Export Oriented Units (EOUs) : A Story Of Rise And Fall March 2018 issue

EOUs have had their glorious years, especially during early years of this century. In 2005, EOUs alone accounted for 10.45% of the overall Indian exports.

Export Oriented Units (EOUs) : A Story Of Rise And Fall

More than three-and-a-half decades back, the EOU Scheme was announced amidst a lot of fanfare. The idea was to enhance exports and earn ‘precious’ foreign exchange. Considering that an EOU was completely exempted from income tax, the scheme was successful in achieving its initial objectives. Today however, EOUs remain just geographies on paper. Is the scheme nearing its end?

Interview by Manisha Choudhari | May 2016 Issue | The Dollar Business

I ndia had set up Asia’s first Export Processing Zone (EPZ) in Kandla in 1965, making it one of the first off the block amongst Asian countries when it came to recognising the effectiveness of the EPZ model in promoting exports. Since then India has introduced a number of schemes designed to help increase merchandise and service exports – few worth a mention are Biotechnology Parks (BTPs), Software Technology Parks (STPs), Electronic Hardware Technology Parks (EHTPs), and the much-touted Export Oriented Units (EOUs) Scheme, which was announced with a lot of fanfare in 1981. The EOU Scheme among many other benefits allowed for complete income tax exemption on exported earnings and drew a positive response from investors. It had to – about a third of a company’s profits goes to the exchequer as income tax – as an exemption from this tax was bound to attract the industry. 

The Rise of EOUs

True to their name, EOUs are units undertaking the export of their entire production of goods and services (except permissible sales in Domestic Tariff Area, aka DTA) that are set up under the Export Oriented Unit (ESEZs to The ForeOU) Scheme. The ambit of manufacturing includes repair, re-making, reconditioning, re-engineering, etc. The objective of this scheme is to promote exports, enhance foreign exchange earnings, attract investment for export production, and increase employment. A defining criteria for EOUs is that they need to be positive Net Foreign Exchange (NFE) earners. NFE for EOUs is calculated on a lenient five-year block period basis. In fact, if EOUs are unable to meet the criterion due to hardship, the five-year block period can also be extended for another year – but, of course, on case to case basis. Apart from industrial incentives offered by the state governments, EOUs get many more benefits. They require no license for import and are exempt from Central Excise duty in procurement of capital goods, raw-materials, consumables spares, etc., from the domestic market. EOUs are also exempt from Customs duty on import of capital goods, raw materials and consumables. EOUs being export centres can operate in a variety of sectors, from steel to agro-products to software services; have the freedom and flexibility to set up their units anywhere in the country, keeping in mind factors like the proximity to ports and raw materials, and like SEZs that are constrained to government notified areas. But the real attraction of the scheme remained the exemption from ‘Income Tax’ on export earnings. 

In fact, this was the real reason why the EOU Scheme flourished, especially during its early years. According to the report ‘Review & Revamp EOU Scheme’ there was a steady growth in setting up of EOUs – from 1,556 in FY2001 to 2,586 in FY2010, and rapid export growth from them – from Rs.15,912 crore in FY2001 to Rs.84,135 crore in FY2010. 

 And The Sunset

The Income Tax exemption that EOUs were enjoying since they were set up came to an end with the Finance Act 2011. Section 10B of the Income Tax Act, 1961 under which this exemption was allowed came with a sunset clause which was due to lapse on April 1, 2010. This was extended first to April 1, 2011 and then to April 1, 2012. It was made clear that there would be no more extension and the exemption would not be allowed from assessment year 2012. And with this started the decline of EOUs.

While some may argue that even after the withdrawal of the exemption, EOUs were attractive because they keep enjoying Customs and Excise exemptions.But what must be noted here is that these exemptions come with substantial obligations – obligations that at times negate the appeal of the benefits. On the other hand, similar benefits are also available to non-EOUs under various schemes like EPCG and Duty Drawback under the Foreign Trade Policy 2015-20 and come with a lesser burden of obligations. This has made the playing field uneven for EOUs. Indeed, the decision to withdraw tax benefits was an inflexion point. The number of EOUs dropped from 2,200 in FY2013 to 1,977 by mid-December of FY2016, a drastic fall. What’s more? In FY2015 alone, 120 units were shutdown. Many consultants advised their clients to de-bond their EOUs and shift to other beneficial schemes.

Commenting on the scenario, Dr. Guruprasad Mohapatra, Joint Secretary for EOUs & SEZs, GoI, says, “The withdrawal of income tax benefit has led to a decline in the number of functional EOUs. There has also been a decline in exports from EOUs – from Rs.1,71,498 crore in FY2009 to Rs.79,343 crore in FY2012. However, in recent years, we have seen some recovery in exports from EOUs, though FY2009 figure is far from sight.”

Withdrawal of Income Tax Benefit Have Led to A Decline In Functional EOUs

SEZs to The Fore

SEZs are another reason for the troubles of EOUs. In FY2009, in the total exports from EOUs and SEZs, EOUs accounted for 63.24% and SEZs for 36.76%. In FY2015, this share dropped to 12.18%, while SEZs accounted for 87.82% of total exports from both zones.

Both SEZs and EOUs have similar objectives – that is to generate employment, get foreign investment, and increase exports. Talking about benefits, SEZs are presently more attractive due to the available infrastructure, the procedure of clearances, and tax exemptions (until the MAT and DDT came into the picture). But, nevertheless, SEZs are doing better because of the extent to which these incentives are given, and due to the government’s focus on the newer SEZs.  

Stemming The Decline

Can we stem the decline? Yes, we can. A CAG (Comptroller and Auditor General) report recommended the same in 2015 in its performance audit of the EOU Scheme stating, “Ministry may initiate necessary corrective measures to arrest the decline with specific timelines and measurable outcomes so that the basic objective of export growth is achieved utilising the uniqueness of the scheme.”

What needs to happen is rationalisation of policies. One step would be to make sales to DTAs easier. Dr. Smita Naram, CMD, Ayushakti Ayurved Pvt. Ltd. shares a letter with The Dollar Business that was sent by Chemexcil to the Prime Minister a few months ago which pointed out the problem stating, “Foreign Trade Policy allows EOUs to sell 50% of their FOB export value into DTAs.

The notification provides charging of duties as if goods are imported into India. The specific provision allows charging of 50% of Basic Customs Duty (BCD), plus Countervailing Duty (CVD) and Special Additional Duty (SAD), or VAT, in lieu of SAD. However, when the same goods are imported under FTAs or any Exemption Notification by domestic users, they are entitled to reduced BCD, including 0% BCD. This duty anomaly makes the DTA sale of any EOU product uncompetitive in domestic market, resulting into capacity underutilisation of such EOUs, thereby increasing overheads on the export product.” This is really a concern and should be addressed if we want to revive EOUs.

Further, EOUs are also not eligible to avail direct tax benefits and exemptions under MEIS. Additionally, EOU products exported via DTAs cannot avail MEIS. EOUs also suffer from having to take multiple levels of approval which need to be expedited.

March was the 16th straight month of decline in exports from India. Should these issues be sorted out, EOUs could possibly stand up to be counted in raising the exports from the country. All it requires is willingness on the part of the policymakers. Need we say more? 

Share of EOUs in India’s exports


“Exporters Now find EOU Scheme Less Attractive”

Dr. Guruprasad Mohapatra Joint Secretary, SEZ & EOU, Department of Commerce, Ministry of Commerce & Industry, GoI


TDB: How successful have Export Oriented Units (EOUs) been for India?

Dr. Guruprasad Mohapatra (GM): The EOU scheme provides liberty to an entrepreneur to set up his manufacturing plant at any location within the national territory as per his convenience, in terms of availability of raw material, access to port, existence of hinterland facilities, availability of skilled manpower, existence of industrial infrastructure, etc. Being composite in nature, the scheme brings many fiscal, institutional, and procedural benefits for the units under one roof. A Committee under the Chairmanship of Shri S. C. Panda, which studied the EOU Scheme and submitted a report titled ‘Review & Revamp EOU Scheme’ had found that there was a steady growth in setting up of EOUs – from 1,556 in FY2001 to 2,586 in FY2010, and rapid export growth from this sector – from Rs.15,912 crore in FY2001 to Rs.84,135 crore in FY2010. The contribution from EOU scheme in total country’s export increased from 11.52% in FY2001 to 53.88% in FY2008. Today, there are 1,977 (as on December 31, 2015) EOUs spread all over the country and the total exports from EOUs has been Rs.64,321 crore in FY2015 and Rs.41,655.08 crore in FY2016 (for April 1 to September 30, 2015 period).

TDB: What challenges do EOUs face?

GM: The primary reason for the decline in EOUs export performance is because Income Tax benefits on the export profits were stopped in April 2011. This has probably pulled down the enthusiasm of potential investors in EOUs. Exporters also find EOU Scheme less attractive because duty-free import of raw material and capital goods, and Chapter 3 benefits are available in DTA as well.

TDB: In FY2009, in the total exports from EOUs and SEZs, EOUs accounted for 63.24% and SEZs for 36.76%. In FY2015, this share dropped to 12.18%, while SEZs accounted for 87.82% of total exports from both zones. Would you say that SEZs have affected the performance of EOUs?

GM: Though both SEZs and EOUs do exports, they are based on different institutional framework and objectives, and, hence, cannot be compared. Each scheme has its own advantages, and it is up to the exporter to choose the most beneficial scheme. SEZs require huge investment, large area, and quality infrastructure. Also, because of its sheer size, the process of setting up an SEZ takes longer to operationalise and it requires approvals from various agencies. Whereas in the case of EOU, it can be set up anywhere, and unlike SEZs, there is no minimum land requirement. It is quite natural that with the enactment of the SEZ Act, 2005 and after the gestation period for the SEZs to take off, there has been a significant growth in exports from SEZs. The large number of IT/ITES SEZs have also contributed significantly to this growth story.

TDB: Union Budget 2016-17 has extended the warehousing period for all goods used by EOUs without limit (earlier 5 years for capital goods and 3 years for other goods). Will it have a positive impact on EOUs? 

GM: Well, it is expected that the steps taken in the Budget 2016-2017 will have a positive impact on exports from India, and the extension of warehousing period for goods used by EOUs is in the right direction of ‘ease of doing business’. Generally, fiscal consolidation and an improvement in ‘ease of doing business’ will also help EOUs, albeit indirectly.

TDB: What plans do you have in store to revive EOUs, if any?

GM: With a view to revive exports from India, a Committee was constituted to study the EOU Model and suggest recommendations. Accordingly, the Ministry has already implemented eight of the 32 recommendations made, which have been incorporated in the FTP 2015-20. Also, the issue of reimbursement of Central Sales Tax (CST) paid by EOUs on purchases made from another EOU has been resolved by amending Appendix 6H of FTP 2015-20, which now allows reimbursement of CST on purchases made by an EOU from another EOU.

TDB: Karnataka has 446 functional EOUs, Tamil Nadu has 410, and Maharashtra has 224, while only Mizoram and Meghalaya have one EOUs each in the whole of northeast. Why is it so?

GM: The scheme of 100% EOUs does not envisage setting up of EOUs by the government. As per the scheme, the exporters who desire to avail the benefits provided to 100% EOUs under Chapter 6 of the Foreign Trade Policy 2015-2020, and are willing to work under the bonded environment can apply to the jurisdictional Development Commissioner of SEZ and avail the benefits of the 100% EOU Scheme after fulfiling all the requirements of the same. As the scheme of 100% EOUs is private investment driven, obviously, the entrepreneurs in those states have not taken benefit of the scheme. It may also be noted that states like Karnataka, Gujarat, Tamil Nadu and Maharashtra are more industrialised states and have easier access to ports. This probably explains the concentration of EOUs in these states.