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Schemes for Export Oriented Undertakings and Special Economic Zones

The procedure for export-import was discussed in detail in Module 2. As explained in Module 2, exporters of goods and services are eligible to numerous incentives under the customs law and the Foreign Trade Policy (FTP).

What about exporters who export most of their output? There are certain sectors in which demand from domestic customers for the products or services may be negligible or a small fraction of that compared to the demand outside India. Similarly, some businesses may simply choose to export most of their production for strategic reasons. For example, a Bangalore based liquor brand called Amrut, which is extremely famous for its single malt whiskies, exclusively exports all its produce.


The government wants to encourage such exporters as a matter of policy because it helps the country in earning foreign exchange. For an entrepreneur or a consultant who intends to advise startups and new businesses, knowing about these incentives and benefits can be extremely useful.


Broadly speaking, exporters can set up units under two kinds of schemes – schemes for Export Oriented Units or Related Undertakings (discussed in Part A below) and SEZ units (discussed in Part B). Units under both kinds of schemes must be ‘net foreign exchange’ earners, that is, their foreign exchange earnings must be more than their foreign exchange expenditures.

Why should you consider opting under an EOU or SEZ scheme?


As compared to ordinary exporters, units in SEZs/ EOU Related Schemes enjoy several benefits on the exported product: 

  • Reduced procedural hassles: While ordinary exporters will have to pay various local taxes on their products and subsequently apply for a refund, there is typically a full exemption on the tax liability on service tax, customs duty, excise duty, central sales tax and VAT, which makes it convenient to have a unit in an SEZ for a predominantly export-oriented business. Broadly, the tax benefits for units in EOUs/ Related Schemes are also similar, with minor differences (see separate file on LMS for an exact list of the differences between SEZs and units in EOUs/ Related Schemes)
  • Lower tax liability: The ‘credit’ or refund procedures available to ordinary exporters reduce the impact of tax substantially but do not eliminate tax liability completely – exporters effectively end up paying reduced rates of tax. However, units in SEZs/ EOU Related Schemes are entitled to complete exemptions from certain taxes, which is economically preferable. 
  • Benefits for vendors: Exporters typically rely on a number of vendors to sell them products and services, which are utilized to eventually create the product that is being exported. Domestic businesses which sell to ordinary exporters are required to pay all applicable taxes on manufacture and sale of such goods – e.g. excise duty (for manufacturing businesses), VAT (for sales in the same state), CST (for sales in a different state) or service tax (for service oriented businesses).

    On the other hand, sales from the domestic market to an SEZ or an EOU/ Related Scheme unit are exempt from these taxes, as they are legally considered to be exports (called ‘deemed exports’). Therefore, domestic suppliers may be more willing to sell to EOUs / Related Scheme Units and SEZs due to reduced tax liability. 

(see separate file on LMS for a comparison of the benefits available to SEZ units vis-à-vis ordinary exporters)


Are there differences between SEZs and units EOUs/ Related Schemes?

The legal framework applicable to SEZs and units in EOUs/Related Schemes is very different. Strategically, SEZs offer the following advantages over units in EOUs/ Related Schemes:

  • Income Tax benefits: A key advantage for having a unit in an SEZ, as compared to a unit in an EOU/ Related Scheme is the income tax benefits available. Income tax benefits for EOUs were completely withdrawn in 2011, while many income tax benefits are still applicable to SEZs. The government has been considering progressively withdrawing income tax related exemptions that are applicable to them (see Table C below for a comparison of benefits available to units in SEZs and EOU/ Related Schemes), which may reduce the commercial attractiveness of SEZs
  • Labour laws: All activities in an SEZ qualify as ‘public utility services’ under the Industrial Disputes Act, which makes it more difficult for employees and labourers to engage in conduct that is likely to disrupt production (e.g. strikes) in an SEZ. This is not applicable to units under the Export Oriented Unit / Related Schemes.
  • Relaxations in procedural requirements: Units in a SEZs/EOU Related Schemes can benefit from relatively simplified procedural requirements with respect to duties and taxation SEZs and other regulatory formalities, as compared to EOUs. However, these are not very significant.

Are there situations when could a businessman consider opting for an EOU/ Related Scheme, instead of an SEZ?

A significant reason to opt for a unit in an EOU or a Related Scheme is where there is a heavy investment and sunk costs in a pre-existing export facility (whether a manufacturing or services establishment), and where the migration costs will be high. In such cases migration costs may not commercially justify moving or setting up a new entity in an SEZ. Hence, instead of shifting such a unit into an SEZ area, it can be converted into an EOU (assuming it has the requisite amount of investment required under law).


Part A – Schemes for Export Oriented Units, Biotechnology Parks, Software Technology Parks and Electronic Hardware Technology Parks

The government has made various schemes granting benefits and incentives for exporters engaged in export of substantial amount of their products and services. These exporters are allowed to sell very limited proportion of their offerings in the Indian market (called the ‘domestic tariff area’ or DTA in customs jargon). Note that sales by export oriented undertakings in the DTA are not eligible for any tax benefits – they attract the same taxes as an ordinary seller located in the DTA would.

These government schemes are essentially classifiable into three parts – Export Oriented Units, Electronic Hardware Technology Parks (EHTPs - for electronics hardware) and Software Technology Parks (STPs) and Bio Technology Parks (BTPs). As they are treated similarly under the Foreign Trade Policy, we shall collectively refer to them as EOU/ Related Schemes in this discussion.

As evident, such schemes envisage the presence of export oriented undertakings in clusters. Complexes for housing units under EOUs/Related Schemes can be set up by the government, a public sector undertaking or a private entity (subject to applicable approval requirements). For the purpose of an entrepreneur or businessman, knowing the conditions and the broad process for setting up his business (called a ‘unit’) in such a cluster is important.


The minimum investment and the regulatory authority for setting up such schemes are listed below:


Name of scheme

Administrative body/ investment conditions

Export Oriented Unit (EOU) Scheme

An EOU must have a minimum investment INR 1 crore in plant and machinery, unless approval has been obtained from the Board of Approvals (BoA).

Electronic Hardware Technology Park (EHTP) Scheme (for hardware manufacturing units and Software Technology Park (STP) Scheme (for software units)

STP / EHTP complexes can be set up by Central Government, State Government, Public or Private Sector Undertakings or jointly by a combination of them. The complex requires approval by the Inter-Ministerial Standing Committee (IMSC) in Ministry of Communication and Information Technology (Department of Information Technology - DoIT).


Application for setting up EHTP / STP unit must be submitted in a prescribed format to the DoIT.


Software units may undertake exports using data communication links or in form of physical exports (which may be through courier service also), including export of professional services.


Biotechnology Park (BTP) Scheme

BTP can be set up by government, a PSU or a private undertaking. Application to establish a BTP must be submitted to Department of Bio-Technology (DoBT).


a. Setting up a business under an EOU/Related Schemes


i) Approval of Units Approval Committee or Board of Approvals:

Ordinarily, setting up units in such schemes requires approval of


i) the Units Approval Committee (for R&D, software and IT enabled services and other services delegated by a body called the Board of Approvals or BOA), which typically takes 15 days, or

ii) the Board of Approvals itself (
in case of other product or service sectors which cannot be approved by the Units Approval Committee).


ii) Approval of Development Commissioner: In sectors which require an industrial license (see Module 4 for a detailed discussion on which sectors require an industrial license) approval of the Development Commissioner (DC) is also required. It takes approximately 45 days to get this approval.


An approval from the Units Approval Committee or Board of Approvals is usually called a Letter of Permission (LOP) or Letter of Intent (LOI). It typically specifies the items of production and the annual capacity in case of a products business, and the type of service in case of service venture, minimum foreign exchange earning requirements, value of inputs that the business requires (including domestic and imported inputs) and other specified details.


All inputs must be utilized within 3 years unless an extension is obtained from customs authorities. This condition does not apply to capital goods and spares. (Capital goods are used for production of the exported product or service, and do not manifest themselves in the exported product or service. E.g. Equipment in a manufacturing plant will qualify as capital goods.)


The unit setup in an EOU/ Related Scheme must also execute an agreement with the Development Commissioner as per the format in Appendix 14-I-F of the Handbook of Procedures.  Units in EOU/ Related Schemes may be approved on leased premises if the lease has been obtained from a government department / agency or a private party (if the Development Commissioner is satisfied that the lease is genuine). A lease from a private party will be valid for 5 years.


Breach of any of the terms of the LOP or the LOI can attract penalties under the Foreign Trade Development and Regulation Act – these can extend up to five times of the value of the imported / exported goods and services which are involved in the contravention and cancellation of the Importer-Exporter Code (which can effectively prohibit a business from engaging in international trade).


Interestingly, violation of the FTDRA does not attract imprisonment (although violation of customs law can attract imprisonment under the Customs Act, 1962).

b.Terms of establishment under an EOU/ Related Scheme


Units in EOU & Related Schemes must export their entire production of goods and services, unless they are eligible for exemptions provided under the Foreign Trade Policy. The FTP allows sale of 50% of the value of exports to be sold within India (called the ‘domestic tariff area’ or DTA), if they have a positive net foreign exchange requirement. They are required to pay concessional rates of duty on domestic sales (called DTA Sales). This exception (relating to payment of extremely low rates of duty) is not available to gems and jewellery units.DTA sales of motor cars, books, alcohol, etc. tea, pepper and other items that are notified by the government cannot be made on payment of concessional duty.


A business established under an EOU/ Related Scheme must have net foreign exchange (NFE) earnings, that is, the foreign exchange earnings must be greater than expenses in foreign exchanges.


A business in an EOU/ Related Scheme is required to maintain proper accounts and file digitally signed quarterly and annual reports as prescribed under the Appendix 14-I-F to various authorities such as the Development Commissioner, designated officers in the Department of Information Technology and Customs and Central Excise authorities.


After expiry of its approval period, a business can opt out of the scheme or apply for an extension to the Development Commissioner (within 6 months after expiry). The Development Commissioner can grant extension after obtaining approval from the Board of Approvals. If no application is made for extension the Development Commissioner can cancel the approval on his own.


Part B - Special Economic Zones

Special Economic Zones (SEZ) have been setup primarily to house Indian exporters in clusters. The first SEZ in India was set up in Kandla in 1965, and it is the largest SEZ in India today. Majority of the SEZs are in the IT or ITeS sector. Earlier, SEZs were governed by the Foreign Trade Policy – however, since 2005 they have been governed by a specific legislation called the Special Economic Zones Act (SEZ Act). The SEZ Act has also amended several tax statutes to introduce tax exemptions for SEZs.

How should one choose an appropriate location for setting up an SEZ?


An entrepreneur can only set up a unit in a particular SEZ if units pertaining to that sector are permitted in the SEZ. The SEZ Rules classify SEZs into multiple categories. See Rule 5, SEZ Rules, 2006 available at http://sezindia.nic.in/writereaddata/rules/SEZ_Rules_July_2010.pdfAs per the rules, some SEZs only permit units from a single product sector (called a single product SEZ), such as leather products, apparel or Information Technology to be established, while others may be multi-product SEZs (that is, an SEZ which has units from two or more industries), or it could be located at a port or an airport, as long as it contains units in two or more sectors. This is dependent on the terms of the government notification which declares that particular area to be an SEZ. 


The government grants approval based on the area of the land which is to be used for the purpose of the SEZ, as per the SEZ Rules. For example, an SEZ which specifically contains only software companies requires only 10 hectares of area, whereas a multiproduct SEZ can only be set up in an area of minimum 1000 hectares.

Therefore, a an entrepreneur who contemplates setting up a software company should look for a single product SEZ in the software or IT sector, or a multi-product SEZ which permits IT companies.

How is a unit in an SEZ established?

Any entity which intends to establish a unit in a particular SEZ is required to obtain an approval from the Approval Committee in that SEZ. The application for the approval must be submitted to the Development Commissioner,(See Form F and Rule 17, SEZ Rules) who will forward it to the Approval Committee. The SEZ Act establishes a single-window clearance system, under which different statutory approvals can be obtained from a single authority. Submission of the application form to the Development Commissioner automatically initiates the single-window clearance process.

The Approval Committee also issues various other permissions – such as water, power connection, pollution control board, Factories Act registration and approval for procurement of goods and services from other domestic regions into the SEZ. The relevant criteria for receipt of approval are that the entity must be a net earner of foreign exchange (i.e. its exports should be greater than imports), and that the developer must have agreed to provide space and infrastructural support.

When the Development Commissioner approves the setting up of the SEZ unit, he issues a letter of permission (LOP) or letter of intent (LOI).


In sectors where an industrial licence (wherever applicable) is required, the Board of Approvals in the SEZ has been prescribed the nodal authority for the same.See Sections 9 and 14 of the SEZ Act, 2005.


What is the procedure for setting up an SEZ? (optional reading)

Any individual, co-operative society, company or partnership firm can file an application for setting up of Special Economic Zone after identifying an area for the said purpose. The application is to be made in Form-A to the concerned State Government and the Board of Approval (BOA) in the Department of Commerce, Government of India. However the application is considered by the BOA only after recommendation of the State Government.


Once the BOA gives formal approval and the concerned Development Commissioner (a Development Commissioner has jurisdiction over SEZs in multiple states) gives an inspection report certifying the contiguity and vacancy of the area, the area is notified as an SEZ. 


Note: A developer and a unit in an SEZ are treated differently. An SEZ is built by a developer. The individual businesses which are established in an SEZ are called units. An early stage entrepreneur is likely to be concerned about the benefits available to the units. On the other hand, a consultant or a lawyer working in a law firm will do well to also know the benefits available for developers.

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