IMPORT OF

CAPITAL GOODS
 What are Capital Goods?
Capital goods are tangible assets that a business uses to produce
goods or services that are used as inputs for other businesses to
produce consumer goods.

Said another way, capital goods are tangible assets, such as

buildings, machinery, equipment, vehicles and tools that one
organization uses to produce goods or services as an input to
produce consumer goods and goods for other businesses.
Manufacturers of automobiles, aircraft, and machinery fall within
the capital goods sector because their products are used by
companies involved in manufacturing, shipping and providing other
services.

Capital goods qualify as tangible assets that an organization uses to

produce goods or services such as office buildings, equipment and
machinery. Consumer goods are the end result of this production
process. The industrials sector of the economy includes capital-
goods-producing businesses such as Boeing, Caterpillar and
Lockheed Martin.
Export Promotion Capital Goods (EPCG) Scheme
• It allows import of capital goods for pre-production, production and post-
production (including CKD/SKD thereof as well as computer software systems)
at zero% customs duty, subject to an export obligation equivalent to 6 times of
duty saved on capital goods imported under EPCG scheme, to be fulfilled in 6
years reckoned from Authorization issue-date.
• The concessional 3% duty EPCG Scheme allows import of capital goods for
pre-production, production and post-production (including CKD/SKD thereof
as well as computer software systems) at 3% customs duty, subject to an
export obligation equivalent to 8 times of duty saved on capital goods
imported under EPCG scheme, to be fulfilled in 8 years reckoned from
Authorization issue date.
• The capital goods shall include spares (including
refurbished/reconditioned spares), tools, jigs, fixtures,
dies and molds. Second hand capital goods, without
any restriction on age, may also be imported under the
EPCG Scheme. The export obligation can also be
fulfilled by the supply of ITA-1 items to the DTA,
provided the realization is in free foreign exchange.
Duty Exemption and
Remission Schemes
Duty Exemption Schemes
Duty exemption schemes enable duty free import of
inputs required for export production. Duty exemption
schemes consist of:
• Advance Authorization scheme
• Duty Free Import Authorization (DFIA) scheme
1. Advance Authorization Scheme
• An Advance Authorization is issued to allow duty free import of inputs,
which are physically incorporated in export product (making normal
allowance for wastage). In addition, fuel, oil, energy, catalysts which are
consumed / utilized to obtain export product, may also be allowed. DGFT,
by means of Public Notice, may exclude any product(s) from the purview of
Advance Authorization.
• Mandatory spares which are required to be exported / supplied with the
resultant product can be allowed duty free but upto 10% of CIF value of
Authorization
• Advance Authorizations are issued for inputs and export items given under
SION. These can also be issued on the basis of Adhoc norms or self
declared norms.
Advance Authorizations can be issued either to a manufacturer
exporter or a merchant exporter tied to supporting
manufacturer(s) for:
• Physical exports (including exports to SEZ); and/or
• Intermediate supplies; and/or
• Such supply of goods that are allowed in Chapter 8 of the
Foreign Trade Policy;
• Supply of ‘stores’ on board of foreign going vessel / aircraft
subject to condition that there is specific SION in respect of
item(s) supplied
2. Duty Free Import Authorization (DFIA) Scheme
DFIA is issued to allow duty free import of inputs, fuel, oil, energy sources,
catalyst which are required for production of export product. DGFT, by means
of Public Notice, may exclude any product(s) from purview of DFIA.

Entitlement:-
A. Provisions of paragraph 4.1.3 shall be applicable in case of DFIA.
However, these Authorizations shall be issued only for products for which
Standard Input and Output Norms (SION) have been notified.

B. DFIA shall be issued in accordance with Policy and procedure in force on

date of issue of Authorization.
C. In case of post export DFIA, a merchant exporter shall be required to
mention only name (s) and address(s) of manufacturer(s) of the export
product(s). Applicant is required to file application to concerned RA
before effecting exports under DFIA.

D. Pre-export Authorization shall be issued with actual user condition and

shall be exempted from payment of basic customs duty, additional
customs duty / excise duty, education cess, anti-dumping duty and
safeguard duty, if any.

E. In case of actual user DFIA and where CENVAT credit facility on inputs
have been availed for the exported goods, even after completion of
export obligation, the goods imported against such DFIA shall be utilized
in the manufacture of dutiable goods whether within the same factory or
outside (by a supporting manufacturer).
Duty Remission Schemes
A Duty Remission Scheme enables post export
replenishment / remission of duty on inputs used in export
product. Duty Remission Schemes consist of :
• Duty Entitlement Passbook (DEPB) Scheme
• Duty Drawback (DBK) Scheme
1. Duty Entitlement Passbook (DEPB) Scheme

The objective of Duty Entitlement Pass Book (DEPB) is to

neutralize the incidence of Customs duty on the import
content of the export product. The neutralization shall be
provided by way of grant of duty credit against the export
product. Under the DEPB, an exporter may apply for credit,
as a specified percentage of FOB (Free on Board or Freight
on Board) value of exports made in freely convertible
currency.
2. Duty Drawback Scheme
 General Meaning
Provides exporters a refund of customs duty paid on unused imported
goods, or goods that will be treated, processed or incorporated into other
goods for export.

 Overview
The Duty Drawback Scheme allows exporters to get a refund on customs
duty paid on imported goods, where those goods are:
• to be treated, processed, or incorporated in other goods for export, or
• are exported unused since importation.
• The minimum claim per application for duty drawback is $100
 Who can apply(Eligibility criteria)
At a minimum, you must:
• Be the legal owner of the goods at the time the goods are
exported
• Duty drawback is available on most goods on which customs duty
was paid on importation and which has been exported.

 Deadline to apply:
Claims must be lodged within four years from the date the goods
were exported.
Capital Goods Imports in
India’s Context
Overview
• Growth in the Indian economy has strengthened. A modest pick-up in the
investment cycle is underway. That’s the good news. The bad news is that a
continued pick-up in investments could widen India’s current account deficit
further.
• India’s current account deficit widened to 2.4 percent of GDP in the April-June
quarter, showed RBI data released on Friday. While oil remains the biggest
pressure on India’s import bill, a surge in imports of consumer items like
smartphones has also weighed on the export-import balance.
• Capital goods imports are also contributing to the imbalance and this could
continue.
• There exists a near perfect correlation coefficient between investments and
capital goods imports, shows analysis by BloombergQuint. This implies that if
investments rise over the coming quarters, capital goods imports will also rise.
The correlation coefficient was calculated taking the absolute level of capital
goods imports and the nominal gross fixed capital formation.
Capital Goods Imports Mirror Investments

Growth will start rising and private investments will rebound after
elections, pushing up capital goods imports further, said Pranjul
Bhandari, the chief India economist at HSBC in a conversation with
BloombergQuint. Capital goods are assets that businesses use to
produce consumer goods.

He also added that even if export growth strengthens, imports of

crude oil, capital and consumer goods will likely outpace exports.
“As India’s growth differential with the rest of the world is rising, imports are
expected to remain very strong and the current account deficit will continue
to widen.”
-Pranjul Bhandari, Chief India Economist, HSBC

 The bank forecasts India’s current account deficit to widen to 2.7 percent of
the GDP for the fiscal year ended March 2019 from 1.9 percent of the GDP
the previous fiscal year.
 What is a 'Current Account Deficit'?
The current account deficit is a measurement of a country’s trade
where the value of the goods and services it imports exceeds the value
of the goods and services it exports. The current account includes net
income, such as interest and dividends, and transfers, such as foreign
aid, although these components make up only a small percentage of
the total current account. The current account represents a country’s
foreign transactions and, like the capital account, is a component of a
country’s balance of payments.
India’s Capital Goods Imports
• A deficit in the current account is created when the value of
goods and services imported, is higher than the value of goods
and services exported by a country.
• But the quality of that deficit also matters. Economists feel that
strong capital goods imports are a positive indicator as they
increase the productive capacity of the economy.
• Capital goods and consumer goods imports cannot be treated
alike, said Shubhada Rao, chief economist at Yes Bank. “Capital
goods imports are a positive indicator as they create further
capacity expansion,” she said. Yes Bank expects a current account
deficit of 2.8 percent of GDP this year.
• In contrast, consumer goods imports simply reflect increased consumption
spending, which may not always be healthy.
• In volume terms, core imports (non-oil, non-gold) rose 10.9 percent year-
on-year in July from 3 percent in June, noted Nomura Global Market
Research in a note last month. A break-up of the imports showed a 9.3
percent year-on-year increase in consumer goods imports, Nomura
pointed out. “Investment and industrial imports growth continued to show
strong performance, in sync with the domestic cyclical capex recovery,” it
added.
• Together, capital and consumer goods account for nearly a fifth of all
imports, slightly less than what crude oil accounts for.