Export Oriented Units (EOUs)-An Introduction

Introduction Objectives of the Export oriented unit Major Sectors in EOUs Export from EOU EOU Activities Need for Special License Choosing the Location for EOU EOU Unit Obligations Bonding Period of EOU EOU in Exim Policy

Introduction The Export Oriented Units (EOUs) scheme, introduced in early 1981, is complementary to the SEZ scheme. It adopts the same production regime but offers a wide option in locations with reference to factors like source of raw materials, ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. As on 31st December 2005, 1924 units are in operation under the EOU scheme. Objectives of the Export oriented unit: The main objectives of the EOU scheme is to increase exports, earn foreign exchange to the country, transfer of latest technologies stimulate direct foreign investment and to generate additional employment. Major Sectors in EOUs:

GRANITE TEXTILES / GARMENTS FOOD PROCESSING CHEMICALS COMPUTER SOFTWARE COFFEE PHARMACEUTICALS GEM & JEWELLERY ENGINEERING GOODS ELECTRICAL & ELECTRONICS AQUA & PEARL CULTURE

Export from EOU Exports from EOUs during 2004-2005 were of the order of Rs.36806.17 crores as compared to the export of Rs.28827.58 crores achieved during 2003-2004, registering a growth of 27.68%. EOU Activities

Initially, EOUs were mainly concentrated in Textiles and Yarn, Food Processing, Electronics, Chemicals, Plastics, Granites and Minerals/Ores. But now a day, EOU has extended it area of work which includes functions like manufacturing, servicing, development of software, trading, repair, remaking, reconditioning, re-engineering including making of gold/silver/platinum jewellery and articles thereof, agriculture including agro-processing, aquaculture, animal husbandry, bio-technology, floriculture, horticulture, pisiculture, viticulture, poultry, sericulture and granites. Need for Special License To set up an EOU for the following sectors, an EOU owner needs a special license.

Arms and ammunition, Explosives and allied items of defense equipment, Defense aircraft and warships, Atomic substances, Narcotics and psychotropic substances and hazardous chemicals, Distillation and brewing of alcoholic drinks, Cigarettes/cigars and manufactured tobacco substitutes.

In the above mention cases, EOU owner are required to submit the application form to the Development Commissioner who will then put them up to the Board of Approvals (BOA). Choosing the Location for EOU EOUs can be set up anywhere in the country and may be engaged in the manufacture and production of software, floriculture, horticulture, agriculture, aquaculture, animal husbandry, pisciculture, poultry and sericulture or other similar activities. However, it should be noted that in case of large cities where the population is more than one million, such as Bangalore and Cochin, the proposed location should be at least 25 km away from the Standard Urban Area limits of that city unless, it is to be located in an area designated as an "industrial area" before the 25th July, 1991. Non-polluting EOUs such as electronics, computer software and printing are exempt from such restriction while choosing the area. Apart from local zonal office and state government, setting up of an EOU is also strictly guided by the environmental rules and regulations. Therefore, an even if the EOU unit has fulfilled all locational policy but not suitable from environmental point of view then the Ministry of Environment, Government of India has right to cancel the proposal. In such situation industrialist would be required to abide by that decision. EOU Unit Obligations The EOUs are required to achieve the minimum NFEP (Net Foreign Exchange Earning as a Percentage of Exports) and the minimum EP (Export Performance) as per the provisions of EXIM Policy which vary from sector to sector. As for instance, the units with investment in plant and machinery of Rs.5 crore and above are required to achieve positive NFEP and export

US$ 3.5 million or 3 times the CIF value of imported capital goods, whichever is higher, for 5 years. For electronics hardware sector, minimum NFEP has to be positive and minimum EP for 5 years is US$ 1 million or 3 times the CIF value of imported capital goods, whichever is higher. NFEP is calculated cumulatively for a period of 5 years from the commencement of commercial production according to a prescribed formula. Bonding Period of EOU The EOUs are licensed to manufacture goods within the bonded time period for the purpose of export. As per the Exim Policy, the period of bonding is initially for five years, which is extendable to another five years by the Development Commissioner. However on a request of EOU Unit, time period can also be extended for another five year by the Commissioner / Chief Commissioner of Customs. EOU in Exim Policy Currently EOU scheme is mentioned in the Chapter 9 of the Foreign Trade Policy (1997-2002) and Chapter 9 of the Handbook of Procedures, Volume-I (HOP). The EOUs can export all products except prohibited items of exports in ITC (HS). Recent Policy Changes in the EOUs Scheme (w.e.f. 7th April, 2006)

The export of goods up to one and half percent of the FOB value. In order to facilitate the smooth functioning of the EOU units, the Development Commissioners will fix time limits for finalizing the disposal of matters relating to EOUs. New units engaged in export of Agriculture/Horticulture/Aqua-Culture products have been now allowed to remove capital goods inputs to the DTA on producing bank guarantee equivalent to the duty foregone on the capital goods/input proposed to be taken out. The EOU units in Textile Sector are allowed to dispose off the left over material/fabrics up to 2 per cent of Cost Insurance Freight (CIF) value of imports, on consignment basis. Recognizing that settling the accounts for every consignment is complex and time consuming it has been decided to allow disposal of left over material on the basis of previous year's imports.

Special Economic Zones (SEZs) India was one of the first countries in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports. Asia's first EPZ was set up in Kandla in 1965. With a view to attract larger foreign investment in India, the Special Economic Zones (SEZs) Policy was announced in April 2000. This policy was intended to make SEZs an engine for economic growth supported by quality infrastructure and by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations. The functioning of the SEZs in India is guided by the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes. To instill confidence in investors and to impart stability to the SEZ regime thereby generating greater economic activity and employment through the establishment of SEZs, a

comprehensive draft SEZ Bill was prepared in consultation with the stakeholders. The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 and received Presidential assent on the 23rd of June, 2005. After extensive consultations, the SEZ Act, 2005, supported by SEZ Rules, came into effect on 10th February, 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to Central as well as State Governments. The main objectives of the SEZ Act are: generation of additional economic activity; promotion of exports of goods and services; promotion of investment from domestic and foreign sources; creation of employment opportunities; and development of infrastructure facilities

The salient features/provisions of the SEZ Rules are given below: Different minimum land requirement for different class of SEZs; Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created; Simplified procedures for development, operation and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs; Single window clearance for setting up of an SEZ; Single window clearance for setting up a unit in a Special Economic Zones; Single window clearance for matters relating to Central as well as State Governments; Simplified compliance procedures and documentation with an emphasis on self certification. Fiscal Incentives for SEZ Units Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units. 100 per cent Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50 per cent for next 5 years thereafter and 50 per cent of the ploughed back export profit for next 5 years. Exemption from Minimum Alternate Tax under section 115JB of the Income Tax Act. External commercial borrowing by SEZ units up to US $ 500 million a year without any maturity restriction through recognized banking channels. Exemption from Central Sales Tax, Service Tax, State Sales Tax and other levies as extended by the respective State Governments. Tax Exemptions to SEZ Developers Exemption from Customs/Excise duties for development of SEZs for authorized operations approved by the Board of Approval. l Income Tax exemption on export income for a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. l Exemption from Minimum Alternate Tax under Section 115 JB of the Income Tax Act. l Exemption from Dividend Distribution Tax under Section 115 O of the Income Tax Act. l Exemption from Central Sales Tax (CST) and Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

Benefits derived from SEZs The benefits derived from multiplier effect of the investments, additional economic activity in the SEZs and the employment generated thereof are estimated to far outweigh the tax exemptions and the losses on account of land acquisition. Stability in fiscal concessions is absolutely essential to ensure credibility of the Government intentions. Benefits derived from the SEZs are evident from the investment, employment, exports and infrastructural developments additionally generated/expected to be generated. The benefits expected to be generated include: Investment of the order of Rs.100,000 crore including FDI of US $ 5-6 billion by the end of December 2007, and 500,000 direct jobs by December 2007.

At present, 1016 units are in operation in the SEZs, providing direct employment to over 1.79 lakh persons; about 40 per cent of whom are women. Private investment by entrepreneurs in the SEZs established prior to the SEZ Act is of the order of over Rs. 4400 crore. In the 63 notified SEZs which have come up after 10th February 2006, investment of Rs. 13,435 crore has already been made in less than one year. These SEZs have so far provided direct employment to 18,457 persons

Export houses consist of Exporting managers, Export agents and Confirming houses. Advantages

All three are local middlemen They have experience in the foreign markets Has political & economic connections Merchants & Agents have specialist skills for counter trade manufacture does not bear the overhead cost of exporting

Disadvantages

The producers has little or no control over his market The Goodwill created is the merchants and not the producers The contract is short term Agents push those products that sell and can neglect others manufacturer loose control if he relies too much on them Merchants and agents are best suited by short term contracts

The grant of Export and Trading House status is one of the many promotional schemes in place by the Government of India. According to this scheme, merchandising and manufacturing companies fulfilling certain criteria can apply for such recognition. What is in it for an entrepreneur qualified for a status? Well, a lot actually. For one, it strengthens the companys negotiating capacity for sales abroad, and build up a more enduring relationship with the supporting manufacturers. Besides this, the status calls for grant of additional import licenses, that ensures availability of imported raw materials in advance for the supporting manufacturers. The status holder becomes eligible for many such privileges under the Foreign Trade Policy of India. The application process is simple, says Ganesh Kumar Gupta, President, Federation of Indian Exporters Organizations. Moreover, there is no fee payable for grant of recognition status. To understand more, we spoke to him. Excerpts: What is the essence of this scheme in the first place? The essence is to give recognition to established exporters for promoting Indias exports and to build up the marketing infrastructure and expertise required for export promotion. This is particularly for small and medium segment of industry, who hardly have the wherewithal to market their products overseas on their own. The recognition is given upon achieving prescribed minimum level of export performance. DARE/facts What are the benefits? As a status holder, you will be eligible for a number of Under the scheme, the applicants are granted the status depending on the total FOB / FOR export privileges under the Foreign Trade Policy, such as performance during the current plus previous automatic customs clearances on self-declaration, priority on fixation in yield ratio for export and import, three years as follows: direct negotiation of export documents, repatriations Export performance Status of export proceeds in 360 days, exemption from (Rs Cr) furnishing of BG in schemes under the policy, Export House 20 overseas warehouses, etc. Once I get this status, what are my Star Export House 100 responsibilities? There is always an expectation that a status holder Trading House 500 will continue to achieve higher growth in export Star Trading House 2,500 performance. Besides this, the status holder should attain internationally accepted standards of quality, Premier Trading 10,000 identify new product and new markets for exports House and give thrust to generate employment. Source: Department of Commerce, Government When exactly can I apply? of India You can apply on achievement of the export performance criterion prescribed in the Foreign Trade Policy. What is the process? At present, there is no fee payable for grant of recognition. As for the process, it is quite simple. It does not call for any specialized help to carry out the application process. However, it is up to the individual to decide on this. For an application for grant of status, you would need to file in ANF 3A of Aayaat Niryaat Form. This, along with the prescribed documents, needs to be filed in at the Regional Authoritys office. There are 32 such offices across the country in total (comprehensive list: http://snipurl.com/1q41t). Besides these, the DGFT headquarters in Delhi has territorial jurisdiction throughout India.

For how long is this recognition valid? As per the policy in force, the recognition of status will be valid up to 31 March 2009. After this, an application of renewal may be filed at the office of the regional authority. What if my exports dip? Is the status still valid? This actually would directly affect your status renewal in future. You have to keep in mind that renewal of the existing status will be granted only if the eligibility criterion is fulfilled.

Role of Export/ Trading houses

by SREE RAMA RAO on AUGUST 2, 2008

In 1958, it was realized that unless positive steps were taken to build up a number of merchant houses, concentrating almost exclusively on exports and capable of undertaking trade on a sustained basis, it would be impossible to compete successfully against the highly experienced and resourceful trading houses of other countries. They were also expected to become focal points for organizing exports of small scale units for whom it may not be practicable to embark on export marketing. A new scheme of recognition of trading Houses was introduced in 1981 to develop new products and new markets particularly for products from the small and cottage industry sector. Export houses with demonstrated export capabilities and having facilities for testing and quality control were made eligible of recognition as Trading Houses. With effect from April 1988 Trading Houses having high volume of exports are eligible for recognition as star Trading Houses. With effect from 1.4.94 another category Super Star Trading Houses, has also been introduced. As of 21.4.97 the number of Super Star Trading Houses was 9. Star Trading Houses 52, trading Houses 464 and Export Houses 3,027. It might be noted that merchant exporters including export houses etc account for 78 per cent of Indias exports. With a view to encourage participation of State Governments and Union Territories in export promotion, one State corporation nominated by the respective State Government/Union territories may be recognized as an export House, even though the criterion of such recognition is not fulfilled by them. The various criteria of eligibility of recognition of export houses, etc and it may be noted that the criteria for recognition have been made more stringent with effect from April1, 1997 and the number of these houses is likely to go down.

Recognition is valid for 3 years after which it has to be renewed within a period of 6 months. Export Houses/Trading Houses/ Star Trading Houses/Super Star Trading Houses are entitled to special import licenses which enable them to import certain specified items from the negative and the restricted lists. A new development in this area has been the decisions to allow large trading houses to set up fully owned trading subsidiaries to operate in India exclusively for export and import related activities. The existing trading multinational in India would be allowed to increase their stake to 100 per cent. The advantages expected from this step are the availability of highly professional marketing expertise and the use of their existing foreign offices for marketing intelligence and business contacts. Advantages Enjoyed by Export houses/Trading Houses: 1. They can avail themselves of the various economies of scale in transportation, warehousing and other areas related to physical distribution 2. They can avail themselves of export finance available at confessional rates. 3. They are in a position to employ qualified and specialized staff to look after the complicated work relating to customs, legal problems, procedures and documentation. 4. They can bargain with large adding companies in foreign countries on an equal footing 5. They can achieve economies in export promotion by using the most effective advertising and publicity media as also by participating in many trade fairs and exhibitions. 6. They can very often profit by taking a position on exchange rates. 7. They are able to absorb many of the risks inherent in International trade because of the wide range of products handled by them. Small industrial units can derive significant advantages by availing themselves of the services of export houses. (1) Expertise and information on market opportunities abroad (2) Ability to provide finance through trade credits, investments, direct loans and loan guarantees. (3) Ability to absorb many of the risks inherent in trade because of the wide range of

products they handle. (4) Sales opportunities in otherwise out-of-the-way markets. Export houses are themselves keen to help small manufacturers in their export effort as thy get extra weightage for the foreign exchange earned by the exports of products manufactured by small industrial units and for exports of handicrafts including silk products (double weightage).

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