Don't dump EPCG scheme for now

Sections of the media have reported that the Export Promotion Capital Goods (EPCG) scheme might be abolished when the Goods and Services Tax (GST) laws take effect.  Normally, I wouldn’t give importance to such reports. However, the commerce ministry did recently take up this issue for discussion at senior levels. It was based on a study on the impact of imports under the EPCG scheme on India’s export and its capital goods sector, by the Centre for WTO Studies in August 2015.

The EPCG scheme allows import of capital goods, including spares for pre-production, production and post-production, at zero duty. This is subject to an export obligation of six times the duty saved, to be fulfiled in six years. The scheme was introduced in 1990, when the import duty rates on capital goods were very high. Over time, the duty rates have come down and the scheme has evolved, gaining in popularity. At present, the basic duty rates on most capital goods is 7.5 per cent, bringing the aggregate duty rates to 26.4283 per cent. Of this, 18.3 per cent can be taken as Cenvat Credit. A GST of 18 per cent will bring the aggregate import duty to 26.85 per cent, with Input Tax Credit available for 19.35 per cent.

The scheme is very attractive because the duty saving of 26.43 per cent on imported capital goods is substantial whenever exporters set up new projects or expand their capacities or go for technological upgradation. Even on locally procured goods, they save the excise duty of 12.5 per cent. Without the scheme, they will have to find more resources to fund the projects, their capital costs will go up and to that extent, their competitiveness will take a hit.

The domestic capital goods industry has always been a bit wary of the EPCG scheme, for making imports cheaper. In response to its representations, used capital goods and some relating to electricity generation and transmission are not allowed now under the scheme. Also, a specific provision has been made to allow EPCG authorisation holders to procure their capital goods from indigenous sources. The local suppliers may import their inputs duty-free and their supplies to EPCG authorisation holders earn deemed export benefits. The scheme also incentivises domestic sourcing of capital goods by reducing the export obligation to 4.5 times the duty saved.

Based on a proposition that the GST regime should not allow any upfront exemption that will break a seamless flow of credit, an option being considered is to levy full duty at the time of import. And, to let the capital goods importer rebate himself of the GST portion through Input Tax Credit and get the rebate of basic customs duty through a scheme similar to the present post-export EPCG scheme.

The finance ministry would prefer to collect all duties and grant the refund after exports are effected, rather than grant upfront exemption. The latter would entail following up on whether an export obligation is fulfiled. Such a scheme might be convenient for the bureaucracy but increase the fund requirement of exporters significantly. And, y dent their ability to build new capacities or upgrade their production facilities. So, it would be unwise to abolish the EPCG scheme when private investment in the economy is weak, export revival is beginning and the rupee is overvalued. The scheme must continue its upfront exemption.

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