Accounting of epcg benefit

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27 July 2016 How the benefit of duty availed under EPCG scheme is to be shown in books of accounts

Querist : Anonymous

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28 July 2016 shall appreciate an early reply

Aashok Kumar Sharma online

Aashok Kumar Sharma online

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14 July 2024 Under the Export Promotion Capital Goods (EPCG) scheme in India, duty benefits are availed on capital goods imported for the purpose of enhancing export competitiveness. Here’s how the benefit of duty availed under the EPCG scheme should be shown in the books of accounts:

### Initial Accounting Treatment:

1. **At the time of Import:**
- When capital goods are imported under the EPCG scheme, they are typically imported at a concessional rate of customs duty or exempted from customs duty and other import taxes.
- Record the import transaction in the books of accounts:
- Debit: Capital Goods (or relevant asset account)
- Credit: Supplier Account (if purchased on credit) or Bank Account (if purchased for cash)

### Subsequent Accounting Treatment:

2. **Amortization of Duty Benefit:**
- The benefit of duty under the EPCG scheme is amortized over a period, usually proportionate to the export obligation fulfilled by the company.
- Calculate the amount of duty benefit availed and spread it over the period during which the export obligations are to be fulfilled (typically 6 years for most sectors under EPCG).

3. **Amortization Entries:**
- Each year, amortize the duty benefit and recognize it as income in the books of accounts. This is based on the proportion of export obligations fulfilled during the year.

- Debit: Duty Benefit Amortization Account (Income Account)
- Credit: Duty Benefit Availed Account (Liability Account)

4. **Impact on Financial Statements:**
- **Balance Sheet:** The Duty Benefit Availed Account (a liability) will reduce over time as you amortize the duty benefit.
- **Profit and Loss Account:** Duty Benefit Amortization is recognized as income, contributing to the profitability of the company over the years.

### Example Journal Entries:

Assume a company imports capital goods under EPCG with a duty benefit of ₹1,00,000, amortizable over 6 years:

1. **At the time of Import:**
- Debit: Capital Goods Account ₹1,00,000
- Credit: Supplier Account or Bank Account ₹1,00,000

2. **Annual Amortization (Assuming straight-line method):**
- If the duty benefit is amortized evenly over 6 years (= ₹16,667 per year):

- Year 1:
- Debit: Duty Benefit Amortization Account ₹16,667
- Credit: Duty Benefit Availed Account ₹16,667

- Year 2, Year 3, etc.: Similar entries for each subsequent year until the duty benefit is fully amortized.

### Reporting and Disclosure:

- Ensure proper disclosure in the financial statements about the duty benefit availed under the EPCG scheme.
- Comply with accounting standards and statutory requirements regarding income recognition and disclosure.

### Conclusion:

By following these accounting principles, you can accurately reflect the benefit of duty availed under the EPCG scheme in your books of accounts. This approach not only ensures compliance with accounting standards but also provides transparency regarding the utilization of government incentives for enhancing export competitiveness. If in doubt, consulting with a professional accountant or tax advisor familiar with EPCG scheme regulations can provide specific guidance tailored to your business circumstances.

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