SynopsisEOUs were the shining stars in India’s export galaxy until SEZs outshone them. The government has to update and upgrade the relevant policies if it does not want to discourage entrepreneurs from taking this route.
Forty years of erosion has finally taken its toll on a scheme meant to encourage exports. As times and needs changed, the government brought radical reforms across the country’s export landscape. These schemes and programmes have benefited exporters, but have almost killed the much coveted export-oriented units (EOUs).
Introduced in 1980, the EOU scheme aims to increase exports, foreign exchange earnings, and employment. Units registered under this classification have to export almost all their products. The programme flourished during its early years. There were 1,556 EOUs in FY2001 and this grew to 2,586 in FY2010. Exports from these units grew from Rs 15,912 crore in FY2001 to Rs 84,135 crore in FY2010, according to a government report. Then the government came up with special economic zones (SEZs).
An EOU can be a manufacturing or service sector enterprise, but it has to export its entire output, except for a permissible amount or value that it can sell in the domestic tariff area (DTA) — areas outside SEZs. Units in SEZs need not pay tax, while EOUs have to pay taxes, but can claim reimbursement for several levies later. But the benefits now available to DTA exporting units has made those given to EOUs futile.
“Today, there are no exclusive incentives for 100% EOUs. There are only additional obligations. It hardly matters if you are an EOU or not,” says a Noida-based EOU operator, venting his disappointment after he was assured his identity would not be revealed. “Non-EOU players are better off as they are free to sell any volume in the domestic market and not have an export obligation. This gives business flexibility at many levels, which is not possible for an EOU.”
Animesh Saxena, President of the Federation of Indian Micro Small & Medium Enterprises (FISME), says the MSME segment represents 40-45% of India’s exports and few in this segment are keen to sign up as an EOU. Many have never felt the need to. Citing his own firm’s example, he says his company exports 100% of its output but never opted for an EOU tag. “Technically, an EOU is a bonded warehouse that has its own strict criteria of operations. You can import raw material duty-free, but you cannot take anything out of the factory premises without the permission of the customs department,” says Saxena.
The policy is also riddled with other restrictive clauses. An EOU has to be a net foreign exchange earner. In other words, its value of export (including deemed exports) must be greater than the value of import or foreign exchange outgo. A company has to have an investment of at least Rs 1 crore into plant and machinery to seek EOU status. These rules would put off most MSMEs.
This situation should ring the alarm bell for the government as the EOU scheme could discourage entrepreneurs from starting up using this route and even encourage promoters of EOUs to shut shop, especially as the novel coronavirus cripples trade around the world. The scheme is in dire need of an update and restart, at the very least, if the government wants to achieve its 2025 export target of $1 trillion and make India a manufacturing hub for the world. Several EOUs are MSMEs — a segment that requires all the help it can get to stay afloat in these challenging times.
Queries sent to the EOU division, under the Ministry of Commerce and Industry, did not elicit any response.
Too Old to Be True
An advantage EOUs have over SEZs is that these can be started anywhere: SEZs have specified geographical limits and companies must be set up in those areas to get the benefits. EOUs don’t have to pay duty to on purchase of raw materials from domestic or foreign markets; can get reimbursements of the goods and services tax and duty paid on fuels purchased from domestic oil firms; are exempted from industrial licensing in certain cases and can get fast-track clearance, says Drip Capital, explaining the nuances. “There is even a single window clearance system for EOUs, but the ground realities are different for setting up a unit in India. You have to sweat it out. Each state has a different rule,” says Bhuvnesh Seth, Chairman of Export Promotion Council for EOUs and SEZs (EPCES).
Experts often point out that EOUs could not scale up and their capacity utilisation is at a dismal level. They cite several reasons for this, the main being that since Indians have tasted the fruits of globalisation, there have been marked differences in consumer wants and the business landscape. A scheme rolled out in the pre-liberalisation period won’t fit in today’s marketplace, they say.
iStockEOUs suffer from restrictive policies that impact their growth and sustainability.Ajay Sahai, Director General & CEO of the Federation of Indian Export Organisations (FIEO), explains that the EOU scheme came into existence almost four decades ago when imports were heavily restricted and tariffs were high. Since then, the country has seen import liberalisation and lowering of tariffs. The objective for which the EOU scheme was devised has changed drastically, he says. Some of the benefits given to EOUs are now given to other export units, too. Besides, experts point out, EOUs don’t get the benefits of several duty drawback schemes that have been designed for modern trade. “The EOU scheme did serve the intended purpose for almost three decades. But it is now losing much of its charm, which is clear in the large number of denotification of units under the said scheme. The 15-year tax holiday that SEZs got, along with a range of benefits, also contributed to this trend,” Sahai says.
It was considered a scheme with great flexibility and it flourished from the 1980s to the mid-2000s, says A Sakthivel, Chairman, Apparel Export Promotion Council (AEPC). EOUs contributed to structural changes in domestic industries by encouraging skill development, building economic linkages and creating more specialised units, he says. But SEZs offered competitive infrastructure and tax incentives at one place. Several multinational companies also found this as a good investment destination. EOUs were spread across the country, often far away from major industrial hubs, leading to a problem of connectivity to ports and logistics infrastructure. “Since the SEZs came into effect in 2006, EOUs have been declining,” says Sakthivel, also the president of FIEO.
Maybe inadvertently, but the government ignored EOUs for SEZs, say industry observers.
Anil Bhardwaj, secretary-general of the Federation of Indian Micro Small & Medium Enterprises (FISME), says the biggest disadvantage for EOUs was that they could neither provide a regulation-free zone nor ensure connectivity with global shipping lines through mega ports. SEZs, on the other hand, enjoy institutional support — “all facilities under one roof”. Many EOUs operate on the borders of the formal and informal economies, say experts. This disconnects these units from global value chains and makes it difficult for them to get easier financing options.
What Next for EOUs?
“The policy needs a re-modelling, and we have been given to understand that the government is looking into it,” says Sahai.
But the authorities face a data challenge. There is a dearth of updated information about EOUs. This is so because EOUs mainly remain non-institutionalised and fragmented across the country. Because of the pandemic, field officers are not available to do physical verifications, says an official. Covid-19 has stopped authorities from trying to get any kind of updated information about the state of EOUs for the past two years. There is no clarity on when updated information can and will be collected.
Promoters in the EOUs say the government should reboot the scheme using the information available in a Comptroller and Auditor General (CAG) report of 2015. That report had said the number of EOUs had gone down from 3,109 in 2009-10 to 2,608 in 2013-14, and the number of functional units had come down from 2,279 to 2,095 during the period. There has been a gradual reduction in EOUs after the SEZ Act came into force in 2006-07, the report said. The value of exports from EOUs has dropped from about Rs 1,80,000 crore in 2008-09 to less than Rs 10,000 crore in 2013-14. For SEZs, it has gone up almost five times, to Rs 5,00,000 crore in the same period. The main reason entrepreneurs opted out of the EOU scheme was because the government discontinued the benefits under Section 10B of the Income Tax Act, the benefits under Duty Entitlement Pass Book, drawback benefits and other such advantages, the CAG added.
iStockEOUs mainly remain non-institutionalised and fragmented across the country.New-Age Needs
FIEO chief Sahai says the government may allow export oriented units to take advantage of the RoDTEP or Remission of Duties or Taxes on Export Product scheme, a recent WTO-compliant programme designed to incentivise exports. But he did not know when it would happen.
The Foreign Trade Policy 2021–26 that is expected soon gives the government a platform to change the policy. EOUs should be given all the benefits that are available to domestic units, he says. EOUs’ domestic sales should be subject to the duties on the inputs used in the supplied products rather than the duties on the supplied products, he says. “Since a lot of imports are happening from FTA countries, to provide a level playing field to EOU units, such supplies should be exempted from customs duties, particularly if the FTA countries account for a predominant share in the total import of such inputs. The domestic supply to the EOU units should be completely exempted from GST as well,” says Sahai.
Industry observers say that the EOU policy should be made compliant with global trade norms. Certain tax benefits given to EOUs are not compliant with World Trade Organization’s rules, says Seth of EPCES. This could land India in legal trouble. EOUs have access to duty-free imports of manufacturing inputs. But free-trade agreements (FTAs) with multiple countries have anyway eliminated or reduced the duties on many products. Sakthivel says if EOUs import raw materials from FTA sources, the domestic units should be allowed to sell the products in India without basic customs duty.
Today, global trade has reached dimensions unheard of in the 1980s. Industry observers say the authorities should keep in mind that a pragmatic policy, which is alive and kicking in a rapidly evolving post-Covid world, is the need of the hour.
(Edited by Ram Mohan. Illustrations by Manali Ghosh)
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