Export Oriented Units: Boosting Indian Exports

Prof. Vijayan Ramakrishnan Saturday 09.12.23 6.30 p.m. to 9.30 p.m. Session 2

EXPORT ORIENTED UNITS ELECTRONIC HARDWARE TECHNOLOGY PARKS SOFTWARE TECHNOLOGY PARKS BIO-TECHNOLOGY PARKS MANUFACTURING UNDER BONDED WAREHOUSE SPECIAL ECONOMIC ZONES INCLUDING FTWZ

EOU/EHTP/STP/BTP EOU/EHTP/STP/BTP are covered under Chapter 6 of Foreign Trade Policy The Export Oriented Units (EOU) scheme was introduced to boost exports, increase foreign earnings and created employment in India. The EOU scheme is complementary to the scheme for Free Trade Zone, Export Processing Zone. Units that are undertaking to export their entire production of goods are allowed to set up as an EOU.

6.00 Introduction and Objective Units undertaking to export their entire production of goods and services(except permissible sales in DTA), may be set up under the Export Oriented Unit (EOU) Scheme, Electronics Hardware Technology Park (EHTP) Scheme, Software Technology Park(STP) Scheme or Bio-Technology Park (BTP) Scheme

For manufacture of goods, including repair, re-making, reconditioning, re- engineering, rendering of services, development of software, agriculture including agro-processing, aquaculture, animal husbandry, bio- technology, floriculture, horticulture, pisciculture, viticulture, poultry and sericulture. Trading units are not covered under these schemes.

Objectives of these schemes are to promote exports, enhance foreign exchange earnings, attract investment for export production and employment generation. An EOU / EHTP / STP / BTP unit may export all kinds of goods and services except items that are prohibited in ITC (HS). However export of gold jewellery, including partly processed jewellery, whether plain or studded, and articles, containing gold of 8 carats and above up to a maximum limitof 22 carats only shall be permitted.

Export of Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET) shall be subject to fulfillment of conditions contained in the Chapter 10 of the FTP (new Chapter for SCOMET). In respect of an EOU, permission to export prohibited item(s) may be considered by BOA ( Board of Approval) on a case to case basis provided the input(s) used for the export item(s) is/are imported and there is no procurementof such inputs from DTA.(DomesticTariff Area)

An EOU / EHTP/ STP/ BTP unit may import and / or procure, from DTA or bonded warehouses in DTA / international exhibition held in India, all types of goods, including capital goods, required for its activities, provided they are not prohibited items of import in the ITC (HS) subject to conditions given at para (ii) & (iii) below. The imports and/ or procurement from bonded warehouse in DTA or from international exhibition held in India shall be without payment of duty of customs leviable thereon under the First Schedule to the Customs Tariff Act, 1975 and additional duty, if any, leviable thereon under Section 3(1), 3(3) and 3(5) of the said Customs Tariff Act

The procurement of goods covered under GST from DTA would be on payment of applicable GST and compensation cess. The refund of GST paid on such supply from DTA to EOU would be available to the supplier subject to such conditions and documentations as specified under GST rules and notifications issued there under. EOU/EHTP/STP/BTP units may import/procure from DTA, with or without payment of duties/taxes as provided at Para 6.01 (d) (ii) and 6.01(d) (iii) above, certain specified goods for creating a central facility. Software EOU/ DTA units may use such facility for export of software

6.02 Second hand Capital Goods Second hand capital goods, without any age limit, may also be imported with or without payment of duty/ taxes as provided under Para 6.01(d) (ii)

6.05 Applications & Approvals/Letter of Permission / Letter of Intent and Legal Undertaking (a) (i) Application for setting up an EOU shall be considered by Unit Approval Committee (UAC)/ Board of Approval (BoA) as thecase may be, as detailed in the Hand Book of Procedure. A detail of administrationof EOUs and powerof DC is given in HBP. (ii) In case of units under EHTP / STP schemes, necessary approval / permission under relevant paras of this Chapter shall be granted by officer designated by Ministry of Communication and Information Technology, Department of Electronics & Information Technology, instead of DC, and by Inter-Ministerial Standing Committee (IMSC) instead of BOA.

(iii) Bio-Technology Parks (BTP) would be notified by DGFT on recommendations of Department of Biotechnology. In case of units in BTP, necessary approval / permission under relevant provisions of this chapter will be granted by designated officer of Department of Biotechnology. (iv)On approval, a Letter of Permission (LoP) / Letter of Intent (LoI) shall be issued by DC / designated officer to EOU / EHTP / STP / BTP unit. Thevalidityof LoP/LoI shall be given in the Hand Book of Procedures.

(b) LoP / LoI issued to EOU / EHTP / STP / BTP units by concerned authority, subject to compliance of provision in Para 6.01 above, would be construed as an Authorisation forall purposes. (c) Unit shall execute an LUT with DC concerned. Failure to ensure positive NFE or to abide by any of the terms and conditions of LoP / LoI / IL / LUT shall render the unit liable to penal action under provisions of the FT (D&R) Act, as amended, and Rules and Orders made there under, without prejudice to action underany other law / rules and cancellation or revocation of LoP/LoI/IL.

6.06 Investment Criteria Only projects having a minimum investment of Rs.1 Crore in plant & machinery shall be considered forestablishmentas EOUs. However, this shall not apply to existing units, units in EHTP / STP/ BTP, and EOUs in Handicrafts /Agriculture/ Floriculture/Aquaculture/Animal Husbandry/Information Technology, Services, Brass Hardware and Handmade jewellerysectors. BOA mayallowestablishmentof EOUswith a lower investmentcriteria.

6.08 DTA Sale of Finished Products / Rejects / Waste/ Scrap / Remnants and By-products Entire productionof EOU/EHTP/STP/BTP units shall beexported However, the following are allowed as exceptions subject to the conditionsspecified

(a) (i) Units, other than gems and jewellery units may sell finished goods manufactured by them as specified in LoP (including by- products, rejects, waste and scraps arising in the course of production, manufacture, processing or packaging of such goods) which are freely importable under FTP in DTA, subject to fulfillment of positive NFE, on payment of excise duty, if applicable, and/ or payment of GST and compensation cess along with reversal of duties of Custom leviable under First Schedule to the Customs Tariff Act, 1975 availed as exemption, if any on the inputs utilized for the purpose of manufacturing of such finished goods (including by-products, rejects, waste and scraps arising in the course of production, manufacture, processing or packaging of such goods). No DTA sale shall be permissible in respect of, pepper & pepper products, marble and such other items as may benefited from time to time.

(ii) Such DTA sale shall also not be permissible to units engaged in activities of packaging / labeling / segregation / refrigeration / compacting / micronisation / pulverization / granulation / conversion of monohydrate form of chemical toanhydrous form orvice-versa.

6.09 Other Supplies Following supplies effected from EOU / EHTP / STP / BTP units will be counted for fulfillmentof positive NFE. Such supplies shall not include marble , except if such supply of marble is an inter unit supply as provided at Sub - Para(c) below: (a) Supplies effected in DTA to holders of Advance Authorisation / Advance Authorisation for annual requirement / DFIA under duty exemption / remission scheme / EPCG scheme. However, printing sector EOUs (or any other sector that may be notified in HBP), can t supply goods, where basic customs duty and CVD is nil or exempted otherwise, to holders of Advance Authorisation / Advance Authorisation forannual requirement

(b) Supplies effected in DTA against foreign exchange remittance received from overseas. (c) Supplies to other EOU / EHTP / STP / BTP / SEZ units, provided that such goods are permissible forprocurement in terms of Para 6.01 of FTP. (d) Supplies made to bonded warehouses set up under FTP and / or under section 65 of Customs Act and free trade and warehousing zones, where payment is received in foreign exchange.

6.12 Other Entitlements Otherentitlementsof EOU/EHTP/STP/BTP unitsareas under: (a) Exemption from industrial licensing for manufactureof items reserved for SSI sector. (b) Export proceeds will be realized within nine months. (c) Unitswill be allowed toretain 100% of itsexport earnings in the EEFC account. (d) Unit will not be required to furnish bank guarantee at the time of import or going for job work in DTA, where: (i) The unit has turnoverof Rs.5 croreorabove; (ii) The unit is in existence forat least threeyears; and

(iii) The unit: (1) has achieved positive NFE / export obligationwhereverapplicable; (2) has not been issued a show cause notice or a confirmed demand, during the preceding 3 years, on grounds other than procedural violations, under the penal provision of the Customs Act, the Central Excise Act, the Foreign Trade (Development & Regulation) Act, the Foreign Exchange Management Act, the Finance Act, 1994 covering Service Tax or any allied Acts or the rules made there under, on account of fraud / collusion / willful misstatement / suppression of facts orcontraventionof anyof the provisions thereof; (e) 100% FDI investmentpermitted throughautomaticroutesimilarto SEZ units.

6.18 Exit from Scheme a) With approval of DC/Designated officer of EHTP/ STP/BTP, an EOU/EHTP/STP/BTP unit mayopt outof scheme. Such exit shall be subject to payment of applicable Excise and Customs duties and on payment of applicable IGST/ CGST/ SGST/ UTGST and compensation cess, if any, and industrial policy in force .(b) If unit has notachieved obligations, it shall also be liable to penalty at the timeof exit. (c) In the event of a gems and jewellery unit ceasing its operation, gold and other precious metals, alloys, gems and other materials available for manufacture of jewellery, shall be handed overtoan agency nominated by DoC, at price to be determined by thatagency.

(d) An EOU / EHTP / STP / BTP unit may also be permitted by DC to exit from the scheme at any time on payment of applicable duties and taxes and compensation cess on capital goods under the prevailing EPCG Scheme for DTA Units. This will be subject to fulfillment of positive NFE criteria under EOU scheme, eligibility criteria under EPCG scheme and standard conditions indicated in HBP.

(e) Unit proposing to exit out of EOU schemeshall intimate DC and Customs authorities in writing. Unit shall assess duty liability arising out of exit and submit details of such assessment to Customs authorities. Customs authorities shall confirm duty liabilities on priority basis, subject to the condition that the unit has achieved positive NFE, taking into consideration thedepreciation allowed. After payment of duty and clearance of all dues, unit shall obtain No Dues Certificate from Customs authorities. On the basis of No Dues Certificate so issued by the Customs authorities, unit shall apply to DC for final exit. In case there is no proceeding pending under FT (D&R) Act, as amended, DC shall issue final exit orderwithin a period of 7 working days

: What are the conditions including export criteria to be met for EOUs? An EOU shall execute a Legal Undertaking (LUT) with the DC. It has to account for the utilisation of inputs as per the Standard Input Output Norms (SION). However, where there is no SION, the norms for waste, scrap and remnants would be 2%. The export proceeds have to be realized within nine months It has to ensure a positive Net Foreign Exchange (NFE) which is computed as per the following formula.

NFE = (A-B) where A is the sum of physical exports in free foreign exchange and deemed exports (as per para 6.09 of FTP) B is the sum of the imported and domestic procured raw materials and consumables along with the amortised value (10% per year over a 10-year period) of the capital goods and foreign technical know-how fees The failure to ensure positive NFE or to abide by any of the terms and conditions of LoP/ Industrial Licence (IL) / LUT shall render the unit liable to penal action under provisions of the FT (D&R) Act, as amended, and Rules and Orders made there under, without prejudice to action underanyother law / rules and cancellation orrevocationof LoP.

(e) Scrap / waste / remnants arising out of production process or in connection therewith may be sold in DTA, as per SION notified under Duty Exemption Scheme, on payment of applicable duties and/ or taxes and compensation cess. Such sales of scrap / waste / remnantsshall not be subject toachievementof positive NFE. In respect of items not covered by norms, DC may fix ad- hoc norms for a period of six monthsand within these period, norms should be fixed by Norms Committee. Ad-hoc norms will continue till such time norms are fixed by Norms Committee. Scrap / waste / remnants may also beexported.

MANUFACTURING UNDER BONDED WAREHOUSE

Customs bonded warehouse -General This is a warehouse that is authorized by the Indian customs to operate the warehousing under 58 and 59 of Act 1962. The act permits the handling, storage, or assembly of dutiable goods without being subject to duty. It may be managed by the state or by a private company. Using this concept of bonded warehousing, importers would store cargo and release part of the cargo at a later point, thereby deferring duty payments to Customs and also releasing the international (ISO) container in which the cargo was stored.

While the goods remain in the bonded warehouse, they may be cleaned, sorted, repackaged, or otherwise changed by processes that do not amount to manufacturing, under the supervision of the customs authority. In the wake of warehousing, the goods can be either exported to another bond (EOU, etc.) without paying duty or consumed at no duty with payment of the appropriate rate for the goods in their renewed condition at the time of withdrawal.

Bonded warehousing offers importers a triple advantage. On one hand, it allows deferral of the payment of duties, and 1. 2. at the same time, it allows the shipping container to be returned to the yard, which would otherwise incur detention charges. 3. Likewise, it allows the importer to store cargo in a relatively cheaper warehouse than to hold onto an ISO container lying at the port, which includes the rental of both the container and the port / CFS.

Process Process After Filling The Warehouse Bill of Entry & Until Ex-bonding BOE for Bonding If the importer does not wish to customs clear the shipment immediately and would like the shipment to be warehoused at the Customs Bonded Warehouse. Afterward, the Bill of Entry for Bonding is submitted, so that the customs department can permit the transfer of import shipment to be warehoused at the customs-bonded warehouse without having to pay customs duties. The importer is required to execute a bond and postpone clearance to a later date. By filing a yellow-colored BOE for bonding, the importer is able to defer the payment of duty until he needs to clear the consignment. The customs assess the consignment and determine the duty payable, and the importer executes a bond for the required value but does not need to pay the actual customs duty.

Ex-Bond Bill of Entry A warehoused importer can clear the goods for domestic consumption by filing an ex-bond Bill of Entry and after payment of duties etc. in terms of section 68 of the Customs Act. When imports are not custom cleared immediately on arrival but rather are warehoused in customs-bonded warehouses. When the importer files an Ex-Bond Bill of Entry to clear the consignment from the warehouse after payment of duty, he or she can opt to clear it as a whole or in parts. The valuation under the Ex-Bond Bill of Entry will take into account the rate of duty prevailing at the time of actual removal of imported goods from the warehouse and not the rate of duty assessed through the Bonding Bill of Entry. A revised tariff will prevail if there has been a revision at the time of removal from the bonded warehouse. It is also known as the Green Bill because of its green color.

Is it necessary to process goods stored in a customs bonded warehouse for value addition before removing them for re-export or for local consumption? The answer is no. You can re-export the warehoused goods under Section 69 of the Customs Act, 1962 without any processing

Manufacturing in Bonded warehouse The Central Board of Indirect Taxes and Customs (CBIC) have launched a revamped and streamlined program to attract investments into India and strengthen Make in India. This program is based upon Section 65 of the Customs Act, 1962, which enables conduct of manufactureand otheroperations in a Customs bonded warehouse. The program has been introduced vide the Manufacture and Other Operations in Warehouse (no. 2) Regulations, 2019, (hereinafter referred to as MOOWR, 2019) and explained through Circular-34/2019- Customs dated 01st October, 2019.

Under this program a unit can import goods (both inputs and capital goods) undercustomsdutydefermentwith no interest liability. There is no investment threshold orexportobligation. The duties are fully remitted if the goods resulting from such operations are exported. Import duty is payable only if the resulting goods or imported goodsare cleared in the domestic market (ex-bonding).

The salient features of the program are i. No geographical limitation on where such units can be set up. ii. A single application cum approval form for uniformity of practice with a single point of approval to set up theoperations of such units. iii. Improved liquiditywith defermentof importdutyand no interest liability. iv. Allows procurement of GST compliant goods from the domestic market for use in manufactureand otheroperations in a Section 65 unit. v. A single digital account for ease of doing business and easy compliance. vi. Enables efficient capacity utilization, as there is no limit on quantum of clearances thatcan be exported orcleared to thedomestic market.

Who is eligible for applying for manufacture and other operations in a bonded warehouse? Response: The following persons are eligible to apply for manufacture and other operations in a bonded warehouse, - (i) A person who has been granted a licence for a warehouse under Section 58 of the Customs Act, in accordance with Private Warehouse Licensing Regulations, 2016. (ii) A person can also make a combined application for licence for a warehouse under Section 58, along with permission for undertaking manufacturing or other operations in the warehouse under Section 65 of the Act. The persons mentioned have to be a citizen of India or an entity incorporated or registered in India.

Is manufacture and other operations in a bonded warehouse allowed in Public Bonded Warehouse licensed under Section 57 of the CustomsAct? Response: No. At present, manufacture and other operations in a bonded warehouse is allowed only in a Private Bonded Warehouse licensed under Section 58 of the CustomsAct

When the raw materials or capital goods are imported, the import duty on them is deferred. If these imported inputs are utilised for exports, the deferred duty is exempted. Only when the finished goods are cleared to the domestic market, import duty is to be paid on the imported raw materials used in the production. Import duty on capital goods is to be paid if and when the capital goods are cleared to the domestic market.

MOOWR: Highlights No minimum investment is required No minimum area/notified area Existing warehouse can be converted into private manufacturing license Submit a triple duty bond under Section 59 of the Customs Act No export obligation or NFE obligation attached to MOOWR A single application

Types of Beneficiaries Export: All businesses can avail of exemption on customs duty on imported inputs used in the production of finished goods to be exported through bonded manufacturing. Domestic: The duty on imported inputs is deferred until the finished goods are cleared to the domestic market. As explained above, the manufacturer benefits from deferred duty on imported inputs, leading to reduced production cost. There is no timeline to store the goods in the warehouse as the goods can be stored until it moves to other storage units or till the manufacture gets over, or till the manufactured goods are exported. The duty on imported goods can be paid only when the finished goods are cleared from the facility to the domestic market. Two different scenarios are covered under this scheme, and they are: Steps to Start Manufacturing Steps for Clearance of Warehoused Goods

Steps to Start Manufacturing Step-1 Fill Online Application Fill online application as per Annexure-A along with the following details: Nature of manufacturing goods Automobile, FMCG, etc. Particulars of imported goods Expected volume of trade, etc. List of documents required: Details of the company like Certificate of Incorporation or AoA or Partnership Deed, etc. (depends on the nature of the company) ID proofs of proprietors/partners/directors Aadhar Card of Authorised Signatory Property documents or Rental agreement Warehouse license, if issued earlier Ground plan of the site with details Audit certificate from fire department

Step-2 Bond Execution A bond to be executed as per Annexure-C (Refer below) and to be submitted to the Commissioner of Customs under the jurisdiction of the business. Step-3 Grant of Sanction Permission is granted by the Commissioner of Customs for manufacturing or other operations in the bonded facility Permission also includes: Manufacturing process or other permitted operations Conditions regarding manufacturing

Step-4 Start Manufacturing or Other Operations Note: The processes for availing the license for a private bonded facility (as per Section 58) and manufacturing or performing other operations (as per Section 65) are combined under single application as per Annexure A.

Steps for Clearance of Warehoused Goods To the domestic market for consumption When warehoused goods are used for manufacturing or other operations & finished goods are domestically consumed To a Customs Station for Export When warehoused goods are used for manufacturing, or other operations & finished goods are exported To another bonded manufacturing facility When imported goods are stored and used as raw materials by another industry Warehoused goods are permitted for clearance after: The owner of goods meets all compliances as per the executed bond. Deferred duty on imported raw materials or capital goods is paid. GST is paid on the finished goods. Any other compliance as per the Customs Act or any other applicable regulations are met.

Follow Simple Steps to Transport Warehoused Goods Form for Transfer of goods to be filled from a facility appended as per Warehouse Goods (Removal) Regulations Act, 2016 to transport stored/warehoused goods. The authorized licensee of the originating warehouse should get permission from the respective Commissioner of Customs and had to disclose the nature of goods and mode of transport. Acknowledgement received from the licensee of the recipient warehouse stating the arrival of goods to the Bond Officer of the originating warehouse to be produced. Acknowledgment is to be produced within one month. *When the goods are transferred from one bonded facility to another, the responsibility of the deferred duty is also transferred to the new facility.

Requirements for Record keeping 1.Maintenance of records Receipts of handling, storing, and removal of goods into/from the facility as per Annexure B. Record each activity, operation, or action carried out to the stored goods. Copies of the following documents: Entry Bills Transport documents Forms for Transfer of goods from the warehouse Shipping Bills Export Bills Documents on receipt/removal of goods from the warehouse, if applicable

2.Preservation of physical and digital records 2. Per policy, the records of accounts should be preserved for a minimum of 5 years from the date of removal of goods from the warehouse. 3. Digital copies of records should be preserved at a place other than a manufacturing or warehousing facility. 3.Filing monthly returns File monthly returns within ten days of the closing of the month. Note: If the licensees fail to comply with any of the provisions of the regulations, they are liable to a penalty as per the Customs Ac

Conclusion Bonded Manufacturing emerges as a strategic tool within India's economic landscape that offersa rangeof benefits to manufacturers, investors, and the nation as a whole. By providing incentives such as deferred customs duty and GST waivers, the scheme fosters an environment conducive to foreign collaboration, subsidiary establishment, and jointventures, thus bolstering the country's position in the global market. The flexibility of the Bonded Manufacturing Scheme in allowing for both domestic utilization and international export of processed goods, coupled with its streamlined setupand minimal compliance requirements, furthersolidifies its appeal.