Performance Audit on the Export Promotion Capital Goods Scheme, Union Government (Indirect Taxes — Customs)

Findings

1. 1,08,798 authorisations whose export obligation period had already expired remained unredeemed at the end of March 2021 — meaning the duty-free imports were taken and the promised exports were never accounted for.

   “As per the data furnished by the DGFT, 1,08,798 authorizations whose Export Obligation Period (EOP) expired remained unredeemed till the end of March 2021.”Executive Summary

2. Duty foregone under the scheme was ₹42,714 crore over 2018-19 to 2020-21 against exports of ₹2,49,137 crore, and the audit's own revenue implication was ₹479.81 crore across 72 observations.

   “There are a total of 24 RAs across India wherein a total of 34,777 authorizations with duty foregone amounting to ₹42,714 crore were issued during the period covered in the Performance Audit (2018-19 to 2020-21). The total FOB (Free on Board) value of exports under the scheme during this period was ₹2,49,137 crore… This report contains 72 audit observations and 26 recommendations. The performance audit has revenue implication of ₹479.81 crore.”Executive Summary

3. 214 authorisation files with duty saved value of ₹2,225.22 crore, across 12 regional authorities, were never produced for audit despite repeated requests.

   “Out of the 4,450 selected cases, 214 authorizations files with DSV value of ₹2,225.22 crore pertaining to 12 RAs (mainly Bengaluru, Kolkata, Chennai, Ludhiana, Coimbatore and Delhi) were not produced for audit, despite repeated requests/reminders to RAs.”Executive Summary

4. The online application system does not check whether documents are genuine, only that something has been uploaded — and accepts applications even when mandatory documents are missing, which the audit reads as a risk of importing unrelated, ineligible or restricted capital goods.

   “Audit observed that even if some of the mandatory documents are not uploaded, the system is accepting the application for issue of authorizations indicating lack of validation controls/soft alerts in the online system which is fraught with the risk of misuse viz., importing unrelated/ineligible/restricted capital goods, incorrect fixation of SEO, etc.”Executive Summary

5. The Denied Entity List, the mechanism meant to force compliance, was ineffective — abeyance orders were issued without recorded reasons, there is no limit on how many an exporter can get, and no standard procedure exists for placing an entity in abeyance.

   “Audit found the implementation of the Denied Entity List (DEL) mechanism, perceived to make the exporters strictly comply with the conditions of authorizations, to be ineffective with delay in placing the entities under DEL and issuing of multiple abeyance orders… abeyance orders were issued without recording any reasons and authorizations were issued to DEL status without issuing abeyance orders. There is no limit fixed for the number of abeyance orders that can be issued to an exporter. There are no Standard Operating Procedures (SOP)/mechanism prescribed for placing the entity in abeyance.”Executive Summary

6. The new centralised system introduced in November 2020 still issues authorisations beyond the delegated financial powers, and authorisations were issued without mandatory particulars such as the supporting manufacturer's endorsement or the export product description.

   “Issuing authorizations without mandatory requirements like endorsement of supporting manufacturer, description of export product, Export Obligation in authorizations as well as in Advance Release Order (ARO) in cases of domestic procurements is fraught with the risk of misuse by diversion of duty free imports allowed under the scheme… DGFT had migrated (November 2020) to a new online and centralized DGFT System for application receipt and processing of authorizations… however, even after digitization of the licensing processes, authorizations beyond the delegated financial powers are being issued.”Executive Summary

7. The department's own system does not record what was actually imported against an authorisation — details of the capital goods and duty saved are not captured, and regional authorities did not know a licence had been used until the holder applied for discharge.

   “Audit observed that DGFT IT system captures the data in respect of issuance, SEOs, etc. however, the data on utilization of authorizations viz., details of the Capital Goods (CG) imported/Duty Saved are not captured in the new system introduced by DGFT and were not available with the RAs… the status of actual utilization of authorizations is not known to RA till the Authorization Holders submits Installation Certificate (IC)/EODC application.”Executive Summary

8. Extensions of the export obligation period were granted routinely, without export orders, purchase contracts, block-wise progress or annual returns to show the obligation could actually be met.

   “Audit observed that the extensions were granted in a routine manner without any reasonable assurance in the form of export orders, purchase contracts, block-wise obligation met, filing of annual returns etc., to ascertain the feasibility of fulfilment of EO within the extended period.”Executive Summary

9. Discharge certificates were issued without verifying the actual user condition, on exports of items not in the authorisation, on ineligible shipping bills and without the obligation being met — with the same shipping bills counted against two different obligations.

   “Audit observed that the control environment for monitoring of Export Obligation and process of issuing EODC to be deficient and requires review by DGFT as cases of issuing EODC without verifying actual user condition, on export of ineligible items (not available in authorization), ineligible SBs, non-fulfillment of AEO/SEO, incorrect waiver of AEO allowed to SSI unit, etc. were found. Besides, delay in issuance of EODC, same SBs were found to be utilized for both AEO and SEO.”Executive Summary

10. The customs module meant to stop imports beyond the duty saved value was not monitored by either customs or the trade directorate, which the audit reads as a weak institutional link between the two departments.

    “The Customs Authorization Utilization Module in Indian Customs EDI System (ICES) is supposed to monitor the Duty Saved Value (DSV) of authorizations and should restrict clearance of excess import which needs to be regularized either with payment of duty or enhancement of Export Obligation. Non-monitoring of excess imports by both Customs and DGFT indicates weak institutional mechanism between two Departments in exchange of information and coordinated action against the non-compliant firms.”Executive Summary

Fact-checks citing this report

• ◑Lacks contextAn Export Promotion Mission will be established integrating all stakeholders… Current accounts deficit will be brought down aggressively by focusing on exports and reducing the dependency on imports.