A Pune engineering company imports a ₹4 crore CNC machining centre under an EPCG authorisation. Customs duty saved: about ₹1.1 crore. The finance head books the asset at landed cost, files the bill of entry, and moves on. Nobody in the company writes down what the licence actually committed them to. Four years later a DGFT letter arrives asking for the first-block export obligation discharge certificate. The company has exported, but only about ₹2 crore worth — and the number they were supposed to hit in that block was not ₹2 crore. It was ₹3.3 crore. They now owe the saved duty back, plus 15% simple interest running from the date of import, on a machine they have already half-depreciated.
The duty was not waived. It was deferred against a promise. Almost every EPCG failure traces back to a company that never wrote the promise down in a form its own operations team could act on.
What the law actually requires
The Export Promotion Capital Goods scheme sits in Chapter 5 of the Foreign Trade Policy 2023, read with Chapter 5 of the Handbook of Procedures 2023, issued under the Foreign Trade (Development and Regulation) Act 1992. Customs exemption flows through the corresponding customs notification; the licence itself is issued by the Directorate General of Foreign Trade through its regional authorities on the DGFT portal.
What you get
An EPCG authorisation permits import of capital goods at zero customs duty — covering basic customs duty and, under the current policy, exemption from IGST and compensation cess on imports under the scheme, subject to the exemption being in force for the relevant period. Capital goods covered include machinery, equipment, and tools for pre-production, production, and post-production, including second-hand capital goods in specified circumstances, spares, moulds, dies, jigs, fixtures, and catalysts for one initial charge.
What you owe — and the number founders get wrong
Here is the correction that matters most, because the scheme is routinely misdescribed:
The export obligation is six times the duties, taxes and cess actually saved — not six times the CIF value of the capital goods.
That distinction is the difference between a manageable commitment and a catastrophic one. On a machine with a CIF value of ₹4 crore and duty saved of ₹1.1 crore, the specific export obligation is roughly ₹6.6 crore, not ₹24 crore. Companies that mis-state this internally either refuse a viable scheme out of unwarranted fear, or — more dangerously — under-provision because they never computed the real figure at all.
The specific EO must be fulfilled in six years reckoned from the date of issue of the authorisation, and it is measured in two blocks:
- Block I — years 1 to 4: 50% of the specific EO
- Block II — years 5 to 6: the balance 50%
Missing Block I is a default in its own right. You do not get to run a weak first four years and make it up with a strong sixth.
The second obligation nobody budgets for
Alongside the specific EO, the authorisation holder must maintain the Average Export Obligation — the average level of exports of the same and similar products achieved in the preceding three licensing years. This runs concurrently, for the full EO period, and it is in addition to the specific EO.
The logic is that the scheme is meant to fund incremental export capacity. In practice it catches companies that already export well: a firm averaging ₹10 crore of exports must keep clearing ₹10 crore and layer the specific EO on top. A company whose exports fall back to the old average has discharged nothing, however large the absolute number looks.
Reductions and concessions
- Indigenous sourcing: where capital goods are procured from a domestic manufacturer, the specific EO is 25% lower — i.e. 4.5 times duty saved instead of 6 times.
- Export proceeds realised in Indian rupees, where permitted under FTP 2023, count towards EO fulfilment.
- Reduced EO and extended periods apply for specified categories, including certain green technology products, units in the North East and Jammu & Kashmir, and specified sectors — check the current Chapter 5 provisions rather than assuming, because these change with each policy amendment.
The installation certificate
Within six months from the date of completion of import, the authorisation holder must submit an installation certificate confirming the capital goods have been installed at the factory or premises specified in the authorisation — issued by an independent chartered engineer or by the jurisdictional customs authority. Extensions are possible on application to the regional authority, but the obligation is easy to miss because it falls due long before anyone is thinking about exports.
The address matters. Capital goods must be installed at the premises named in the authorisation. Shifting the machine to another plant without an amendment is a breach even where every export number is met.
Practical implications
What a default actually costs. On failure to fulfil the export obligation, the authorisation holder must pay the proportionate duties, taxes and cess saved, together with interest at 15% per annum computed from the date of import. There is no cap tied to the value of the goods.
Work the arithmetic on the opening example. Duty saved ₹1.1 crore. Shortfall of half the EO means roughly ₹55 lakh of duty becomes payable. Interest at 15% simple over five years adds about ₹41 lakh. Total exposure around ₹96 lakh on a ₹4 crore machine — and that is before any penalty under the FT(D&R) Act 1992 for contravention, or the risk of the DGFT placing the firm in the Denied Entity List, which blocks future authorisations across every scheme, not just EPCG.
Proportionality is the one mercy in the design: if you discharge 70% of the EO, you pay duty on 30%, not on everything. This is why a company heading for a shortfall should still export as hard as it can right up to the last day of the EO period, rather than concluding the licence is lost and stopping.
Redemption is not automatic. After completing the EO, the holder must apply to the regional authority for redemption — an Export Obligation Discharge Certificate — supported by shipping bills, e-BRC or bank realisation evidence, the installation certificate, and a chartered accountant's certificate of exports made. Until redemption is granted, the bond and bank guarantee executed at import remain live, and the bank guarantee continues to consume the company's credit limits with its banker. A surprising number of firms complete their exports and then leave the file open for years, paying guarantee commission on an obligation they have already discharged.
Annual reporting. The holder must submit an annual report on EO fulfilment to the regional authority by 30 April each year for the preceding licensing year. Non-submission is itself a contravention and is the trigger for most DGFT show-cause notices — the department usually finds you because you stopped reporting, not because it audited your exports.
Where this collides with Companies Act reporting. The EPCG bond and bank guarantee are contingent liabilities. Under Schedule III to the Companies Act 2013, contingent liabilities and commitments must be disclosed in the notes to the financial statements. An unfulfilled export obligation with a quantifiable duty-plus-interest exposure belongs there — and the statutory auditor under Section 143 is expected to look for it.
This surfaces at the worst possible moment during diligence. A buyer or investor reviewing the data room finds an EPCG authorisation with three years left and no EO tracking, and either discounts the valuation or demands an indemnity. A clean EODC file is a genuine asset in a transaction.
MCA21 v3 angle. v3's linked filing architecture means AOC-4 financial data, including the contingent liability disclosures, is machine-readable and comparable year on year. A contingent liability that appears in one year's notes and silently vanishes the next — without a corresponding redemption — is exactly the kind of inconsistency the system surfaces. If you disclose the EPCG exposure, disclose it consistently until the EODC is in hand.
Step-by-step: what to do
- Compute the real specific EO on the day the authorisation issues. Take the duties, taxes and cess saved from the authorisation itself — not the CIF value — and multiply by 6 (or 4.5 for indigenously sourced goods). Write that rupee figure at the top of a tracker.
- Establish the Average Export Obligation baseline in the same sitting. Pull export turnover of the same and similar products for the three preceding licensing years, average it, and record it as a separate annual floor. The specific EO and the AEO are two numbers, not one.
- Split the specific EO into the two blocks and put the dates in the compliance calendar. 50% by the end of year 4, balance by the end of year 6, both reckoned from the date of issue of the authorisation.
- File the installation certificate within six months of completing the import. Engage the chartered engineer before the machine is commissioned, not after. If the timeline will slip, apply to the regional authority for extension before the six months expire.
- Tag every export invoice against the authorisation from the first shipment. The shipping bill must carry the EPCG authorisation number and date, and the scheme must be declared correctly at the time of export. A shipment that qualifies commercially but was filed without the EPCG declaration does not count, and retrospective amendment is slow and uncertain.
- File the annual EO report by 30 April, every year, without exception. Even a nil-progress year. Silence is what generates the notice.
- Review shortfall risk at the end of year 3, not year 4. If Block I is tracking below 50%, you have roughly twelve months to close it or to apply for an extension of the EO period under the Handbook of Procedures. Extensions are discretionary and are far easier to obtain before a default than after.
- Apply for redemption immediately on completing the EO, and confirm the bank guarantee has been released. Reconcile with the banker that the limit has actually been restored.
FAQ
Is the export obligation really six times the CIF value of the machine?
No. It is six times the duties, taxes and cess saved, fulfilled over six years. This is the single most common misstatement about the scheme and it swings the commitment by roughly a factor of four on a typical import. Read the figure off the authorisation.
Can third-party exports count towards the obligation?
Yes, subject to the conditions in the Handbook of Procedures — the goods must be manufactured by the authorisation holder using the imported capital goods, and the shipping bill and export documents must carry both the third-party exporter's and the authorisation holder's names, with realisation traceable to the holder. Get the documentation structure right before the first such shipment, not at redemption.
What happens if the company is sold, merged, or the capital goods are transferred?
The export obligation attaches to the authorisation holder and to the capital goods installed at the specified premises. A transfer of the goods, a change of premises, or an amalgamation requires prior permission and amendment of the authorisation by the regional authority. In a share sale the obligation simply travels with the company — which is why an unredeemed EPCG licence must be surfaced in diligence and either indemnified or priced.
Can the six-year export obligation period be extended?
Yes. The Handbook of Procedures provides for extension of the EO period on application to the regional authority, generally on payment of a composition fee, with the block-wise position also capable of extension. It is discretionary and conditional. Apply early — the regional authority takes a very different view of a company that comes forward in year 5 than of one that answers a show-cause notice in year 7.
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