Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Indirect Tax Laws

Foreign Trade Policy for CA Final: IEC, EPCG, Advance Authorisation and SEZ

Updated 5 October 2026 · Fact-checked

Foreign Trade Policy (FTP) is the Central Government's policy, issued under the Foreign Trade (Development and Regulation) Act, 1992, to regulate and promote imports and exports. To solve questions, identify the scheme, check its condition (export obligation, end use, eligibility), then state the customs and GST consequence and the effect of default.

Understand Foreign Trade Policy

Foreign Trade Policy is the government's rulebook for imports and exports. It is issued by the Central Government under the Foreign Trade (Development and Regulation) Act, 1992, and is run by the Directorate General of Foreign Trade (DGFT). It works with the Customs Act and the GST law. FTP gives the permission and the scheme. Customs and GST decide the duty and tax.

Start with the Importer Exporter Code (IEC). In general, a person needs an IEC to import or export goods (and technology). For services, an IEC is needed only when the service exporter wants to claim FTP benefits. Exceptions exist, such as certain imports and exports for personal use and some dealings by government departments. Do not claim more than the exceptions you remember. One IEC is allotted per PAN, and it is linked to the PAN of the holder.

Export promotion schemes share one idea. The exporter gets inputs or capital goods free of some duty, and in return must export. This is the export obligation. If the exporter fails, the benefit is recovered, usually with interest, and penal action can follow.

EPCG (Export Promotion Capital Goods) lets you import capital goods at zero customs duty, subject to an export obligation on the products made with them. Advance Authorisation (AA) lets you import inputs that are physically incorporated in the export product, duty free, subject to export obligation and value addition norms. Both need an authorisation from DGFT and an import under the matching customs notification.

SEZ units and EOU units are different. An SEZ is a notional foreign territory for trade operations, duties and tariffs, under the SEZ Act, 2005. Supplies to an SEZ unit or developer are zero-rated supplies under section 16 of the IGST Act, 2017. An EOU is a unit in the domestic tariff area approved to export all its output. It is not an SEZ, so GST zero-rating for supplies to SEZs does not apply to it. The EOU's own benefits, such as duty-free or tax-free import and procurement of goods, come mainly from the FTP and customs notifications. Keep the two apart in every answer.

Key rules to remember

Authority for FTP: Foreign Trade (Development and Regulation) Act, 1992 → FTP issued by Central Government → administered by DGFT; Write this as the legal source in any theory answer.
IEC rule: Import or export of goods (and technology) needs an IEC, unless an exemption applies. For services, an IEC is needed only to claim FTP benefits; IEC is linked to PAN. State the exceptions only if the question asks.
Export obligation (EO): Benefit of duty-free import is conditional on exporting within the prescribed period; On default, expect recovery of the duty foregone with interest, as the customs notification provides.
EPCG logic: Capital goods imported at zero customs duty → EO on goods made with them; Check the EO quantum and period in the authorisation. Do not quote figures unless the question gives them.
Advance Authorisation logic: Inputs physically incorporated in export product → duty-free import → export with prescribed value addition; Used for inputs, not for capital goods. Capital goods fall under EPCG.
SEZ supply under GST: Supply of goods or services to an SEZ unit or developer for authorised operations = zero-rated supply under section 16 of the IGST Act, 2017; Exporter can supply under bond or letter of undertaking without IGST, or pay IGST and claim refund.
EOU vs SEZ: EOU = unit in domestic tariff area, exports all output, benefits mainly under FTP and customs notifications. SEZ = specified area treated as foreign territory for trade operations, duties and tariffs, with zero-rating of supplies to it under section 16 of the IGST Act, 2017; An EOU is not an SEZ and has no such zero-rating. Supplies to an EOU are not zero-rated merely because the buyer is an EOU.

How to solve Foreign Trade Policy questions

Use this order for any FTP question, whether theory or case-based. It keeps the answer in provision, facts, conclusion form.

1Read the facts and mark the person: manufacturer-exporter, merchant exporter, EOU, SEZ unit or SEZ developer.
2Check the IEC. Ask whether the person is importing or exporting goods, or exporting services and claiming FTP benefits, and whether an exemption applies.
3Identify the scheme from the goods imported: capital goods point to EPCG, inputs for export products point to Advance Authorisation, and a unit in a specified zone points to SEZ.
4State the condition: authorisation from DGFT, export obligation, period, and any end-use or value addition requirement.
5Apply the customs consequence: duty-free import under the relevant notification, and what happens on non-fulfilment.
6Apply the GST consequence: zero-rating, supply under bond or LUT, or payment of IGST with refund.
7Conclude in one clear line and name the risk if the condition fails.

Quickest way: Scheme-first shortcut

When to use it: Use when a case has many facts and you have little time for a 4 to 6 mark part.

Underline what is imported: machinery or raw material.
Write the scheme name: EPCG for machinery, Advance Authorisation for raw material.
Write the one condition that matters: export obligation.
Write the GST line: exports and supplies to SEZ are zero-rated.
Write the default line: duty recovered with interest.
Check the EOU versus SEZ label once before concluding.

Common mistakes in Foreign Trade Policy

Treating EOU and SEZ as the same
Both give export-linked benefits and are often taught together.
Fix: Remember that an SEZ is treated as foreign territory for trade operations, duties and tariffs, while an EOU sits in the domestic tariff area.
Using Advance Authorisation for capital goods
Both schemes give duty-free imports, so students mix them up.
Fix: Link Advance Authorisation to inputs incorporated in the export product and EPCG to capital goods.
Ignoring the export obligation
Students stop after saying the import is duty free.
Fix: Always add the export obligation and the result of default.
Saying FTP itself levies duty or tax
FTP is discussed beside customs and GST.
Fix: State that FTP grants permission and schemes. Customs Act and notifications deal with duty, and GST law deals with tax.
Assuming IEC is needed in every case
The general rule is remembered without its exceptions.
Fix: State the general rule for goods, note that services need an IEC only to claim FTP benefits, then say exceptions exist for certain cases such as personal use.
Mixing GST terms with customs terms
Both laws talk about exports and zero rating.
Fix: Keep two separate lines in the answer: one for customs duty and one for GST, each under its own Act.

Worked examples

Example 1

Mehta Textiles Ltd manufactures garments for export. It plans to import a new embroidery machine and also imports fabric that will be physically incorporated in garments to be exported. It has no IEC yet. Advise on the schemes available.

Show the solution

Fact: the company will import goods, so it needs an IEC before importing, unless an exemption applies. None is stated, so it must obtain one.
The machine is a capital good, so EPCG is relevant. It can be imported at zero customs duty against an authorisation from DGFT, subject to export obligation on the goods made.
The fabric is an input physically incorporated in the export product, so Advance Authorisation applies. Import is duty free, subject to export obligation and value addition norms.
Condition: both benefits depend on the export obligation being met within the period in the authorisation.
Consequence of default: the customs duty foregone becomes recoverable, with interest, as provided in the notification.

Answer: Mehta Textiles must first get an IEC, because it will import and export goods. It should use EPCG for the embroidery machine and Advance Authorisation for the fabric, and it must fulfil the export obligation under each, failing which duty with interest is recoverable.

Example 2

Rao Components Pvt Ltd, a domestic supplier, supplies machine parts to Zenith Tech, a unit located in a Special Economic Zone, for its authorised operations. Zenith Tech asks Rao to charge no tax because it is an SEZ unit. Separately, Alpha Exports is an EOU in the domestic tariff area. Is the position the same for supplies to Alpha?

Show the solution

Provision: supply of goods to an SEZ unit or developer for authorised operations is a zero-rated supply under section 16 of the IGST Act, 2017.
Application: Rao may supply to Zenith Tech without payment of IGST under bond or letter of undertaking, subject to conditions. Alternatively, Rao may pay IGST and claim a refund.
Distinction: an SEZ is treated as foreign territory for trade operations, duties and tariffs, and the IGST Act specifically zero-rates supplies to an SEZ unit or developer.
Alpha Exports is an EOU in the domestic tariff area. It is not an SEZ, and no such zero-rating applies to supplies to it merely because it is an EOU.
Conclusion: the treatment differs. The benefits of an EOU arise mainly under the FTP and customs notifications, for example duty-free or tax-free import and procurement of goods by the EOU, and not from SEZ zero-rating.

Answer: Supplies to Zenith Tech, the SEZ unit, are zero-rated under section 16 of the IGST Act, 2017, so Rao can supply under bond or LUT without IGST or pay IGST and claim refund. The position is not the same for supplies to Alpha Exports, because an EOU is not an SEZ and has no such zero-rating. Its benefits come mainly under the FTP and customs notifications.

Exam tips

Write the legal source first: Foreign Trade (Development and Regulation) Act, 1992, with DGFT as the administrator. It earns easy marks.
In case-scenario MCQs, find the imported item first. Machinery means EPCG and inputs mean Advance Authorisation.
Always give both consequences: customs for the import and GST for the supply. Keep each under its own Act.
In EOU versus SEZ questions, use a two-column contrast in bullet form and finish with the GST zero-rating point.
Do not quote export obligation ratios or periods unless the question supplies them, as they change with the policy.

Practice questions from Indirect Tax Laws

Foreign Trade Policy in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Foreign Trade Policy: frequently asked questions

What is the Foreign Trade Policy in simple words?

It is the Central Government's policy that regulates and promotes imports and exports. It is issued under the Foreign Trade (Development and Regulation) Act, 1992 and administered by DGFT. It sets out IEC rules and export promotion schemes.

What is the difference between EPCG and Advance Authorisation?

EPCG is for importing capital goods at zero customs duty against an export obligation. Advance Authorisation is for importing inputs that are physically incorporated in the export product, duty free, against export obligation. The key test is whether the import is machinery or raw material.

What is the difference between EOU and SEZ?

An SEZ is treated as foreign territory for trade operations, duties and tariffs, and supplies to an SEZ unit or developer are zero-rated under section 16 of the IGST Act, 2017. An EOU is a unit in the domestic tariff area that exports its output, and its benefits come mainly under the FTP and customs notifications. Do not apply SEZ rules to an EOU.

What happens if the export obligation is not fulfilled?

The benefit of duty-free import is withdrawn. The duty foregone is generally recoverable with interest as the customs notification provides, and penal action may follow. Quote exact terms only if the question gives them.