Understanding India’s Major Export Promotion Schemes

India’s export sector forms a crucial pillar of the nation’s economic growth strategy. To help businesses compete globally and boost foreign exchange earnings, the government offers several export promotion schemes under the Foreign Trade Policy. These initiatives provide duty exemptions, tax benefits, and simplified procedures that make Indian products more competitive in international markets. Whether you’re a manufacturer looking to upgrade technology or a service provider expanding overseas, understanding these schemes can significantly reduce costs and streamline operations.

Export Promotion Capital Goods (EPCG) scheme 🔗

The Export Promotion Capital Goods scheme is designed to help exporters modernize their production capabilities. Under this scheme, businesses can import capital goods-including machinery, equipment, spares, moulds, and dies-at zero customs duty. The primary objective is to enable Indian manufacturers to produce quality goods and services that can compete effectively in global markets.

How the EPCG scheme works 🔗

Capital goods imported under EPCG can be used for pre-production, production, and post-production activities without paying customs duty. In return, the authorization holder must fulfill an export obligation equivalent to six times the duty saved within six years from the date of authorization. This means if you save ₹10 lakh in customs duties, you must export goods worth ₹60 lakh manufactured using those capital goods.

The scheme covers manufacturer exporters, merchant exporters tied to supporting manufacturers, and service providers. Recent amendments by DGFT have simplified procedures by extending the period for submitting installation certificates and introducing a reduced composition fee structure for export obligation extensions. Second-hand capital goods can also be imported without any age restriction, providing flexibility for businesses with varying budget requirements.

Duty exemption and remission schemes 🔗

These schemes help exporters manage the cost of imported inputs by either exempting duties upfront or providing remission after export. The key schemes under this category include Advance Authorization and Duty Free Import Authorization.

Advance Authorization scheme 🔗

Advance Authorization permits duty-free import of inputs that are physically incorporated into export products, with a minimum value addition requirement of 15%. The authorization is issued based on Standard Input Output Norms (SION) or on a self-declaration basis. Inputs include raw materials, components, intermediates, and consumables necessary for production.

The authorization remains valid for 12 months for making imports, with an 18-month period to fulfill the export obligation. Manufacturers and merchant exporters tied to supporting manufacturers can both apply for this scheme. The benefit extends to deemed exports as well, where goods don’t physically leave India but qualify as exports under specific categories.

Duty Free Import Authorization (DFIA) 🔗

DFIA is issued on a post-export basis and allows duty-free import of inputs with a minimum value addition requirement of 20%. Unlike Advance Authorization, DFIA becomes transferable once the export obligation has been fulfilled. This transferability feature provides additional flexibility, allowing authorization holders to sell unused duty-free inputs in the market after completing their export commitments.

Duty Drawback scheme 🔗

Administered by the Department of Revenue, this scheme provides refunds of customs duties and central excise duties paid on inputs used to manufacture export products. The refund is claimed after the export is completed, helping exporters recover costs incurred during production. This is particularly useful for businesses that cannot plan imports in advance or prefer not to be bound by pre-export conditions.

100% Export Oriented Unit (EOU) scheme 🔗

The EOU scheme was introduced in 1981 to create dedicated manufacturing units focused primarily on exports. Unlike SEZ units that must operate within designated zones, EOUs can be established anywhere in India, providing significant locational flexibility.

Key features and benefits 🔗

EOUs enjoy duty-free import of raw materials, consumables, and capital goods needed for production. The scheme covers manufacturing, software development, repair, reconditioning, and various agricultural activities including aquaculture, biotechnology, and horticulture. Trading units, however, are not eligible.

To maintain EOU status, units must achieve positive Net Foreign Exchange (NFE) earnings cumulatively over five years. This means the FOB value of exports must exceed the CIF value of imports. Most EOUs require a minimum investment of ₹1 crore in plant and machinery, though exemptions exist for sectors like IT services, handicrafts, and agriculture.

Additional benefits include reimbursement of GST, eligibility for input tax credit refunds, fast-track customs clearance, and exemption from industrial licensing for items reserved for the small-scale sector. EOUs can also sell up to 50% of their production in the domestic market, subject to payment of applicable duties.

Special Economic Zone (SEZ) policy 🔗

India’s SEZ policy was announced in April 2000 to overcome challenges like inadequate infrastructure and complex regulatory procedures that hindered export growth. The Special Economic Zones Act, 2005, provided a comprehensive legal framework, and as of March 2024, India has 280 operational SEZs across the country.

Incentives for SEZ units 🔗

SEZ units enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years, and 50% of ploughed-back export profits for an additional five years. They also benefit from duty-free import and domestic procurement of goods for development and operations. Supplies to SEZs are zero-rated under the IGST Act.

SEZs are treated as foreign territory for customs purposes, meaning no import license is required for authorized operations. Both manufacturing and service activities are permitted within these zones. Units must demonstrate positive net foreign exchange earnings over a cumulative period of five years from the start of production.

SEZ performance and impact 🔗

Physical exports from SEZs reached approximately ₹13.55 lakh crore in 2023-24, contributing about 38% to India’s total exports. These zones have generated employment for over 30 lakh people and attracted cumulative investments exceeding ₹6.9 lakh crore. Major SEZs include Kandla in Gujarat (India’s first and Asia’s first Export Processing Zone established in 1965), Chennai SEZ, Noida SEZ, and Mundra SEZ.

SEZ developers also receive incentives including income tax exemption on business income and exemption from customs duties for development activities. A single-window clearance mechanism through a 19-member Board of Approval simplifies the approval process for setting up new zones and units.

Status Holder scheme 🔗

The Status Holder Certificate (also called Star Export House Certificate) recognizes exporters who have achieved significant export performance. This recognition scheme categorizes exporters from One Star to Five Star Export House based on their cumulative export earnings over the current and previous three financial years.

Categories and thresholds 🔗

The scheme categorizes exporters into five tiers based on FOB/FOR value of exports: One Star Export House (USD 3 million), Two Star (USD 15 million), Three Star (USD 50 million), Four Star (USD 200 million), and Five Star (USD 800 million). The certificate remains valid for five years from the date of application.

Special provisions exist to encourage smaller exporters: Micro and Small Enterprises receive double weightage when calculating export performance for One Star status. Similarly, manufacturing units with ISO/BIS certification and units in North Eastern states also qualify for double weightage benefits.

Privileges for status holders 🔗

Status holders enjoy several operational advantages: authorization and customs clearances on self-declaration basis, exemption from furnishing bank guarantees under FTP schemes, priority fixation of input-output norms within 60 days, and exemption from compulsory negotiation of export documents through banks.

Higher-tier status holders receive additional privileges. Two Star and above can establish export warehouses. Three Star and above manufacturers can self-certify their goods as originating from India for preferential treatment under Free Trade Agreements and Comprehensive Economic Partnership Agreements. Status holders can also export freely exportable items on a free-of-cost basis for promotional purposes, subject to annual limits.

Choosing the right scheme 🔗

Selecting the appropriate export promotion scheme depends on your business model and operational requirements. The EPCG scheme suits businesses needing technology upgrades through capital goods imports. Duty exemption schemes work well for exporters requiring regular imports of raw materials. EOUs offer flexibility in location while SEZs provide comprehensive infrastructure with extensive tax benefits. Status Holder recognition rewards consistent export performance with simplified procedures.

Many exporters combine multiple schemes to maximize benefits. For instance, an EOU can also apply for Status Holder recognition based on its export performance, thereby accessing privileges from both schemes. Understanding the compliance requirements, export obligations, and documentation needs for each scheme is essential before making commitments.

What do you think? Which export promotion scheme would be most beneficial for your business operations, and what challenges do you anticipate in meeting the export obligations associated with these incentives?

References

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