EPCG Scheme & Advance Authorization (FTP Chapters 4 & 5)

By Vikram Mehta | Updated March 2026

What Are the EPCG Scheme and Advance Authorization?

The Export Promotion Capital Goods (EPCG) Scheme and Advance Authorization (AA) are India's two primary duty exemption schemes for exporters, governed by Chapters 5 and 4 of the Foreign Trade Policy (FTP) 2023 respectively. Both schemes are administered by the Directorate General of Foreign Trade (DGFT) and allow exporters to import goods without paying customs duties, provided they fulfill prescribed export obligations.

The EPCG Scheme permits import of capital goods at zero customs duty — machinery, equipment, tools, jigs, fixtures, dies, and moulds needed for manufacturing export products. In return, the importer must export goods worth six times the duty saved within six years of authorisation. Advance Authorization allows duty-free import of inputs — raw materials, components, fuel, oil, catalysts, and mandatory spares (up to 10% of CIF value) — that are physically incorporated in export products, with export obligation fulfillment within 18 months.

For foreign companies establishing or expanding manufacturing in India through a wholly-owned subsidiary or joint venture, these schemes can eliminate import duties of 10-25% on capital equipment and raw materials, dramatically improving project economics and export competitiveness.

Legal Basis

• Chapter 5 of FTP 2023 (Para 5.01-5.18) — Governs the EPCG Scheme, including zero-duty import, export obligation structure, block-wise fulfillment, and early redemption incentives.
• Chapter 5 of Handbook of Procedures (HBP) 2023 — Prescribes application procedure (Form ANF 5B), documentation, bond requirements, and annual reporting for EPCG authorisations.
• Chapter 4 of FTP 2023 (Para 4.01-4.30) — Governs Advance Authorization, including duty exemption scope, SION norms, self-declaration route, validity, and value addition requirements.
• Chapter 4 of HBP 2023 — Prescribes application procedure (Form ANF 4A), redemption (Form ANF 4F), and documentation for Advance Authorization.
• DGFT Public Notice No. 51/2025-26 (March 2026) — Extended the Export Obligation Period for Advance Authorisations expiring between March 1 and May 31, 2026 to August 31, 2026.
• DGFT Policy Circular No. 10/2025-26 (February 2026) — Granted relief in Average Export Obligation under EPCG for sectors with export decline exceeding 5% in 2024-25.

EPCG Scheme: How It Works

Zero Duty Import of Capital Goods

Under the EPCG Scheme, an authorisation holder can import capital goods — including machinery, equipment, spares (new, reconditioned, or refurbished), tools, jigs, fixtures, moulds, and dies — at zero customs duty. This covers Basic Customs Duty, IGST, and Compensation Cess. The capital goods must be used for pre-production, production, or post-production activities related to export manufacturing or services.

Eligibility

The scheme is available to manufacturer exporters and merchant exporters tied to supporting manufacturers. An Import Export Code (IEC) and Registration Cum Membership Certificate (RCMC) are mandatory. The application is filed through DGFT's online portal using Form ANF 5B, accompanied by a Chartered Accountant certificate and Chartered Engineer certificate.

Export Obligation (EO) Structure

The EPCG authorisation holder must fulfill two types of export obligations:

Block-wise Fulfillment Schedule

The Specific EO must be fulfilled in two blocks:

• Block 1 (Years 1 to 4): Minimum 50% of the specific export obligation
• Block 2 (Years 5 to 6): Remaining 50% of the specific export obligation

Annual EO fulfillment reports must be submitted by June 30 each year. The authorisation itself is valid for 24 months for completing imports (no revalidation permitted).

Early Fulfillment and Special Incentives

• Early redemption: If an authorisation holder fulfills 75% or more of the Specific EO and 100% of the Average EO within half the EO period (3 years), the remaining obligation is waived.
• Green technology products: Only 75% of the standard export obligation applies.
• North East, J&K, and Ladakh units: Only 25% of the standard obligation applies.
• DGFT RA condonation: A shortfall of up to 5% in Specific EO may be condoned by the Regional Authority, provided Average EO is fully met.

Advance Authorization: How It Works

Duty-Free Import of Inputs

Advance Authorization allows duty-free import of inputs that are physically incorporated in an export product (after accounting for normal manufacturing wastage). The exemption covers Basic Customs Duty, Additional Customs Duty, Education Cess, Anti-dumping Duty, Safeguard Duty, IGST, and Compensation Cess. Importable items include raw materials, components, consumables, fuel, oil, catalysts, and mandatory spares up to 10% of the CIF value of the authorisation.

Eligibility

Available to manufacturer exporters and merchant exporters with supporting manufacturers. An IEC is mandatory. Application is filed through DGFT using Form ANF 4A. The scheme covers physical exports, intermediate supply to other exporters, deemed exports, and supplies to foreign-going vessels or aircraft.

SION vs Self-Declaration: Four Routes to Authorization

Validity, EO Period, and Value Addition

• Authorisation validity: 12 months from the date of issue for completing imports
• Export obligation period: 18 months from the date of issue (or as extended by DGFT)
• Minimum value addition: 15% (calculated as: (FOB value of exports minus CIF value of imports) / CIF value of imports x 100). Exception: 50% for tea exports
• Actual user condition: Non-transferable — the authorisation holder must use the imported inputs themselves

Redemption Process

On completion of imports and exports, the authorisation holder submits Form ANF 4F to the Regional Authority for redemption. This requires proof of import (Bills of Entry), proof of export (Shipping Bills), bank realisation certificates for export proceeds, and a Chartered Accountant certificate confirming value addition. Upon successful redemption, the customs bond and bank guarantee furnished at the time of import are released.

EPCG vs Advance Authorization: Side-by-Side Comparison

Penalties for Non-Fulfillment

EPCG Penalties

If the authorisation holder fails to meet the Specific Export Obligation, the customs authority recovers the duty saved proportionate to the shortfall, plus 15% interest per annum from the date of import clearance. If the Average Export Obligation is not maintained (even if the Specific EO is fulfilled), the entire duty saved plus 15% annual interest must be paid. The proof of duty payment is then submitted to DGFT for regularisation of the authorisation.

Advance Authorization Penalties

Non-fulfillment triggers recovery of the customs duty exempted on the proportionate shortfall, plus applicable interest. In severe cases, the penalty can be up to five times the difference between the CIF value of imported goods and the unfulfilled export obligation value. The DGFT Amnesty Scheme (introduced in 2025) offered a one-time opportunity for bona fide exporters to regularise defaults by paying customs duty proportional to the shortfall, with interest capped at 100% of the exempted duties.

Recent Changes Under FTP 2023

• Simplified EPCG procedures: Chapter 5 of HBP 2023 was amended to reduce compliance burden and improve processing efficiency for EPCG applications.
• Average EO relief (February 2026): DGFT Policy Circular No. 10/2025-26 granted relief in Average EO for 2024-25 for sectors with more than 5% export decline compared to 2023-24.
• AA export obligation extension (March 2026): Public Notice No. 51/2025-26 extended the EO period for Advance Authorisations expiring between March 1 and May 31, 2026, automatically extending them to August 31, 2026.
• Self-ratification for AEOs: Authorized Economic Operators can now self-ratify norms under Advance Authorization, bypassing the Norms Committee — a significant procedural simplification.
• Second-hand capital goods: EPCG now permits import of second-hand capital goods without age restrictions, broadening the scheme's utility for cost-conscious manufacturers.

How This Affects Foreign-Invested Manufacturers

Both schemes are fully available to Indian companies with foreign direct investment, including wholly-owned subsidiaries and joint ventures. Key practical considerations:

• Project finance impact: For a greenfield factory importing INR 50 crore of capital equipment attracting 15% average customs duty, EPCG eliminates INR 7.5 crore in upfront duty — a meaningful reduction in project capital requirements.
• Working capital benefit: Advance Authorization eliminates customs duty on recurring raw material imports. For a unit importing INR 20 crore of inputs annually at 10% duty, the annual cash flow benefit is INR 2 crore.
• Interaction with transfer pricing: Export obligation fulfillment is measured by FOB value. Related-party exports must be at arm's length pricing — artificially deflated transfer prices can result in undervaluation of exports, jeopardising EO compliance.
• Interaction with GST: Imports under EPCG and AA are exempt from IGST at the border. However, domestic procurement of capital goods or inputs under these schemes requires careful GST treatment to avoid input tax credit reversals.
• No dual benefit: RoDTEP is available alongside EPCG and AA, but SEZ duty exemptions and duty drawback cannot be claimed simultaneously on the same imports.

Common Mistakes

• Neglecting the Average Export Obligation under EPCG. Many foreign-invested units focus solely on the Specific EO (6x duty saved) and hit the 6x target within 4 years. But if their average annual exports fall below the pre-licence 3-year average in any single year, the entire duty saved plus 15% interest is payable — even though the Specific EO was fully met. This catches manufacturers whose export volumes fluctuate due to global demand cycles.
• Applying for Advance Authorization without checking SION availability. If DGFT has published Standard Input-Output Norms for your product, the self-declaration route is slower and invites greater scrutiny. Always check the SION database first — if norms exist for your product, use them for faster approval.
• Treating EPCG capital goods as freely transferable after import. Capital goods imported under EPCG must remain with the actual user until the export obligation is fulfilled. Transferring equipment to another unit, selling it, or even leasing it without DGFT permission triggers duty recovery with interest. This is particularly relevant during corporate restructurings involving company type conversions.
• Missing the 15% minimum value addition under Advance Authorization. The value addition is calculated strictly as (FOB minus CIF) / CIF. For products with high imported input intensity (such as electronics assembly), achieving 15% value addition requires careful pricing. Falling below 15% means the authorisation cannot be redeemed, and duties become payable with interest.
• Not filing annual EO fulfillment reports for EPCG by June 30. The annual report is mandatory even if you are ahead of schedule on export obligations. Missing the June 30 deadline can trigger show-cause proceedings and complications during final redemption.

Practical Example

TechPrecision Pte Ltd, a Singapore-based precision engineering firm, establishes a wholly-owned subsidiary in Chennai to manufacture aerospace components for export. The project involves both capital equipment imports and ongoing raw material imports.

EPCG Authorisation:

• Capital goods imported: CNC machines and testing equipment worth INR 25 crore (CIF)
• Applicable customs duty: 7.5% BCD + IGST = approximately INR 4.5 crore saved
• Specific Export Obligation: 6 x INR 4.5 crore = INR 27 crore in exports within 6 years
• Average EO: Must maintain average export turnover from the 3 years preceding the authorisation in each year
• Block 1 (Years 1-4): Minimum INR 13.5 crore in exports
• Block 2 (Years 5-6): Remaining INR 13.5 crore

TechPrecision exceeds 75% of SEO and 100% of AEO within 3 years (achieving INR 22 crore in exports). Under the early redemption provision, the remaining INR 5 crore obligation is waived, and the EPCG bond is released.

Advance Authorization:

• Annual import of titanium alloy and specialised fasteners: INR 8 crore (CIF) at 10% BCD = INR 80 lakh duty saved per authorisation
• SION norms available for aerospace fasteners — automatic approval by Regional Authority
• Export obligation: Ship manufactured components worth minimum INR 9.2 crore (FOB) within 18 months (ensuring 15% value addition)
• Actual exports: INR 14 crore (FOB) — value addition of 75%, well above minimum
• Redemption filed via Form ANF 4F with CA certificate — bond released within 60 days

Combined annual savings: INR 80 lakh (AA) + proportionate EPCG benefit = approximately INR 1.55 crore per year in duty savings on a manufacturing operation with INR 33 crore in combined imports.

Key Takeaways

• EPCG allows zero-duty import of capital goods with an export obligation of 6x the duty saved within 6 years; Advance Authorization allows duty-free import of inputs with export within 18 months
• EPCG has two obligations — Specific EO (6x duty saved) and Average EO (maintain pre-licence average exports) — and both must be fulfilled to avoid penalties
• Advance Authorization requires minimum 15% value addition calculated as (FOB - CIF) / CIF; failing this threshold means the authorisation cannot be redeemed
• Penalties are severe: EPCG triggers duty + 15% annual interest; AA can trigger penalties up to 5x the shortfall value
• Both schemes are fully available to foreign-invested companies and can be used simultaneously — EPCG for capital goods, AA for inputs
• Recent FTP 2023 changes include simplified EPCG procedures, AEO self-ratification for AA, and relief provisions for sectors facing export decline

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