EOU Scheme-Overview

1
EOU Scheme-Overview

• Units undertaking to export their entire
  production of goods and services may be set up
  under the Export Oriented Unit (EOU) Scheme
• EOUs can get a location of their choice
  Customs-bonded anywhere in India
• For setting up an EOU in Karnataka, Kerala,
  Lakshadweep or Mahe, apply to Development
  Commissioner, Cochin SEZ
• EOUs can import without duties, all capital goods
  and raw materials for running the unit.
• EOUs can procure these items from Indian sources
  also without excise duties and sales taxes
• EOUs can sell upto 50 of FOB value of exports in
  the Indian market at concessional duties
• New EOUs get Corporate Income Tax concessions
  till 2009

2
Approvals for EOUs

• EOUs are given approval for manufacture of goods,
  including re-furbishing, as well as for rendering
  of services including bio-technology, BPO, Call
  Centres, IT enabled Services. An EOU may also
  engage in mining, agriculture, aquaculture,
  floriculture, or horticulture.
• Trading by EOUs is not permitted
• Minimum Investment for approval as an EOU should
  be Rs.10 million in plant machinery.
• Software /services/ handicrafts/ agriculture/
  floriculture/ aqua-culture/ animal husbandry/
  information technology are exempted from this
  size restriction.

3
Approvals for EOUs

• Licences are required for
• Manufacturing arms and ammunition, atomic
  substances, narcotics/psychotropic substances,
  and tobacco products
• Establishing EOUs in Bangalore and Cochin city
  limits (unless it is a non-polluting sector EOU,
  or is located in an industrial estate within the
  city)
• Approvals for licensable activity and services
  are given by the Board of Approvals in the
  Commerce Ministry
• Applications are to be routed through the
  Development Commissioner
• Approval (called Letter of Permission (LOP)) for
  non-licensable manufacturing activity is given
  locally by the Development Commissioner
• Relevant forms are available at
  http//www.cepz.com/eouforms

4
EOU Scheme Features

• EOUs may export all products except prohibited
  items of exports
• EOUs may import without duty all types of goods,
  including capital goods required for its
  activities, unless they are prohibited for import
• Even second hand plant machinery can be
  imported.
• Capital Goods can be purchased, loaned, sourced
  from foreign/domestic leasing companies or
  brought free of cost.
• EOUs get upto 5 years for utilization of imported
  capital goods, and upto 3 years for other items.

5
EOUs FDI

• 100 FDI in manufacturing EOUs is permitted under
  the automatic route of the Reserve Bank of India
• i.e. first bring in the money, and then inform
  Reserve Bank of Indias local office in Form
  FC(RBI)  within 30 days of receipt
• Also under the automatic route for EOUs are
• External Commercial Borrowing upto USD 50
  million, with maturities of 3 years or more, for
  funding and running the unit.
• Use of brand names/trademarks, if royalty is upto
  2 on exports and 1 on domestic sales, without
  technology transfer
• Foreign technology tie-ups, if lump sum payment
  does not exceed USD 2 million, and if royalty is
  upto 5 on domestic sales and 8 on exports, even
  for wholly owned subsidiaries

6
EOUs and Foreign Exchange

• EOUs may freely repatriate investment returns
  abroad
• EOUs need to bring export proceeds to India only
  within 360 days of export
• And even then, upto 100 may be retained in
  foreign currency in the units EEFC Account
• EOUs may invoice sales to other EOUs etc in
  foreign exchange
• EOUs may invoice sales to Indian entities other
  than EOUs also in foreign exchange sourced from
  from their EEFC account or abroad

7
Tax Concessions for EOUs

• New EOUs are entitled under to Corporate Income
  Tax exemption on physical exports out of India
  till 2009
• Central Sales Tax is reimbursed on purchases from
  local manufacturers
• Supplies from local manufacturers are free of
  Central Excise Duty
• In case duties are paid, Terminal Excise Duty is
  reimbursed
• EOUs in manufacturing sector get exemption from
  State Sales Tax on inputs (excepting fuel)

8
EOU Scheme DTA entities

• Existing Indian entities can open a new EOU under
  the same legal entity
• But the EOU division must maintain separate
  accounts, including separate Bank accounts
• DTA units can also convert to EOU scheme
• Units working with EPCG /Advance Licencing can
  also convert to EOU scheme
• Their pending licence obligations will be
  subsumed into the EOU scheme.
• But to be eligible for Corporate Income Tax
  concessions under section 10B, it has to be
  ensured that old assets do not exceed 20 of
  total assets of the EOU

9
EOUs Customs Department

• EOUs have to get their premises bonded by the
  local Customs/ Central Excise Department, and
  function under their supervision
• They can get a location of their choice so
  bonded.
• All duty-free items have to be brought here
  first.
• One single multi-purpose bond with the Customs
  /Central Excise Department, called the B 17 Bond,
  suffices for all operations.
• While there is no physical control, there is
  record-based control
• EOU has to maintain proper account of the import,
  consumption and utilisation of all
  imported/locally procured materials and exports
  made and submit them periodically to the Customs.
  
• Duty foregone under the EOU scheme with interest
  is recoverable in case of fraudulent activity
  (along with prosecution penalties)

10
Export Obligations of EOUs

• EOUs have only to be foreign exchange positive
• FE Inflowsgt FE Outflows
• where
• FE Inflows Export earnings (Direct Exports
  Exports through Third Parties Inter-unit Sales
  Exports to EOU/SEZ/STP/EHTPs)
• FE Outflows Foreign Exchange outgo on imports
  of Raw materials/consumables FE payments of
  commission/ royalty/ fees/ dividends/ interest on
  ECB share of amortised value of capital goods
  imported
• Imported capital goods are amortized over 10
  years only amortized amount is included in NFE
  calculation
• Values are included in the calculation even if
  the imports are not actually paid for.

11
EOU Scheme- Duty-free Supplies from Indian Market

• Supplies from Indian manufacturers to EOUs are
  classified as deemed exports, and the suppliers
  are eligible for
• Advance Licence for import of intermediate inputs
• Deemed Export Duty Drawback
• Discharge of export performance obligation on the
  supplier
• EOUs may obtain, on production of a suitable
  disclaimer from the suppliers, the duty drawback
  and refund of Terminal Excise Duty

12
EOUs Access to Indian Market

• Sales to the Indian Market
• EOUs can sell duty-free to other EOU /SEZ /STP
  /EHTPs etc
• EOUs can sell on full duties in the DTA against
  foreign currency (from EEFC account or from
  abroad)
• This also counts for NFE.
• Apart from the above,
• EOUs can sell upto 50 of FOB value of physical
  exports to the DTA at concessional duties
• EOUs can sell over and above that at full duties,
  subject to NFE being positive

13
EOU Sales to other EOUs

• EOUs Sales are duty-free to Indian entities like
  
• SEZ /EOU /EPZ /STP /EHTP units,
• Advance Licence Holders,
• Bonded Warehouses
• Educational institutions, defence establishments,
  other agencies notified by Government of India as
  eligible for duty-free imports.
• These sales count for computation of NFE.
• But they do not count as physical exports.
• They can be invoiced in foreign currency or in
  Indian currency.

14
EOUs Subcontracting

• EOUs can subcontract up to 50 of production or
  part of production process to units in the EOU or
  Indian manufacturers.
• EOUs may temporarily take to the job workers
  premises jigs, moulds, tools, fixtures, tackles,
  instruments, hangers, patterns drawings for job
  work
• EOUs can even subcontract to units abroad
• EOUs can import raw materials components free
  of cost for job-working and return.
• EOUs can undertake job-work for export on behalf
  of local manufacturers.

15
EOU Scheme Exit Policy

• Units can de-bond without paying duties capital
  goods they have used for 10 years
• Software units can de-bond on duty-free basis
  after 3 years.
• Units can wind up their operations on meeting
  their export obligations by
• Exporting back any imported capital goods and
  other material, or transferring them to another
  SEZ/EOU unit, or
• Destroying the items in Customs presence, or
• Donation on gratis basis to educational
  institutions, or
• De-bonding on payment of duty on capital goods
  under the EPCG Scheme as a one time option, or
• De-bonding all duty-foregone items by paying
  duties at current rates on unutilised raw
  materials (imported value) and on capital goods
  (on depreciated value only) and selling them in
  the DTA.

16
EOU Scheme Exit Policy

• In case of failure to achieve positive NFE, duty
  foregone under the EOU scheme with interest is
  recoverable in proportion to the shortfall in NFE
• If the unit has not met positive NFE, de-bonding
  shall also be subject to payment of penalties
  under the Foreign Trade (Development
  Regulation) Act, 1992, and under the Customs Act,
  1960

17
EOU Scheme Who can operate

• To run manufacturing activities foreign companies
  need to set up an Indian Company
• The Indian Company has to have independent legal
  status, distinct from the parent foreign company.
  
• The Company may be a wholly-owned subsidiary, or
  a joint venture company in financial
  collaboration with an Indian company in India.
• A Company registered in India can start an EOU
  unit without starting a new legal entity
  separate accounts suffice.

• To run manufacturing activities foreign companies
  need to set up an Indian Company
• The Indian Company has to have independent legal
  status, distinct from the parent foreign company.
  
• The Company may be a wholly-owned subsidiary, or
  a joint venture company in financial
  collaboration with an Indian company in India.
• A Company registered in India can start an EOU
  unit without starting a new legal entity
  separate accounts suffice.

18
How to Contact

• For more details of Indian EOUs, see website
  http//eouindia.com
• For details of EOUs with the Development
  Commissioner, CSEZ, see www.cepz.com/sez/heou/inde
  x.htm
• especially the How To Apply section at
  http//www.cepz.com/eouhowtoapply
• Contact CSEZ office
• at Cochin mail_at_csez.com
• Phone in at 91-484-2413222
• at Bangalore adcblr_at_csez.com
• Phone in at 080-25714874