exporters must repay the duty exemption with 15% annual interest.
• Early Fulfillment Incentive: If 75% of the SEO and 100% of the AEO are met in half the stipulated period, the remaining obligation is waived.
• Extension Options: The EO period may be extended under specific conditions.

Illustration

Exporter	Pre-EPCG Exports	Customs Duty Exemption	EO Requirement (6x Duty Saved)	Minimum Export in 6 Years
ABC Ltd	₹2 crores/year	₹1 crore	₹6 crores	₹18 crores (₹2×6 + ₹1×6)

2. Advance Authorization (AA) Scheme

Overview

The Advance Authorization Scheme allows duty-free import of inputs incorporated into exported products. This significantly lowers production costs, enhancing global competitiveness for Indian exporters.

Key Features

• Exemptions: Importers are exempted from Basic Customs Duty (BCD), IGST, and Compensation Cess.
• Eligibility: Available to manufacturer and merchant exporters with supporting manufacturers.
• Input-Output Norms: The authorization is granted based on standard input-output norms ensuring correct utilization.
• Minimum Value Addition (VA): Generally 15%, but 25-50% for sectors like spices and tea.
• Export Obligation Period: 18 months from the date of import.

Special Provisions

• Mandatory Spares: Up to 10% of the CIF value of raw materials can be imported duty-free if exported with the final product.
• Authorization Scope:
  • Physical export, including SEZ supplies
  • Deemed Exports under FTP
  • Stores supplied on board foreign-going vessels/aircraft
• Obligation Compliance: Exporters must furnish a Bank Guarantee (BG) or Legal Undertaking (LUT) to ensure adherence.

Illustration

Importer	Raw Material Required	Standard Input-Output Ratio	Import Quantity	Export Obligation (115% of Input Value)	EO Deadline
XYZ Ltd	₹2 crores	100:95	₹2.10 crores	₹2.415 crores	18 months

Conclusion

Exemption schemes like EPCG and Advance Authorization play a pivotal role in India's export growth strategy. While these schemes provide significant cost advantages, exporters must strictly adhere to value addition norms, export obligations, and compliance requirements to maximize benefits. Understanding these schemes can empower exporters to reduce production costs, enhance competitiveness, and expand their global footprint. Are you leveraging these benefits effectively? Let us know your thoughts in the comments!

For further reading on Foreign Trade Policy and related schemes, explore our detailed guides on export incentives and compliance best practices.