Setting up of Export Oriented Units: Essential Factors

Ashish M. Shaji

21 May, 2020

The scheme of export oriented units was introduced at the beginning of the 1980s. It is complementary to the SEZ scheme and has the same production regime; however, it offers a wide range of options in locations with reference to factors such as:

• Source of raw materials;
• Port of export, facilities of hinterland;
• Availability of technological skills;
• Industrial base existence; and
• And the need for a larger area of land for the project.

What are the Objectives of Export Oriented Units?

Following are the objectives of Export Oriented Units’:

• It aims to increase exports;
• It looks to earn foreign exchange for the country;
• It facilitates the transfer of the latest technologies;
• Stimulates Foreign Direct Investment (FDI);
• It seeks to generate additional employment; and
• It aims to improve the supply chain.

Eligibility

The units that are undertaking to export the whole of their production of goods and services apart from permissible sales in DTA (Domestic Tariff Area) under this policy can be set up under various schemes like Export Oriented Scheme, Electronic Hardware Technology Park, scheme for the manufacture of goods and rendering of services.

Incentives for Export Oriented Units

Different forms of incentives for the EOU’s are as follows:

• Duty-free imports, procurement from bonded warehouse, consumables, office or any other capital goods etc.
• Procurement of goods without paying the Central Excise Duty from Domestic Tariff Area.
• Supplies made by the DTA manufacturer are eligible for export benefits, which include a drawback, refund of Terminal Excise Duty, and advance authorization issue, which ensures duty-free import to the DTA supplier.
• Reimbursement in full of Central Sales Tax on goods bought from DTA against Form –C for the manufacture of goods for export.
• Income from export exempted from payment of income tax.
• DTA sale up to 50% FOB value of exports allowed on payment of the concessional rate of Central Excise Duty.
• Duty-free goods, except capital goods, to be used over a time period of three years.
• Proceeds from exports to be realized within a period of twelve months. Up to 100% of retention allowed of export earnings in the EEFC (Exchange Earners Foreign Currency) account.
• Goods permitted to be supplied duty-free in DTA against Advance Authorization/DFIA (Duty Free Import Authorisation) issued by DGFT (Director General of Foreign Trade).
•  Subject to fulfillment of some conditions, job work/sub-contracting for or from DTA permitted.
• Import or export of goods allowed through personal carriage and foreign post office.
• FDI up to 100% permitted under the guidance of DIPP (Department of Industrial Policy and Promotion).
• Exemption from industrial licensing for the manufacture of items reserved for the SSI (Small Scale Industries) sector.
• Software units permitted to utilize computers for training purposes.
• Export Oriented Units permitted to install one fax machine and two computers outside the bonded area of the unit.
• Up to 100% depreciation permitted on capital goods.

Important factors to keep in mind while setting up an Export Oriented Unit (EOU)

I) Application for setting up EOU

The application for EOU set up is made to the Board of Approval. Once it approves, the letter of permission is provided for setting up the EOU. The letter provides you two years for the construction of the plant and installation of machinery. It may be extended by another year. The EOU shall have to achieve positive foreign exchange within five years once the operation begins.

II) Minimum Investment

In order to assume the status of an EOU, the minimum investment required to be put into plant and machinery is one crore. However, it may be noted that this is not applicable to software technology parks, electronic hardware technology parks, and biotechnology parks.

III) Location of EOU

EOU’s location should be minimum 25 kilometers away from the standard urban area limits except if it is set up in the industrial area or if it deals in non-polluting products or services. Apart from the local zonal office and state government, EOU’s set up is also guided by the rules and regulations of the environment. Therefore it is essential to understand that even if the EOU fulfills all the location policy but is not in accordance with the environmental rules, then the Ministry of Environment under the Government of India can cancel such a proposal.

IV) Industries where EOU’s are formed

In the beginning, the EOU’s revolved around the industries such as textile, electronic, food processing, chemical industries, plastic and minerals, but over the years the EOU’s have been set up for engineering, manufacturing, agriculture and allied sectors, services, etc.

V) Special License

A special license is essential for setting up an EOU for sectors such as atomic, defense sector, narcotics and psychotropic substances, and certain tobacco products.

VI) Bonding period

The EOU’s are licensed to manufacture goods and exports within a bonded time period of five years. This time period may be extended five more years by the Development Commissioner.

Export Oriented Units impact on Exports

The positive effect of the EOU scheme was eminent in the first two decades of its beginning till the floating of the SEZ scheme. EOU’s provided exporters the freedom to set up an export business in places of their choice, which were different from free trade zones and export processing zones that were having certain locational restrictions. It has provided the exporters to choose from a range of industrial sectors while setting up their Export Oriented Units.

Conclusion- Export Oriented Units

Export Oriented Units have various benefits as they can claim reimbursement on the GST amount they pay. The EOU may apply for an input tax credit on the paid GST while providing supplies to the DTA, or it can claim a refund of the GST.