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How To Set Up Export Oriented Unit In India

Export Oriented Unit introduced in 1981, the Export Oriented Units (EOU) scheme having aim to enhance exports from India, to thereby increase foreign exchange earnings and generate employment. This scheme also complements other schemes like Free Trade Zone (FTZ) & Export Processing Zone (EPZ).

The provisions of Chapter 6 of the Foreign Trade Policy and its process are applicable to EOU, as well as to Electronics Hardware Technology Parks (EHTPs), Software Technology Parks (STPs) and Bio-Technology Parks (BTPs). In common parlance, EOU/STP/EHTP/BTP is together called the EOU scheme. Units which are registered under the EOU scheme are required to export 100% of their products unless they sell a portion of it to DTA (Domestic Tariff Area).

Important Factors Need To Know While Setting Up 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.

How GST Works In EOU

A supplier will charge GST must on goods supplied to the EOU. For its part, the EOU can either apply for ITC (input tax credit) on the GST paid while providing supplies to the DTA or claim a refund of the GST. EOUs are required to pay GST on admissible sales made to DTAs, except if it is the sale of zero-rated supplies which are exempt from GST. Important note is that GST is applicable even in case of sales from one EOU to another; as such a transaction is considered a regular sale for the purpose of the GST law. Notably, primary customs duty is exempted for an EOU in case of imports.

What Is The Impact Of EOUs On Exports?

The positive effect of the EOU scheme was prominent in the first two decades of its existence until the floating of the SEZ scheme. This was in 2011-12, around the time the tax benefits under the Income Tax Act was withdrawn. EOU permitted exporters the freedom of setting up an export business in places of their choice, unlike Free Trade Zones and Export Processing Zones, which had specific locational restrictions. It has provided exporters a broad range of industrial sectors to choose from while setting up their export-oriented units.

What Is The Eligibility For EOU?

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.