A glut in the global steel market combined with stiff tariff barriers imposed by various countries have ensured that domestic steel companies are well short of meeting their export obligations under the Export Promotion Capital Goods (EPCG) scheme.

The increase in cost of production and a stable rupee have further dampened the steel firms’ exports. Under the EPCG scheme, the Centre allows duty-free import of capital goods including spare parts, but under the condition that on completion of the project, the importing company will export eight times the value of duty saved over a period of six years.

For example, a steel company which has set up 3 million tonne of additional capacity faces export obligation of about ₹15,000 crore, considering that imports of capital goods account for 30-35 per cent of the total project cost. The export obligation has to be met over six years.

While Indian steel companies including Tata Steel have taken the zero duty benefit of importing capital goods required for their projects, they have not been able to fulfil the export obligation due to poor market conditions.

Fall in price

“When we placed orders for importing our machinery in 2009-10, HR steel coil prices were at about $685 a tonne. This has fallen now to about $310 a tonne. So we have to more than double our shipments to meet our export obligation,” said a steel company official.

Stiff penalty

Under the EPCG scheme, steel companies have to meet the six-year export obligations in blocks of two years.

If a company fails to meet the obligation in one block it can carry forward the deficit to the next two years by paying a penalty. The penalty is the sum of unfulfilled export obligation and an interest at 15 per cent per year from the date of clearance of goods. Steel firms say that the penalty is stiff, given the overall sluggishness in the industry.

While the steel companies have increased capacity by over 10 million tonnes over the past few months — led by Tata Steel and JSW Steel commissioning 3 million tonnes per annum each and Bhushan Steel adding 1 mtpa — the industry has sought the Centre’s intervention in relaxing the norms.

Extension of timeframe

A Mumbai-based steel company executive said that considering that that the last four years have been bad for steel exports, the industry has requested the Centre to extend the timeframe for meeting the export obligation under the EPCG scheme.

It has sought an extension of the payback period, preferably by five years, and a reduction in export obligation to the amount of duty saved instead of the current level of eight times the duty saved.

It has also sought the removal of the 15 per cent interest penalty, as the default on obligation is mostly due to external factors.

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