Import Procedures for 100% Export Oriented Units and SEZ Units in India

India’s push to become a global manufacturing and export hub relies heavily on policies that make it easier for businesses to import materials and produce goods for international markets. Two key schemes-the 100% Export Oriented Unit (EOU) scheme and the Special Economic Zone (SEZ) framework-offer significant duty exemptions and streamlined procedures for businesses committed to exporting. Understanding how these import procedures work is essential for anyone looking to tap into India’s export-driven incentives.

What are 100% EOUs and SEZ units? 🔗

A 100% Export Oriented Unit is a manufacturing or service unit established anywhere in India with the primary objective of exporting its entire production. These units can engage in manufacturing, software development, services, repair, reconditioning, and even jewellery making. The scheme allows businesses to set up operations at any location they choose, provided they meet specific export obligations.

Special Economic Zones, on the other hand, are designated duty-free enclaves considered outside India’s customs territory for trade purposes. Unlike EOUs that can operate anywhere, SEZ units must be located within notified SEZ areas. Goods moving from the Domestic Tariff Area (DTA) into an SEZ are treated as exports, while goods coming out of the SEZ are treated as imports. India currently has over 265 operational SEZs spread across various states.

Duty-free import benefits 🔗

The cornerstone of both schemes is the ability to import goods without paying customs duties. For EOUs, Notification No. 52/2003-Customs governs duty-free imports, allowing units to bring in capital goods, raw materials, components, packing materials, consumables, and spares required for export production. After GST implementation, EOUs also received exemption from Integrated Tax (IGST) and compensation cess on imports through Notification No. 78/2017-Customs.

SEZ units enjoy similar benefits but with even broader scope. They can import or procure domestically without any duty on capital goods, raw materials, consumables, spare parts, packing materials, office equipment, and DG sets for their authorized operations. No import license is required, which significantly reduces paperwork and delays.

What goods qualify for duty-free import? 🔗

Both EOUs and SEZ units can import the following categories duty-free:

Capital goods: Machinery, equipment, pollution control systems, quality assurance equipment, and even office furniture fall under this category. Imported capital goods can be warehoused for up to five years and utilized throughout the approval period.

Raw materials and components: All inputs required for manufacturing export products qualify for exemption. This includes intermediates, sub-assemblies, and any materials that become part of the finished product.

Consumables and spares: Items consumed during production, along with spare parts needed to maintain machinery, can be imported without duty.

Second-hand capital goods: EOUs can import second-hand capital goods without any age limit, either with or without payment of duty as specified under the Foreign Trade Policy.

Customs bonding and compliance requirements 🔗

For EOUs, operating from customs-bonded premises is mandatory. This bonding requirement under Section 58 of the Customs Act ensures proper tracking of duty-free goods. The unit executes a single bond called the B-17 bond, which covers duty-free imports, domestic procurement, provisional assessment, exports, and accountal of all dutiable goods.

The bond amount is calculated based on duty foregone on sanctioned capital goods plus duty foregone on raw materials required for three months of production. When this bond amount becomes insufficient to cover duty foregone, units must execute additional or revised bonds.

SEZ units operate under a simpler single all-purpose bond system. The bond amount equals 25% of duty foregone on sanctioned capital goods plus duty foregone on three months’ raw material requirements. Units with a turnover of ₹1 crore or more in the preceding financial year are exempted from furnishing any security or surety.

Net Foreign Exchange (NFE) obligation 🔗

The most critical requirement for both EOUs and SEZ units is achieving positive Net Foreign Exchange. This isn’t measured monthly but over a block period of five years from the commencement of production. The formula for calculating NFE is:

NFE = A – B

Where A equals the sum of physical exports in free foreign exchange plus deemed exports, and B equals the sum of imported and domestically procured raw materials and consumables, along with the amortized value of capital goods (calculated at 10% per year over ten years) and foreign technical know-how fees.

Failure to achieve positive NFE has serious consequences. Units become liable for penal action under the Foreign Trade (Development & Regulation) Act, and the duty foregone on imported goods becomes recoverable along with interest. The Letter of Permission (LoP) may also be cancelled or revoked.

Domestic Tariff Area (DTA) sales 🔗

While these schemes are designed for 100% export, some flexibility exists for domestic sales. EOUs can sell finished goods in the DTA up to 50% of the FOB value of their exports, but only after fulfilling positive NFE requirements. Such sales attract full customs duty on the Basic Customs Duty (BCD) exempted on inputs used in manufacturing, plus applicable GST.

For SEZ units, DTA clearances are subject to full customs duty as per prevailing import policy. Goods cleared from SEZs to DTA are essentially treated as imported goods for duty calculation purposes. This maintains the integrity of the duty-free enclave concept while allowing some commercial flexibility.

Domestic procurement procedures 🔗

Both schemes allow duty-free domestic procurement, though the mechanisms differ slightly post-GST. For EOUs, domestic supplies from registered GST persons are treated as “deemed exports” under Section 147 of the CGST Act. The GST paid on such supplies can be claimed as a refund by either the recipient EOU or the supplier.

For goods covered under the Fourth Schedule of the Central Excise Act, 1944 (petroleum products, tobacco, etc.), EOUs continue receiving ab-initio exemptions from central excise duty by following the CT-3 procedure. SEZ units enjoy zero-rated supplies under the IGST Act, 2017, meaning goods and services supplied to SEZs attract zero GST.

Additional benefits and incentives 🔗

Beyond duty-free imports, both schemes offer several other advantages:

100% FDI: Full foreign direct investment is permitted through the automatic route in most sectors for both EOUs and SEZ units.

Single window clearance: SEZ units benefit from single window clearance for both central and state-level approvals, reducing bureaucratic delays significantly.

No routine customs examination: Export and import cargo of SEZ units doesn’t require routine examination by customs authorities, enabling faster movement of goods.

Income tax benefits: SEZ units receive 100% income tax exemption on export income for the first five years under Section 10AA, followed by 50% for the next five years, and 50% on reinvested export profits for another five years. However, the sunset clause for new units became effective from April 1, 2020.

Forex retention: EOUs can retain export earnings in Exchange Earners’ Foreign Currency (EEFC) accounts to manage foreign currency without forced conversion.

Minimum investment and eligibility 🔗

Not every business qualifies for EOU status. Projects must have a minimum investment of ₹1 crore in plant and machinery. This requirement prevents businesses from simply importing ready-made goods, adding labels, and repacking them as “export work.” However, this investment threshold doesn’t apply to units in handicrafts, agriculture, floriculture, aquaculture, animal husbandry, IT services, brass hardware, and handmade jewellery sectors.

SEZ units face no such minimum investment requirement but must operate within notified SEZ areas and obtain approval from the Development Commissioner. Both types of units must execute a Legal Undertaking (LUT) with the Development Commissioner and maintain detailed records of all imports, production, and exports.

Exit procedures and de-bonding 🔗

Units wishing to exit these schemes can do so with approval from the Development Commissioner. However, exit involves payment of applicable customs and excise duties on unutilized raw materials and depreciated capital goods. If export obligations weren’t met, penalties may also apply.

For gems and jewellery EOUs ceasing operations, all gold, precious metals, gems, and alloys available for manufacture must be handed over to a specified agency at a determined price. This prevents misuse of duty-free precious materials.

Choosing between EOU and SEZ 🔗

The choice between setting up an EOU or locating within an SEZ depends on several factors. EOUs offer location flexibility-you can establish operations anywhere in India near raw material sources, labour markets, or ports. SEZ units, while restricted to specific zones, benefit from superior infrastructure, on-site customs presence, and potentially easier compliance due to the controlled environment.

SEZs also provide more robust physical controls over goods movement, which can be advantageous for businesses dealing with high-value items. EOUs rely more heavily on record-based controls and self-certification, which offers flexibility but demands meticulous documentation.

What do you think? If you were planning an export-oriented manufacturing venture in India, would you prefer the location flexibility of an EOU or the infrastructure advantages of an SEZ? How might the five-year NFE calculation period affect your business planning and cash flow projections?

References

1. https://www.indiafilings.com/learn/export-oriented-units-scheme/
2. https://sezindia.gov.in/facilities-and-incentives
3. http://www.dgep.gov.in/introduction-eou.php
4. https://nacin.gov.in/ZCLucknow/Images/Documents/E_Books/12_EOU%20Scheme.pdf
5. https://vsez.gov.in/faq/
6. https://www.karboncard.com/blog/export-oriented-unit