Benefits Of Setting Up An Export-Oriented Unit In India

India has rapidly emerged as a global hub for export manufacturers and has retained a dominant position globally due to several enticing benefits, such as a supportive ecosystem, government policies, skilled labour pools, competitive costs and availability of world-class infrastructure. As schemes such as the Export Oriented Units ("EOU") scheme, Electronics Hardware Technology Park ("EHTP") scheme, Software Technology Park ("STP") scheme and Bio-Technology Park ("BTP") scheme for manufacturing of goods, re-making, reconditioning, re-engineering, rendering services and development of software which were aimed at promoting exports, attracting investments for export production, and enhancing the foreign exchange earnings of the country by creating additional production capacity. Amongst all the existing schemes under the Foreign Trade Policy, 2023 ("FTP"), the EOU scheme has gained noteworthy popularity amongst manufacturers owing to the distinct benefits and relaxations provided under the FTP.

Setting up an EOU in India presents a multitude of advantages, benefiting the export business. This article explores the legal, economic, and strategic merits of setting up an EOU in India, highlighting the favourable regulatory environment, attractive incentives, and operational flexibility that make it a compelling choice for businesses looking to expand their global footprint.

Key Benefits of Setting Up an EOU

EOUs enjoy numerous benefits under the FTP, which include but are not limited to the following:

1. Simplified Application Process: Applications for establishing EOUs are considered by the approval committee/board of approval as per the FTP and the handbook of procedures. On the other hand, units such as EHTPs/STPs and BTPs require approvals and permissions from the concerned ministries and departments. In addition to the simplified application and approval process, EOUs also enjoy fast-tracked clearance processes.
2. Exemptions from Investment Criteria: EOUs engaged in the business of information technology, services, handicrafts, agriculture, animal husbandry, brass hardware and handmade jewellery sectors have been exempted from the minimum investment criteria.
3. Exemptions for New Units: New units set up as EOUs have been allowed to make advance sales of finished products/rejects/scrap/remnants and by-products to the Domestic Tariff Area ("DTA") i.e. the territory of India, subject to the sale not exceeding 50% (Fifty Percent) of the estimated exports in the first year. Further, pharmaceutical units have been allowed to calculate the sales based on the estimated exports in the first 2 (Two) years.
4. Specific Permission for Export of Prohibited Items: Items prohibited under the Indian Trade Clarification based on Harmonized System ("ITC-HS"), may be exported by EOUs by obtaining permission from the authorities. The EOU shall be required to ensure that the inputs for such export items are not being procured from the DTA.
5. Goods and Services Tax ("GST") Refunds: EOUs are eligible to claim the input tax credit for GST paid on supplies from the DTA. The refunds shall be subject to conditions and documentation under the applicable laws. Additionally, EOUs can also procure excisable goods falling under the Central Excise Act, 1944 from the DTA without paying the applicable excise duty.
6. Import of Second-Hand Capital Goods: EOUs may import second-hand capital goods, without any limit on the age and without the payment of duties and taxes on such second-hand capital goods.
7. Leasing of Capital Goods: EOUs may, on the basis of a contractual agreement, source goods from domestic/foreign leasing companies.
8. Exemptions on Imports from the DTA: EOUs may procure or import certain specified goods as inputs from the DTA without paying any duties or taxes.
9. Exemption from State Trading Regime: As EOUs are established with the primary objective of exporting their entire production of goods, the state trading regimes do not apply to EOUs, except in the case of chrome ore/chrome concentrate. This allows EOUs to operate under a more liberalized framework and reduces the complexities of ensuring compliance with state trading regimes.
10. Exemptions on Sub-Contracting Works: Import of goods for execution of export orders placed on EOU by foreign suppliers on a job work basis has been allowed with or without payment of duties and/or taxes as provided under the Chapter 6 of the FTP, subject to the condition that no clearance for the DTA shall be allowed.

Other Benefits of Setting Up as EOUs

In addition to the benefits of setting up EOUs enumerated above, there are certain additional benefits including the following:

1. Exemption from industrial licensing for the manufacture of items reserved for micro and small enterprises;
2. Procurement from the DTA or bonded warehouses in the DTA or international exhibitions in the DTA, without payment of customs duties;
3. Realisation of export proceeds within 9 (Nine) months;
4. Retention of 100% (Hundred Percent) export earnings in exchange earner's foreign currency account;
5. Bank guarantee exemption at the time of import from or going for job work to the DTA, subject to certain conditions;
6. 100% (Hundred Percent) Foreign Direct Investment ("FDI") permitted through automatic route similar to SEZ units; and
7. Permission for infrastructure-sharing facilities among EOU units (on a request which may be approved on a case-to-case basis).

EOUs vs Special Economic Zone ("SEZ") Units

EOUs are designated units specifically set up to undertake exports of their entire production of goods and/or services and may be set up to export all kinds of goods and/or services, except items which have been prohibited under the ITC-HS for export and import items.

Export units may be set up anywhere in India subject to the fulfilment of the investment criteria.

SEZ units are established within the designated SEZ areas that operate as duty-free enclaves and have been deemed as separate territory for the purposes of trade operations, including duties and tariffs. While both EOUs and SEZ units offer benefits for businesses engaged in export activities, EOUs remain a more attractive option for the following reasons:

1. Establishment and Location: EOUs can be established anywhere in India, without any restrictions on their location, provided the units fulfil the criteria set forth by the government. SEZ units on the other hand must be set up in the areas specifically designated as SEZ by the government and treated as foreign territory for the purposes of trade.
2. Regulatory Approvals: Establishing an EOU requires approvals under the FTP from the jurisdictional development commissioner which is less stringent as compared to the rigorous regulatory approvals required for establishing a unit in the SEZ and further compliance with the complex regulatory requirements.
3. Taxation: Units in SEZ enjoy zero rates and hence have been exempted from GST. However, the units in SEZ are required to pay GST in case of outward supply made to the DTA i.e. the territory of India, Further, EOUs are required to pay GST on inward supply of inputs procured from the DTA. However, EOUs can claim input tax credits for the GST paid on domestic procurements.
4. Physical Movement of Goods: Unlike EOUs, physical movement of goods to and from the SEZs are under significant control by virtue of SEZ being a distinctly demarked area.
5. Compliances: While EOUs are required to maintain minimal records and reports, SEZ units are required to undertake extensive reporting and compliances.

Conclusion

The EOU framework in India stands out as a strategic choice for entrepreneurs willing to thrive in the global markets. Establishing an EOU in India not only facilitates duty-free procurement of raw materials and capital goods but also involves the least number of compliances, costs, and approvals and allows for relaxation in taxes and reimbursement of taxes such as input tax credits, thereby improving cash flow and reducing overall costs. By setting up EOUs, export-oriented businesses may not only avail of these benefits but also significantly boost their export operations and mark their presence globally in a thriving ecosystem.

How Can We Assist?

Our EOU consulting team is committed to assist you and your business to harness the best opportunities that will have a huge operational and financial impact on the overall growth of your business. Our team of experts excel in providing customised solutions in relation to assistance in establishing an EOU along with drafting and guidance in submitting all the documents to the authorities for various approvals required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.