Export Oriented Unit - A comprehensive discussion

Export Oriented Units (EOUs), as their name suggest are those units who export their entire production of goods and services. However, some domestic sales (DTA) are also permitted for EOUs. The main objective of the EOU Scheme is to promote exports and enhance the foreign exchange earnings. As the EOU mainly exports their goods and services, hence the special benefits are given in form of taxes and duties, to the export oriented units. In this article we will discuss about the provisions and other compliances which are applicable to Export Oriented Units (EOUs) in respect of GST, Customs, Foreign Trade Policy and Handbook of procedure 2023.

The provisions relating to EOUs are given in Chapter 6 of the Foreign Trade Policy (FTP 2023), Chapter 6 of Handbook of Procedures (HBP 2023) and the relevant Appendices and Aayat Niryat Forms (ANF) are Appendix 6A to 6M and Aayat Niryat Forms ANF 6A to 6D.

Eligibility for setting up an EOU:
For obtaining EOU status, only the projects which have a minimum investment of Rs.1 Crore in plant & machinery shall be considered for establishment as EOUs. However, this shall not apply to existing units, units in EHTP / STP/ BTP, and EOUs in Handicrafts /Agriculture /Floriculture /Aquaculture /Animal Husbandry/Information Technology, Services, Brass Hardware and Handmade jewellery sectors. Board of Approval (BoA) may allow establishment of EOUs with a lower investment criteria.

Application and other formalities for setup an EOU:
An application for setting up an EOU needs to be made in ANF 6A to the office of the Development Commissioner (DC) along with necessary documents as mentioned in ANF 6A  and such application shall be approved or rejected by Unit Approval Committee  within 15 days. On approval of the same, a Letter of Permission (LoP) would be issued which have an initial validity of 2 years to enable the Unit to construct the plant & install the machinery and by this time the unit should have commenced production. In case the unit is not able to commence production in the validity period of 2 years, an extension of one year may be given by the DC for valid reasons. Once unit commences production, LoP issued shall be valid for a period of fresh 5 years for its activities.

The EOU shall be a positive net foreign exchange (NFE) earner. NFE Earnings shall be calculated cumulatively in blocks of five years, starting from commencement of production. Wherever a unit is unable to achieve NFE due to adverse market condition or any grounds of genuine hardship having adverse impact on functioning of the unit, the five year block period for calculation of NFE earnings may be extended by BoA for a period of upto one year. The method of calculation of NFE would be = A-B>0

Where "A" is FOB value of exports by EOU and other supplies done by EOU as per para 6.08 of FTP; (like Supplies made in DTA to AA holders / DFIA under duty exemption / remission scheme / EPCG scheme, Supplies made to other EOU / SEZ units, Supplies made to bonded warehouses set up under FTP and / or under section 65 of Customs Act) all these would counted for the purpose of NFE.

“B” is the sum of the imported and domestic procured raw materials and consumables along with the a mortised value (10% per year over a 10-year period) of the capital goods and foreign technical know-how fees.

Performance of EOUs shall be monitored by Units Approval Committee as per guidelines given in Appendix 6F of Appendices & ANFs.
The failure to ensure positive NFE or to abide by any of the terms and conditions of LoP shall render the unit liable to penal action under provisions of the FT (D&R) Act and Rules and Orders made there under.

Permissible Indirect Export by EOU:
An EOU has also given the facility to export the goods manufactured by it through other exporters, or through any other export oriented unit or any SEZ unit. Para 6.19 of Handbook of Procedure 2023 clearly states that an EOU / EHTP / STP / BTP unit may export goods manufactured / software developed by it through other exporter, or any other EOU / EHTP/ STP / BTP / SEZ unit subject to the conditions specified therein.

Sub-contracting by Export oriented units:
Facility of getting job work done from DTA unit is available subject to the condition that goods are brought back on the completion of job work. The export of finished goods from the premises of job worker are also permitted subject to the condition that such premises are registered with GST authorities. EOUs may be permitted to remove moulds, jigs, tools, fixtures, tackles, instruments, hangers and patterns and drawings to premises of sub-contractors, subject to condition that these shall be brought back to premises of units on completion of job work within a stipulated period.

In case of sub-contracting of production process abroad, goods may be exported from sub-contractor premises subject to conditions that at the time of clearance of goods, the EOU shall declare the transaction value of finished goods to be cleared from the sub- contractor’s premises abroad, job work charges to be paid to the sub-contractor abroad and value of intermediate goods along with supporting documents.

Supply of Samples by EOU:

(a) The export oriented units may on prior intimation to Customs authority, supply or sell samples in DTA for display or market promotion on payment of excise duty, if applicable, and on payment of GST & compensation cess alongwith reversal of duties of Customs.

(b) An EOU can remove samples without payment of duty or taxes on furnishing a suitable undertaking to the Customs authorities for bringing back samples within a stipulated period.

(c) An EOU may export free samples, without any limit, including samples made in wax moulds, silver mould and rubber moulds through all permissible mode of export including through courier agencies / post. For statutory requirement of Stability & Retention sample with manufacture, an EOU / EHTP / BTP / STP unit may re-import with or without payment of duties/taxes as provided at para 6.01(d)(ii) of FTP those samples, which were exported by it, under intimation to Custom Authorities, and FOB value of such samples shall not be counted for NFE  purpose and other export benefits, if any.

(d) An EOU may send samples to other EOUs for display on returnable basis within a period of 30 days.

Exit from the EOU Scheme:
An EOU may opt out of scheme with the approval of Deputy Commissioner (DC) and after payment of applicable Excise, Customs duties, GST & compensation cess. If unit has not achieved obligations, it shall also be liable to penalty at the time of exit.  In case the gems & jewellery unit ceasing its operation, the gold and other precious metals available for manufacture of jewellery, shall be handed over to an agency nominated by Department of Commerce (DoC), at price to be determined by that agency. After payment of duty and clearance of all dues, unit shall obtain “No Dues Certificate”. On the basis of said certificate, the unit shall apply to DC for final exit. In case there is no proceeding pending against such EOU, the DC shall issue final exit order within a period of 7 working days. Between “No Dues Certificate” issued by Customs authorities and final exit order by DC, unit shall not be entitled to claim any exemption for procurement of capital goods or inputs. However, unit can claim Advance Authorisation / Duty Free Import Authorization (DFIA) / Duty Drawback.

In cases where a unit is initially established as DTA unit with machines procured from abroad after payment of import duty, or from domestic market after payment of excise duty/GST, and unit is subsequently converted to EOU, in such cases removal of such capital goods to DTA after exit would be without payment of duty.

Similarly, in cases where a DTA unit imported capital goods under EPCG Scheme and after fulfilling the export obligation gets converted into EOU, unit would not be charged customs duty on capital goods at the time of removal of such capital goods in DTA when exit.

Customs Notification for EOU:
Under the Customs Act 1962 there is Notification No. 52/2003 Customs dated 31.03.2023 which provides an exemption to EOUs from the payment of Basic Customs Duty as per the First Schedule of the Customs Tariff Act, 1975, as well as Additional Customs Duty as per Section 3.
However, as per para 3 of the said notification, the exemption on payment of Basic Customs Duty would not available to inputs which are used for the purpose of manufacture of finished goods or services and such finished goods or services are supplied in DTA in accordance with the Foreign Trade Policy by such EOU.

Relevant Provisions under GST in respect of EOU:
Under GST Law, there is a concept of deemed export as provided under section 147 of CGST Act 2017 which states that the Government may, on the recommendations of the Council notify certain supplies of goods as deemed exports, where goods supplied do not leave India and payment for such supplies is received either in Indian rupees or in convertible foreign exchange, if such goods are manufactured in India.

Accordingly, by using the power given under section 147 of CGST Act 2017, a Notification No. 48/2017-Central Tax dated 18.10.2017 was issued by the Central Government in which following supplies are notified as deemed export:

“1. Supply of goods by a registered person against Advance Authorisation.
2. Supply of capital goods by a registered person against EPCG.
3. Supply of goods by a registered person to Export Oriented Unit.
4. Supply of gold by a bank or PSU specified in the Notification No. 50/2017-Customs, dated 30.06.2017 against Advance Authorisation”.

Accordingly, it is clear that the supply of goods by DTA to EOU would be considered as deemed export.

Applicability of GST on Supply made by one EOU to another EOU:
Para 6.12 of FTP 2023 contains the provisions relating to Inter Unit Transfer by EOU and the clause (a) of para 6.12 of FTP 2023 states that the transfer of goods from one EOU to another EOU would be done on payment of applicable GST and compensation cess with prior intimation to concerned Development Commissioners of the transferor and transferee units as well as concerned Customs authorities. Further, as per clause (b) of para 6.12 of FTP 2023 the capital goods may also be transferred by one EOU to another EOU on payment of applicable GST and compensation cess with prior intimation to concerned authorities. The same was also clarified in para 3(iv) of Circular No. 29/2017-Customs that GST would be applicable on the transfer from one EOU to another.

Applicability of GST on Supplies made by EOU to DTA:
In respect of supply of goods by EOU to DTA, it is clearly stated in para 6.07(a)(i) of FTP 2023 that EOU (other than those of gems and jewellery) can sell the goods in DTA on payment of excise duty, if applicable, and on payment of GST and compensation cess along with the reversal of custom duties availed as an exemption, this reversal of customs duty would be as per prevailing SION norms or norms fixed by Norms Committee (where no SION norms are fixed).

Any Scrap / waste arising out of production process may be sold by EOU in DTA, as per SION notified under Duty Exemption Scheme, on payment of applicable duties, taxes and compensation cess. Such sales of scrap / waste shall not be subject to the achievement of positive NFE. In respect of items not covered by norms, DC may fix ad- hoc norms for a period of six months and within this period, norms should be fixed by Norms Committee. Ad-hoc norms will continue till such time norms are fixed by Norms Committee. Scrap / waste may also be exported by EOU.

There shall be no duties, taxes on scrap / waste, in case same are destroyed with permission of Customs authorities. The expression "no duties/ taxes" shall not include applicable taxes and cess under the GST laws.

After discussing the relevant Provisions of EOU from custom, GST, FTP & HBP 2023, we can conclude the article as follows;

Conclusion:  The Export oriented Units have to export their entire production of goods and services. However, some DTA supplies are also permissible for EOU on payment of GST and compensation cess along with the reversal of custom duties availed as an exemption. Similarly GST is also applicable on supply from one EOU to another EOU. The EOU can also procure the goods from DTA and such transaction would be considered as deemed export for the supplier. The EOU also enjoy the benefit of exemption from the payment of custom duty and additional duties on import of goods.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.