Export-oriented units, export processing zones, special economic zones, and export and trading houses

1. Export-oriented units (EOUs)

The EOU scheme, introduced in 1981 and now in Chapter 6 of the Foreign Trade Policy 2023, allows a unit anywhere in India (not only inside a zone) to work as a bonded unit that exports its production.

• Who: units undertaking to export their entire production of goods and services (with permitted sales in the domestic tariff area, DTA). Includes EHTP (electronics hardware technology parks), STP (software technology parks) and BTP (biotechnology parks) units.
• Approval: by the Development Commissioner of the SEZ concerned or a Board of Approval; the unit executes a legal undertaking and bond.
• Condition: the unit must be net foreign exchange (NFE) positive, that is, earn more foreign exchange than it spends, over five years.
• Benefits: duty-free import and domestic procurement of inputs and capital goods; GST-related reimbursement on domestic purchases; sale in the DTA on payment of duty within limits; 100 per cent FDI under the automatic route; retention of export proceeds in an EEFC account; simplified procedures.
• Evaluation: useful for units that need a particular location (near raw materials, as in granite or marine products), but the scheme’s income-tax benefit ended in 2011, and many EOUs have moved into SEZs.

2. Export processing zones (EPZs)

An EPZ was an industrial enclave, outside the country’s customs territory, where units could import inputs duty-free and manufacture for export. India set up Asia’s first EPZ at Kandla (Gujarat) in 1965, followed by Santacruz (Mumbai, 1973, for electronics and gems), and later Falta, Noida, Cochin, Madras and Visakhapatnam. EPZs had limited success: small size, poor infrastructure, controls and procedures, and a narrow range of benefits.

3. Special economic zones (SEZs)

(a) Origin and law

The SEZ policy was announced in April 2000 (modelled on China’s zones such as Shenzhen), and the EPZs were converted into SEZs. The Special Economic Zones Act, 2005 and the SEZ Rules, 2006 came into force on 10 February 2006.

(b) Meaning

An SEZ is a specifically delineated duty-free enclave, deemed to be foreign territory for the purposes of trade operations, duties and tariffs. Goods going from the DTA into an SEZ are treated as exports; goods coming from an SEZ into the DTA are treated as imports.

(c) Objectives (section 5 of the Act)

• Generation of additional economic activity.
• Promotion of exports of goods and services.
• Promotion of investment from domestic and foreign sources.
• Creation of employment.
• Development of infrastructure facilities.

(d) Administration

The Board of Approval in the Ministry of Commerce approves SEZ proposals and developers; a Development Commissioner administers each zone and approves units; single-window clearance; self-certification for many matters. SEZs may be multi-product or sector-specific (IT, pharmaceuticals, gems) and may be set up by the Central or State Government or by private developers.

(e) Benefits

• Duty-free import and domestic procurement of goods for authorised operations.
• Supplies to SEZ units and developers are zero-rated under GST (section 16, IGST Act).
• Income-tax: units that began operations before 1 April 2020 received a 15-year tapering deduction of export profits (100 per cent for five years, 50 per cent for the next five, and 50 per cent of profits ploughed back for five more) under section 10AA of the Income-tax Act, 1961; no new unit now qualifies.
• 100 per cent FDI under the automatic route in most activities; external commercial borrowing for units.
• Exemption from many state levies; simplified labour and environmental procedures in some States.
• Units must be NFE positive over five years.

(f) Evaluation

Achievements: large exports, particularly IT and software services from SEZs in Bengaluru, Hyderabad, Pune and Chennai; investment and jobs. Criticisms: acquisition of farmland (the Nandigram and Singur protests of 2007–08), revenue loss from tax holidays, many notified zones never made operational, concentration in a few States, diversion of investment from the DTA rather than new investment, and the 2019 WTO panel ruling against the export-linked benefits. A replacement law (the proposed Development of Enterprise and Service Hubs, or DESH, Bill) was announced in 2022 but has not been enacted.

4. Export houses and trading houses

(a) Meaning and history

An export house is an exporter recognised by the government, on the basis of its past export performance, as a status holder entitled to privileges. The scheme began in 1960. Indian policy for many years used a ladder: Export House, Trading House, Star Trading House, Super Star Trading House (and, under the EXIM policies of the 1990s and 2000s, Premier Trading House). Trading houses were larger status holders, often merchant exporters dealing in many products and aggregating the output of small producers, as in the Japanese sogo shosha model.

(b) Status holders under the Foreign Trade Policy 2023

FTP 2023 recognises exporters as status holders on the basis of export performance in the current and the previous three financial years, with lower thresholds than the 2015 policy:

(c) Privileges

• Authorisation and customs clearances on self-declaration.
• Exemption from furnishing bank guarantees for many schemes.
• Priority in processing and clearance; exemption from compulsory negotiation of documents through banks (subject to RBI rules).
• Two Star and higher status holders may set up export warehouses.
• Under FTP 2023, status holders are treated as partners in capacity building and are encouraged to train young people in export skills.

(d) Role

Export houses help small manufacturers and artisans reach foreign buyers; build scale and market knowledge; and act as merchant exporters, as the trading-house model intended.

How this is examined

The SEZ note: origin (Kandla EPZ, 2000 policy), the Act of 2005, the “foreign territory” idea, objectives, benefits and two lines of criticism. EOU note: scheme, NFE condition, benefits. Export houses: meaning, history of the trading-house ladder, the FTP 2023 table and privileges. Avoid quoting the old 2015 thresholds (USD 25 million for Two Star, USD 2,000 million for Five Star): they were lowered in 2023.