Paragraph 5 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
An EPCG holder does not have to import every machine. Paragraph 5.07 of the Policy lets the holder source capital goods from a domestic manufacturer through an Invalidation Letter or an Advance Release Order (ARO), and gives that manufacturer deemed export benefits. Paragraphs 5.08 and 5.09 of the Handbook say how the request is made and, for supplies from an SEZ, how the "Certificate of supplies from SEZ" works.
This article is based on the chapter-wise text of the Foreign Trade Policy, 2023 published on the DGFT website, as consulted on 2 October 2026; the copy carries no "updated up to" date. The procedure is taken from Chapter 5 of the Handbook of Procedures, 2023 as published on the DGFT website (file of July 2026), consulted on 2 October 2026. Later Notifications and Public Notices should be checked. The tax side of deemed exports is a GST matter; our GST refund on deemed exports service covers the refund claim.
The holder may source capital goods from a domestic manufacturer through an Invalidation Letter or an ARO. That manufacturer is eligible for deemed export benefits under paragraph 7.03 of the Policy and as may be provided under the GST Rules. Domestic sourcing is also permitted from EOUs, and those supplies count towards the EOU's positive net foreign exchange under paragraph 6.08(a). The specific obligation is 25% less for indigenous sourcing (paragraph 5.04(d)).
What the Policy says in paragraph 5.07
A person holding an EPCG Authorisation may source capital goods from a domestic manufacturer either through an Invalidation Letter or through an Advance Release Order. Such a domestic manufacturer is eligible for deemed export benefits under paragraph 7.03 of the Policy, and as may be provided under GST Rules under the category of deemed exports. Domestic sourcing is also permitted from EOUs, and these supplies count for the EOU's positive NFE as provided in paragraph 6.08(a) of the Policy.
Three consequences follow from other paragraphs, each cited to its own text:
- Paragraph 5.01(a) says the holder may procure capital goods from indigenous sources under paragraph 5.07 as an alternative to importing.
- Paragraph 5.04(d) says that for indigenous sourcing the specific EO is 25% less than the EO stipulated in paragraph 5.01, with no change in the average EO under paragraph 5.04(c).
- Paragraph 5.08 reckons the obligation for domestic sourcing with reference to the notional Customs duty, taxes and cess saved on the FOR value indicated in the ARO or Invalidation Letter, not an actual duty paid. That paragraph is explained in our article on paragraphs 5.04 and 5.08.
The Policy does not itself list what the deemed export benefits are in this case; it points to paragraph 7.03, which is explained in our article on paragraphs 7.03 to 7.06 and 7.08. The GST position is for the GST guides, such as Deemed Exports under GST and Section 147 of the CGST Act, 2017; this article states no GST rule.
Procedure under the Handbook
Paragraph 5.09: sourcing capital goods manufactured indigenously.
| Sub-paragraph | What it says |
|---|---|
| (a) | The holder intending to source capital goods manufactured indigenously makes a request to the RA for an Invalidation Letter or an ARO. |
| (b) | Deemed export benefits as given in paragraph 7.03 of the Policy are available. |
| (c) | The request can be made along with the application or during the validity of the EPCG Authorisation. |
| (d) | The applicant gives the name and address of the manufacturer(s) of the capital goods. |
| (e) | The RA issues the Invalidation Letter or ARO in quadruplicate. |
| (f) | The validity of the Invalidation Letter or ARO is co-terminous with the validity of the EPCG authorisation. |
Paragraph 5.08: procurement from an SEZ.
- (a) If the request comes with the application for authorisation for procurement of new capital goods from SEZs, the RA may issue a "Certificate of supplies from SEZ" with the details of the requested items, after marking the import item "Invalid for direct imports". The certificate contains the name, address and GSTIN of the SEZ unit; the GSTIN and address of the recipient unit of the holder where the goods will be installed; the name, description (with specifications where applicable) and quantity of items; and the individual value of the items.
- (b) The certificate is marked in quadruplicate, with a copy each to the holder, the SEZ supplier unit, the designated officer at the SEZ and the relevant port Customs authorities. It is issued as an online amendment to the authorisation and has to be transmitted.
- (c) Where the request is made in due course, it is accompanied by an authorisation utilisation status issued by the relevant Customs authorities named on the authorisation, so that the RA can verify actual utilisation. The certificate may be issued to the extent of the quantity available per the utilisation status. The same procedure applies where the request comes along with the application.
The Handbook does not state a time limit for issuing the Invalidation Letter, the ARO or the certificate; it is silent on that point.
Why the two routes are different
| Route | Paper | Obligation reckoned on | Supplier benefit |
|---|---|---|---|
| Domestic manufacturer | Invalidation Letter or ARO (paragraph 5.09) | Notional duty, taxes and cess saved on FOR value (paragraph 5.08 of the Policy) | Deemed export benefits under paragraph 7.03 |
| EOU supplier | As the paragraph permits domestic sourcing from EOUs | Paragraph 5.08 speaks of domestic sourcing and does not separate EOU supplies | Supplies counted for the EOU's positive NFE (paragraph 6.08(a)) |
| SEZ supplier | "Certificate of supplies from SEZ" (paragraph 5.08 of the Handbook) | Not stated in the Handbook paragraph | Not stated in these paragraphs |
Example with invented names
Kiran Textile Machines Pvt Ltd manufactures looms. Anand Weaves Ltd holds an EPCG Authorisation and wants to buy a loom from Kiran instead of importing. It asks its RA for an Invalidation Letter or ARO, giving Kiran's name and address (paragraph 5.09(d)). The RA issues it in quadruplicate, valid as long as the authorisation (paragraph 5.09(e), (f)). Kiran becomes eligible for the deemed export benefits of paragraph 7.03. Anand's specific obligation for this purchase is 25% less than the paragraph 5.01 obligation (paragraph 5.04(d)), measured on the notional duty saved on the FOR value shown in the document.
Related reading and the Act
For a plain scheme guide see GST Refund Under the EPCG Scheme. The deemed export benefits connected with supplies to EOUs are discussed in EOU Deemed Export Refund: When the Recipient Claims. The Policy is made under section 5 of the Foreign Trade (Development and Regulation) Act, 1992, and the Handbook is issued under section 6. The Policy is not a statute; it binds through the Act and the conditions of each authorisation.
Need help with the deemed export side of a domestic sale?
A supplier that sells capital goods against an Invalidation Letter or ARO needs its refund route clear before it invoices. Our GST refund on deemed exports team can look at the documents and the undertakings with you.
Key takeaways
- Paragraph 5.07: domestic sourcing through an Invalidation Letter or an ARO; deemed export benefits for the supplier under paragraph 7.03.
- Supplies from EOUs are permitted and count for the EOU's positive NFE (paragraph 6.08(a)).
- Handbook paragraph 5.09: request to the RA, name and address of manufacturer, issue in quadruplicate, co-terminous validity.
- Handbook paragraph 5.08: "Certificate of supplies from SEZ" with four sets of details.
- Paragraph 5.04(d): specific obligation 25% less.
Read next
- Paragraphs 5.04 and 5.08 of the Foreign Trade Policy, 2023: EPCG export obligation
- Paragraphs 7.03 to 7.06 and 7.08 of the Foreign Trade Policy, 2023: benefits for deemed exports
- Deemed Exports under GST
- GST Refund Under the EPCG Scheme
Disclaimer: Based on the chapter-wise text of the Foreign Trade Policy, 2023 and the Handbook of Procedures, 2023 published on the DGFT website, and on the later Notifications named in this article, as consulted on 2 October 2026. The copies carry no "updated up to" date. Notifications, Public Notices, Trade Notices, the ITC(HS) schedules, Appendices and forms change often; the current text on the DGFT website should be checked before acting. This article is general information, not legal advice; check the official text before acting.