Introduction
The Export Oriented Units (EOU) scheme presents a valuable opportunity for businesses aiming to expand their reach into global markets. Designed to bolster export performance, the EOU scheme offers significant advantages, including tax exemptions and streamlined import processes. To fully leverage these benefits, businesses need to understand the eligibility criteria, the types of goods that can be imported, and the tax implications involved. This article provides crucial insights into how businesses can maximize the benefits of the EOU scheme, ensuring compliance with regulations while optimizing their operations.
What are export-oriented units?
Export-oriented units (EOUs) are businesses dedicated to exporting their entire production of goods. EOUs can engage in various activities such as manufacturing, services, software development, repair, remaking, reconditioning, and re-engineering. They can also produce gold, silver, and platinum jewellery and articles. Additionally, units involved in agriculture, agro-processing, aquaculture, animal husbandry, biotechnology, floriculture, horticulture, pisciculture, viticulture, poultry, sericulture, and granite production are eligible for EOU status.
To qualify under the EOU scheme, units must export their entire production of goods and services, except for a permissible level of sales in the Domestic Tariff Area (DTA) as per the Foreign Trade Policy. It is important to note that trading units are not covered under this scheme.
Who can qualify under the Export Oriented Units Scheme?
To qualify under the EOU scheme, units must meet the export performance criteria outlined in the Foreign Trade Policy of 2023 published by the Ministry of Trade and Commerce. This includes maintaining a specified level of export turnover and adhering to other regulatory requirements. Additionally, EOUs are allowed to sell a limited portion of their products in the Domestic Tariff Area (DTA), subject to the payment of applicable duties.
According to the latest Foreign Trade Policy published in 2023 by the Ministry of Trade and Commerce, only projects with a minimum investment of Rs. 1 crore in plant and machinery will be considered for establishment as EOUs. However, businesses engaged in the production and export of handicrafts, agriculture, floriculture, aquaculture, animal husbandry, information technology, services, brass hardware, and handmade jewellery sectors are eligible to apply for EOU status regardless of this investment threshold.
Significance for the businesses for enrolment under the Export-oriented Units scheme
Enrolling under the EOU scheme offers significant advantages and opportunities for businesses. One of the key financial benefits is the ability to import raw materials, capital goods, and other inputs without paying customs duties, which substantially reduces production costs.
Additionally, businesses under the EOU scheme can subcontract parts of their production processes to other EOUs, Special Economic Zones (SEZs), or domestic suppliers, which helps them meet their export obligations within the required timeframe. EOUs are also allowed to sell a limited portion of their products, as well as finished products, rejects, waste, scrap, remnants, and by-products, in the DTA.
Moreover, the EOU scheme facilitates the attraction of foreign direct investment (FDI) through the automatic route, making it easier for businesses to access capital and advanced technology. The scheme also provides simplified import and export procedures, reducing the administrative burden and expediting transactions.
When Does the Importation of Goods Become Necessary for Businesses under the EOU Scheme?
Importing goods can be beneficial as well as sometimes necessary for businesses for various reasons including fulfilling export obligations. Businesses often need to import raw materials, components, and inputs that are not readily available or cost-effective to produce domestically. These imports are crucial for manufacturing goods that meet international quality standards and remain competitive in global markets.
Importing specialized machinery and technology can significantly enhance a business’s production capabilities, improve efficiency, and support innovation. Access to advanced technology through imports enables businesses to maintain their competitiveness and adapt to evolving market demands.
Many times, imported goods may offer better quality or cost advantages compared to goods available in the domestic markets. By importing goods can help businesses maintain product standards and it may help reduce production costs and maintain the production of goods compatible with international standards.
Entering the EOU scheme also allows businesses to integrate into the global supply chain by sourcing materials from international markets where they are more accessible or competitively priced. This integration helps optimize production processes and logistics.
Sometimes businesses may need to import goods to fulfil export obligations or meet contractual agreements with international clients.
Types of Goods and Source Locations for Import by Businesses under the EOU Scheme
Under the EOU scheme, businesses can import goods from various sources to support their manufacturing and export operations. They can acquire goods directly from foreign suppliers or manufacturers, as well as procure certain items from the DTA within India, including raw materials and components necessary for production.
EOUs are allowed to import special chemicals and catalysts essential for smooth and efficient manufacturing processes. They can also import spare parts and components for machinery maintenance, ensuring minimal downtime and continuous production. EOUs engaged in software manufacturing and export can import specific software. Gems and jewellery EOUs can source gold, silver, and platinum through nominated agencies on a loan or outright purchase basis.
Importing certain items categorised under Special Chemicals, Organisms, Materials, Equipment, and Technologies (SCOMET) is subject to specific regulations and restrictions outlined in India’s Foreign Trade Policy. EOUs must adhere to these regulations to comply with national and international security and trade guidelines.
Packing materials necessary for preparing goods for export can be imported by EOUs, and prototypes can be imported for product development and testing to support innovation and product quality. Additionally, units can import goods, including capital goods, either free of cost or on loan/lease from clients for approved activities. Capital goods, such as machinery and industrial equipment, are essential for production, and their import is based on self-certification by the EOUs. Importantly, second-hand capital goods, without any age limit, may also be imported. EOUs can source capital goods from domestic or foreign leasing companies based on a firm contract between parties. All imported goods must be used exclusively for export production and adhere to the “actual user condition,” meaning they must be utilized directly in manufacturing products for export.
EOUS need to follow the Export and Import (EXIM) Policy and the latest guidelines from the Directorate General of Foreign Trade (DGFT) to ensure compliance and optimize their operations.
Tax Implications for Goods Imports under the EOU Scheme
Under the EOU scheme, businesses benefit from significant tax exemptions when importing goods. Imports or procurements from bonded warehouses in the DTA or from international exhibitions held in India are exempt from customs duties levied under the First Schedule to the Customs Tariff Act, 1975, including additional duties under Sections 3(1),3(3), and 3(5) of the Customs Tariff Act.
Second-hand capital goods, regardless of age, can also be imported with or without payment of duties/taxes as specified. EOUs may source capital goods from domestic or foreign leasing companies based on firm contracts, with or without payment of duties/taxes.
Additionally, imports or procurements you undertake are exempt from integrated tax and compensation cess under Sections 3(7) and 3(9) of the Customs Tariff Act, 1975, according to notifications from the Department of Revenue. This exemption extends to Goods and Services T ax (GST) and other relevant taxes on these imports. When procuring goods covered under GST from the DTA, the suppliers are required to pay the applicable GST and compensation cess. However, these suppliers can claim a refund of the GST paid on such supplies to your EOU, provided they adhere to specific conditions and documentation requirements as per GST rules and notifications.
Under Section 16 of the IGST Act of 2016, supplies to EOUs are zero-rated, providing significant benefits. Suppliers can either supply goods or services without paying IGST upfront by furnishing a bond or Letter of Undertaking (LUT), maintaining cash flow, or paying IGST and claiming a refund later. Notification No. 48/2017-Central Tax provides details of the conditions and procedures for furnishing a bond or LUT for export without IGST payment. These provisions ensure smooth and tax-efficient transactions, benefiting your EOU by ensuring seamless procurement and cost efficiency.
EOUs can also procure excisable goods listed under the Fourth Schedule of the Central Excise Act, 1944, from the DTA without paying applicable excise duty. These tax and duty benefits help reduce the cost of importing essential goods for EOUs.
Conclusion
To capitalize on the benefits of the Export Oriented Units (EOU) scheme, businesses must navigate the regulatory landscape effectively. By taking advantage of duty-free imports and other tax exemptions, EOUs can significantly reduce production costs and enhance their competitiveness in the global market. Businesses need to stay informed about the latest guidelines and tax implications, including GST and customs duties, to ensure compliance and optimize their export activities. Adhering to the provisions of the Foreign Trade Policy and understanding the nuances of importing goods will help businesses achieve their export goals and drive long-term success.
Author: Hiteashi Rajan Desai, Associate at R&D Law Chambers LLP
Email – info@rdlawchambers.com.
*R & D Law Chambers is a firm providing Legal advisory and International and Domestic Tax Advisory services. To know more visit https://rdlawchambers.com/.