The Export Oriented Unit (EOU) scheme provides a specific status to manufacturing and service units dedicated to international trade. The function of an EOU is to enhance a nation’s foreign exchange earnings. It achieves this by creating a favorable, duty-free environment for export production.
Defining an Export Oriented Unit (EOU)
An Export Oriented Unit is a status granted under the Foreign Trade Policy for businesses producing goods or services entirely for export. The unit commits to exporting all production, though limited domestic sales are permitted under strict conditions. This commitment ensures the scheme maximizes foreign exchange inflow. Consequently, an EOU operates as a distinct entity from the Domestic Tariff Area (DTA) for customs and fiscal purposes.
Operational Requirements and Regulatory Framework
A fundamental requirement for an EOU is the mandatory commitment to achieve a positive Net Foreign Exchange (NFE) earning cumulatively over a five-year period. This means the total foreign exchange earned from exports must exceed the total foreign exchange spent on imports. The NFE criterion ensures the unit provides a net benefit to the national economy.
For most manufacturing projects, a minimum investment of ₹1 crore in plant and machinery is a prerequisite for EOU status. Units must operate within a customs-bonded premises, subjecting the facility to physical control and supervision by customs authorities. This bonding establishes the EOU as an area theoretically outside the country’s customs territory, even though it can be located anywhere. Allowed activities include manufacturing, processing, software development, and the provision of services, but explicitly exclude simple trading operations.
Major Incentives and Advantages for EOUs
The EOU scheme provides financial and operational incentives to encourage export-focused production. A primary advantage is the permission for duty-free procurement of capital goods, raw materials, components, and consumables. This applies to both imports and domestic purchases, which reduces the cost of production inputs.
EOUs benefit from a zero-rating of Goods and Services Tax (GST) on all goods and services supplied for use in the manufacturing of exported products. Suppliers may charge GST, but the EOU can claim a refund, or the supplier can supply under a Letter of Undertaking (LUT) without paying GST upfront. EOUs are also exempt from specific duties, such as excise duty, when procuring goods from the Domestic Tariff Area. The operational process is streamlined, with EOU consignments receiving fast-track clearance facilities that reduce logistics time and improve supply chain efficiency.
Key Obligations and Compliance for EOUs
In exchange for benefits, EOUs must adhere to obligations monitored by the jurisdictional Development Commissioner. The primary rule is the continuous requirement to maintain a positive Net Foreign Exchange (NFE) status over the specified five-year block. Failure to meet this performance target can result in the unit having to repay the duties and tax exemptions it received.
Sales of finished goods into the Domestic Tariff Area (DTA) are permitted up to 50% of the unit’s annual export value. These domestic sales are treated as imports and are subject to the payment of all applicable customs duties and taxes. The unit must execute a Legal Undertaking (LUT) and a B-17 Bond with customs authorities, legally binding the company to its export and NFE obligations. This necessitates meticulous record-keeping and periodic submission of performance reports.
EOU vs. Special Economic Zone (SEZ)
The distinction between an EOU and a Special Economic Zone (SEZ) unit centers on location and regulatory scope.
Location and Status
An EOU is a standalone unit that can be situated anywhere within the geographical boundaries of the country, offering maximum flexibility in site selection. Conversely, an SEZ unit must be located within a specifically notified geographical enclave. This enclave is treated as foreign territory for trade and customs purposes.
Regulatory Framework and Benefits
An EOU’s operations fall under the purview of the Foreign Trade Policy, while an SEZ is governed by the comprehensive SEZ Act. Supplies made to an EOU are considered “deemed exports,” with benefits extended through duty refunds or tax exemptions. Supplies made to an SEZ unit are treated as physical exports, providing zero-rating on all goods and services immediately. SEZs often provide more integrated physical infrastructure, including dedicated power, water, and connectivity.
Compliance and Exit
Compliance procedures for SEZ units are often streamlined, offering a single-window clearance system managed by the SEZ Authority. Exiting the EOU scheme is comparatively simpler than exiting the SEZ framework. SEZ exit involves a complex process of debonding and payment of accumulated duties and taxes on the unit’s assets.
Procedure for Setting Up an EOU
Establishing an EOU requires submitting an application to the jurisdictional Development Commissioner (DC), using a prescribed form such as ANF 6A. This application must include a project report detailing the commercial and technical viability of the venture, including projected exports and foreign exchange earnings. The Unit Approval Committee (UAC) reviews the proposal against scheme guidelines and the commitment to NFE.
Upon approval, the DC issues a formal Letter of Permission (LoP), granting authority to establish the unit. The LoP typically has an initial validity of two years, allowing time to construct the plant and install machinery before commencing production. Following the LoP, the unit must register with customs authorities, execute the B-17 Bond and a Legal Undertaking to formalize its customs-bonded status. The unit must then begin commercial production within the stipulated timeframe and notify the DC.