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Export Oriented Unit Scheme
The Export Oriented Unit (EOU) scheme was introduced in the year
1980 vide Ministry of Commerce resolution dated 31st December
1980. The purpose of the scheme was basically to boost exports by
creating additional production capacity. It was introduced as a
complementary scheme to the Free Trade Zones/ Export Processing
Zone (EPZ) Scheme introduced in the sixties, which had not
attracted many units due to locational restrictions. The exporters
showed willingness to set up units with long term commitment to
exports under Customs bond operations provided they had the
freedom to locate them in places of their choice and given most of
the benefits as provided to units set up in the Zones.
Over the years the Scheme has
undergone various changes and its scope also expanded
substantially as compared to the initial Scheme, which was
basically for manufacturing sector with certain minimum value
addition in terms of export earnings. The EOU scheme is, at
present, governed by the provisions of Chapter 9 of the Export and
Import (EXIM) Policy, (1997-2002) and Chapter 9 of the Handbook of
Procedures, Volume-I (HOP). Under this scheme, the units
undertaking to export their entire production of goods are allowed
to be set up. These units may be engaged in the manufacture,
services, development of software, trading, repair, remaking,
reconditioning, re-engineering including making of
gold/silver/platinum jewellery and articles thereof, agriculture
including agro-processing, aquaculture, animal husbandry,
bio-technology, floriculture, horticulture, pisciculture,
viticulture, poultry, sericulture and granites. The EOU’s can
export all products except prohibited items of exports in ITC
(HS).
Under the EOU scheme, the
units are allowed to import or procure locally without payment of
duty all types of goods including capital goods, raw materials,
components, packing materials, consumables, spares and various
other specified categories of equipments including material
handling equipments, required for export production or in
connection therewith. Even the goods appearing in the restricted
list of the EXIM Policy (1997-02) are permitted to be imported.
However, the goods prohibited for import are not permitted. In the
case of EOU’s engaged in agriculture, animal husbandry,
floriculture, horticulture, pisciculture, viticulture, poultry,
sericulture and granite quarrying, only specified categories of
goods mentioned in the relevant notification have been permitted
to be imported duty-free.
The Customs exemption
notifications for import & related Central Excise exemption
notification when the goods are procured from local manufacturing
units, prescribe several conditions to be fulfilled by the
beneficiaries keeping in view the objective of the Scheme and to
prevent abuse. Working in Customs Bond is one of the essential
prerequisite-there being few exceptions. They also provide various
flexibilities in the matter of taking out the materials for
jobwork, inter-unit transfer. The EOU’s are required to achieve
the minimum NFEP (Net Foreign Exchange Earning as a Percentage of
Exports) and the minimum EP (Export Performance) as per the
provisions of EXIM Policy. The NFEP and EP varies from sector to
sector. As for instance, the units with investment in plant and
machinery of Rs.5 crore and above are required to achieve positive
NFEP and export US$ 3.5 million or 3 times the CIF value of
imported capital goods, whichever is higher, for 5 years. For
electronics hardware sector, minimum NFEP has to be ‘positive’ and
minimum EP for 5 years is US$ 1 million or 3 times the CIF value
of imported capital goods, whichever is higher. NFEP is calculated
cumulatively for a period of 5 years from the commencement of
commercial production according to a prescribed formula.
The EOU’s are licensed to
manufacture goods within the bonded premises for the purpose of
export. As per the policy, the period of bonding is initially for
five years, which is extendable to another five years by the
Development Commissioner. On completion of the bonding period, it
is for the unit to decide whether to continue under, or to opt
out, of the scheme. The imported capital goods are allowed to be
warehoused for a period of 5 years. For other goods, the
warehousing period is one year, which can be extended further by
the Commissioner / Chief Commissioner of Customs. On an
application being made by the unit, extension of the time limit is
granted in all cases unless there is malafide and diversion of
duty free materials. As on 31-3-2001, there are about 1,350 EOU’s
functioning in the country.
Administrative Machinery
The EOU’s basically function under the administrative control of
the Development Commissioner of the Export Processing Zones, whose
jurisdiction has been notified by the Ministry of Commerce. In
all, there are seven Development Commissioners at Mumbai,
Gandhidham, Chennai, Cochin, Vizag, Noida and Calcutta, who
supervise the functioning of the EOU’s and eight Export Processing
Zones/Special Economic Zones in the country. The Development
Commissioners of the EPZ’s /SEZ’s are the Licensing Authorities in
respect of units under the EOU Scheme, as per specified
territorial jurisdiction as indicated in the Export and Import
Policy.
The provisions of the Customs
and Central Excise law in respect of the EOU’s are administered by
the Commissioners of Customs and Central Excise, who work under
the control of Central Board of Excise & Customs. The work
relating to EOU’s is handled by the staff of jurisdictional
Commissioner of Central Excise. However, in the case of EOUs
located in port cities/towns or within the municipal limits of
port cities/towns, the work is handled by jurisdictional
Commissioner of Customs, Seaport.
Application Procedure
Paragraph 6.7 of the Exim Policy, (2002-2007), deals with the
application for the approval of units under the EOU Scheme. It is
provided that the project applications for EOU units except for
service sector units satisfying the conditions mentioned in the
Handbook of Procedures may be given approval within 15 days by the
Unit Approval Committee. In all other cases, the approvals may be
granted by the Board of Approvals (BOA) set up for that purpose.
Further, the Trade Policy
announced on 13-8-1991 included a new package for 100% EOU units.
As a result, along with the removal of the industrial licensing
requirement for larger segment of industry, a route of automatic
approval was introduced for the EOU’s falling within a defined
parameter. Such proposals were to be cleared within 2 weeks.
As per the present policy and
procedure, in case the unit is proposed as an EOU, 3 copies of the
application in the prescribed proforma are to be submitted to the
Development Commissioner concerned.
Completed application entitled
‘Application form for EOU’s’ must be accompanied by a crossed bank
draft for Rs.5000/-. The receipt of the application will be
acknowledged by the Development Commissioner and a reference
number will be given.
If the application satisfies
the specific conditions, the Letter of Approval (LOA)/ Letters of
Permission (LOP) shall be issued within 15 days by the Development
Commissioner. This shall specify the conditions/parameters and
also obligations and conditions under which he unit shall work.
The LOP shall specify the
items of manufacture/service activity; annual capacity; projected
annual export performance for five years in dollar terms; Net
Foreign Exchange earnings (NFE); limitation and such other matter
as necessary.
The LOP shall be construed as
a license for all purposes under the scheme, including for the
procurement of raw materials and consumables either directly or
through designated canalizing agency.
The LOP shall be valid for 3
years from the date of commencement of production. This period is
extendable for a period of further 3 years at a time by the
Development Commissioner.
Benefits for the unit once registered as an EOU
The eligible EOU unit may import without payment of duty all types
of goods required by it (other than prohibited goods in the ITC
(HS)) for manufacture, production, processing etc. (Customs Duty
Exemption)
In a parallel to the customs
duty exemption notifications enabling the EOU’s to import goods
for their use without payment of customs duty, there are central
excise duty exemptions which exempt the goods procured by the
EOU’s from domestic manufacturers.
Income Tax concessions
EOU units can avail the exemption from payment of corporate income
tax in terms of Section 10 B of the Income Tax Act, 1961. Under
the provisions of the said section, the entire profits of the EOU
would be eligible for a deduction for a 10-year period from the
date of start of commercial production. The deduction is subject
to an overall expiry date of March 31, 2009.
The CBDT in its Circular no.1
dated January 6, 2005 has clarified that in the case of a unit
(engaged in domestic sales), which converts into an EOU, the unit
can avail the deduction under section 10B of the Act from the year
from which it receives the EOU approval. Given the fact that the
CBDT circular recognizes a conversion, it should be possible to
claim an income tax exemption post conversion. However, given the
provisions of the Act and the circular, any unit which has been
set up before April 1, 1999 would not be eligible for the same tax
deduction, irrespective of when the conversion happens.
The concessions are subject to
the fulfillment of the following conditions:
# The unit should be engaged in manufacturing.
# The unit is not formed by splitting up or reconstruction of an
existing business.
# The unit should not be formed by the transfer to a new business
of machinery or plant previously used for any purpose.
# The sale proceeds in foreign exchange must be received within
the period of 6 months or such extended period as may be allowed
at the end of the previous period.
# With a few exceptions there should be no reorganization of the
business and ownership or beneficial interest in the unit must not
be transferred.
# The profits from exports shall be the amount, which bears the
same proportion to the profits of the unit as the export turnover
bears to the total turnover of the unit.
# A report of the Chartered Accountant in the prescribed form 56 F
or 56 G must be submitted along with the return of the income.
Conversion of DTA unit into
EOU
Domestic Tariff Area (DTA)
signifies an area within India, which is beyond the Special
Economic Zones (SEZ’s).
An existing DTA (Domestic
Tariff Area) unit may apply for conversion into an EOU unit but no
concession in duties and taxes would be applicable under the
scheme for the plant, machinery and equipment already installed.
Guidelines for conversion:
There would be no concessions in or refund of duty (customs,
excise etc.) and taxes on machinery, plant and equipment already
installed in the DTA at the time of its conversion into an EOU.
On conversion into an EOU the
export obligation under the EPCG scheme, if any, will be met
concurrently from the exports by the unit as an EOU. In this case
there shall be no refund of duty paid by the unit under EPCG
scheme. If the unit is having outstanding export commitment in
proportion to the quantum of duty free material actually utilized
for production and be permitted to carry forward the unutilized
material, if nay under the EOU scheme.
If the industrial unit is both
operating as a domestic unit as well as an EOU unit, it shall have
two distinct entities with separate accounts. It is however, not
necessary for it to be a separate legal entity, but it should be
possible to distinguish the imports and the exports or supplies
effected by the EOU unit from those made by the other units of the
enterprise.
In event of partial conversion
of a DTA unit into an EOU unit and vica versa after necessary
approval of the competent authority, the EOU as well as the DTA
unit continue to operate from the same or adjacent premises.
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Grab
the EOU Advantage: Conversion of Existing Manufacturing Units
into Export Oriented Units (EOU’s)
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The
author can be reached at: rohanbagai@legalserviceindia.com /
