Export Oriented Unit (EOU) Scheme. Complete Compliance Guide

What Is an Export Oriented Unit (EOU)?

An Export Oriented Unit is a manufacturing or service establishment approved under Chapter 6 of the Foreign Trade Policy (FTP) 2023 that undertakes to export its entire production of goods or services. The scheme is designed to boost India's exports by allowing units to import capital goods and raw materials duty-free, in exchange for a commitment to earn positive net foreign exchange.

EOUs are governed by the Board of Approvals (BOA) at the central level and administered through Development Commissioners (DCs) at the zonal level. Unlike SEZ units, EOUs can be set up anywhere in India, giving manufacturers significantly more location flexibility.

While the name says "100% export," the scheme does permit Domestic Tariff Area (DTA) sales up to 50% of FOB value of exports, subject to payment of applicable duties. This makes EOUs a practical choice for manufacturers who primarily export but want the flexibility to serve the domestic market as well.

EOU vs SEZ vs DTA. 12-Parameter Comparison

Choosing between EOU, SEZ, and regular DTA operations depends on your export intensity, investment size, location preferences, and tax planning horizon. This table covers the 12 parameters that matter most.

Who Should Consider Setting Up an EOU

The EOU scheme is not for everyone. It works best for units with high export intensity and a genuine need for duty-free procurement. Here are the profiles that benefit most.

Manufacturers Exporting 100% Output

If your entire production is destined for export and you import significant raw materials or capital goods, the duty exemption alone can save 15-30% on input costs. This is the core use case the scheme was designed for.

Agri-Export Units

Agricultural and food processing exporters enjoy EHTP-like benefits under the EOU scheme. Units processing seafood, spices, rice, and other agri-commodities for export can import processing equipment and packaging materials duty-free. See our food export compliance guide for FSSAI requirements.

Gems and Jewellery Units

The gems and jewellery sector has special EOU norms including relaxed NFE calculations, allowance for personal carriage of samples, and simplified customs procedures for precious metals and stones. DTA sale norms are also more flexible for this sector.

IT/ITES Units (STP Comparison)

Software Technology Park (STP) units are effectively IT-sector EOUs. If you are an IT/ITES exporter , the STP scheme provides similar duty exemptions with IT-specific simplifications. However, the income tax benefit under Section 10A/10AA is no longer available for new units.

Units Needing Location Flexibility

Unlike SEZ units that must locate within a notified zone, EOUs can be set up anywhere in India. If your manufacturing process requires proximity to raw material sources, ports, or skilled labour that is not available near an SEZ, the EOU scheme gives you that freedom while retaining duty benefits.

Setting Up an EOU. Step by Step

The setup process involves six steps from application to commencing operations. Plan for 3-6 months from application to production start, though this varies by jurisdiction.

Application to Development Commissioner (DC)

Submit your application to the Development Commissioner of the jurisdiction where your proposed unit is located. The application must include a detailed project report with production capacity, export projections, import requirements, and NFE calculations for the first 5-year block.

Board of Approvals (Unit Approval Committee) Clearance

The Unit Approval Committee (UAC) under the DC reviews your application. For standard manufacturing proposals, the UAC can grant approval directly. Proposals involving sensitive sectors or large investments may be referred to the inter-ministerial Board of Approvals. Approval typically takes 4-8 weeks.

Green Card / Letter of Permission (LOP)

Upon approval, you receive a Letter of Permission (LOP). Sometimes called a Green Card. This document specifies your approved product mix, export obligations, DTA sale entitlement, and the conditions under which you operate. The LOP is valid for 5 years and must be renewed before expiry.

Execute Bonding with Customs (B-17 Bond + Bank Guarantee)

Before importing any goods duty-free, you must execute a B-17 bond with the jurisdictional customs authority. The bond covers the estimated duty foregone on imports. A bank guarantee (typically 5% of the estimated duty liability, though this varies) must accompany the bond. The bond amount is reviewed and adjusted periodically.

Customs Notification of Premises

Your manufacturing premises must be notified as a customs bonded area. Customs officers will inspect the premises to ensure adequate security, demarcation from any DTA operations, and proper storage for bonded goods. CCTV installation may be required in some jurisdictions.

Commence Operations Within Prescribed Time

You must commence production within the time specified in the LOP (typically 12-24 months from the date of approval). Failure to commence within the stipulated period may result in cancellation of the LOP. Extensions can be requested from the DC with valid reasons.

Documents Required

Duty Exemptions and Benefits

The EOU scheme offers significant duty benefits that can reduce input costs by 15-30% compared to DTA operations. Here is the full list of exemptions and benefits available.

• Duty-free import of capital goods and raw materials. Complete exemption from Basic Customs Duty (BCD), IGST, and Compensation Cess on all imports for use in the EOU. This covers machinery, equipment, raw materials, consumables, and spares.
• Domestic procurement at zero GST. Goods procured from domestic suppliers can be obtained without payment of GST using CT-3 (for excisable goods) or ARE-3 forms. The domestic supplier treats the supply as a deemed export and claims refund of input tax credit.
• DTA sales up to 50% of FOB value. EOUs can sell in the domestic market up to 50% of FOB value of exports, on payment of applicable duties. This provides revenue diversification without losing EOU status.
• Depreciation benefit on capital goods. When clearing capital goods into DTA (on exit or for DTA sale), duty is calculated on the depreciated value, not the original import value. Depreciation rates follow the Customs (Import of Goods at Concessional Rate of Duty) Rules.
• Exemption from industrial licensing. EOUs are exempt from industrial licensing requirements for most items, enabling faster setup and product diversification.
• RoDTEP on FOB value of exports. Eligible EOU exports can claim RoDTEP benefits on the FOB value, subject to the product being listed in the RoDTEP schedule and the unit not availing CENVAT/ITC on the inputs used for export production.
• Subcontracting up to 50% of production. EOUs can subcontract up to 50% of overall production (by value) to DTA units, subject to customs supervision and proper documentation of goods movement.
• Inter-unit transfer within EOUs. Goods can be transferred between EOU units without payment of duty, enabling multi-location manufacturing operations under the EOU umbrella.

Positive Net Foreign Exchange (NFE) Obligation

The NFE obligation is the core accountability mechanism for EOUs. Every unit must demonstrate that it earns more foreign exchange than it consumes, measured over a 5-year block period.

NFE Calculation Formula

NFE = A − B − C

A = FOB value of exports (including deemed exports)

B = CIF value of all imported goods (capital goods + raw materials + consumables)

C = Value of domestic materials procured duty-free, valued at international prices

Result: NFE must be positive (A > B + C) over the 5-year block

The 5-year block starts from the date of commencement of production. The NFE is calculated cumulatively. A unit may have negative NFE in individual years as long as the cumulative position over the block period is positive.

Consequences of NFE Failure

• Recovery of duty benefits: Proportionate customs duty on all goods imported/procured duty-free becomes recoverable, along with applicable interest.
• Penalty: Additional penalty may be imposed under the Customs Act and Foreign Trade (Development and Regulation) Act.
• LOP cancellation: Persistent NFE failure can lead to cancellation of the Letter of Permission and forced exit from the scheme.
• Bank guarantee invocation: Customs may invoke the bank guarantee furnished under the B-17 bond to recover duty.

Compliance and Reporting Requirements. Annual Cycle

Running an EOU involves ongoing compliance across multiple regulators. Here is the complete annual cycle of reports, filings, and obligations.

DTA Sales Rules

DTA (Domestic Tariff Area) sales are the mechanism by which EOUs can sell goods in the Indian domestic market. The rules are specific and deviations attract serious consequences.

Entitlement: Up to 50% of FOB Value

EOUs may sell goods in DTA up to 50% of the FOB value of exports. The entitlement is calculated on a cumulative basis over the approval period. DTA sales attract payment of concessional customs duty (BCD at the applicable rate plus IGST).

Duty Calculation on Capital Goods

When capital goods are cleared into DTA (either on exit or as DTA sale), duty is calculated on the depreciated value , not the original import value. Depreciation is allowed at rates prescribed under the Customs rules. Typically straight-line depreciation from the date of import.

Rejects, Waste, and Scrap

Production rejects, waste, and scrap can be cleared into DTA on payment of duty calculated on the transaction value (not the value of imported inputs used). Proper records of waste generation must be maintained and reconciled with production records.

Job Work Provisions

EOUs can send goods outside the unit for job work and bring them back within a prescribed timeframe (typically 90-180 days). The goods remain under bond during this period. The job worker does not need to be an EOU. Regular DTA units can undertake job work for EOUs.

Subcontracting: Up to 50% Value Addition Outside Unit

EOUs can subcontract manufacturing processes to DTA units, provided the value addition by the subcontractor does not exceed 50% of the total value addition. The EOU must maintain proper documentation of goods sent and received, and ensure that the subcontracted goods return to the EOU before export.

Exit from EOU Scheme

Exiting the EOU scheme is a regulated process that typically takes 6-12 months. There are four exit pathways depending on your circumstances.

Voluntary Exit to DTA

The most common exit route. You pay customs duty foregone on capital goods (at depreciated value) and unused raw materials (at full value), obtain NOC from customs and the DC, and convert to a regular DTA unit. The unit continues operations as a standard manufacturing entity.

Conversion to SEZ Unit

An EOU can convert to an SEZ unit if it relocates to a notified SEZ. The duty liability on goods in stock at the time of conversion is adjusted against the SEZ regime. This route makes sense if you want stronger regulatory protection and are willing to relocate.

Conversion to DTA with Advance Authorisation/EPCG

Some units exit EOU but continue exporting under Advance Authorisation or EPCG schemes. This avoids the full compliance burden of EOU while retaining duty benefits on a shipment-by-shipment basis.

Closure

If the unit is shutting down entirely, all duty liabilities must be settled with customs. Capital goods can be sold in DTA on depreciated duty payment, re-exported, or destroyed under customs supervision. Raw materials must be either exported, cleared into DTA on duty payment, or destroyed.

Common Compliance Issues

Based on customs audit findings and DC reports, these are the most frequent compliance problems that EOU operators run into. Each can lead to financial penalties and, in serious cases, LOP cancellation.

• Insufficient bond coverage as imports increase, failure to renew the bank guarantee on time, or not adjusting the bond amount after DTA clearances. Customs can halt imports until the bond is regularised.
• Falling short of positive NFE at the end of the 5-year block. Often caused by overestimating exports or underestimating the CIF value of imports in the original project report. Early warning signs should trigger corrective action.
• Selling in DTA beyond the 50% entitlement, selling without paying applicable duties, or selling products not covered under the DTA sale permission. Treated as diversion of duty-free goods.
• Missing the deadline for Annual Performance Reports or Quarterly Progress Reports. The DC may issue show-cause notices and, in extreme cases, suspend the LOP until reports are filed.
• Discrepancies between bonded inventory records and physical stock, inadequate segregation between EOU and DTA operations (if on the same premises), or missing documentation for goods movement.
• Failure to realise export proceeds within the 9-month window prescribed under FEMA. This creates EDPMS entries that remain open and can result in the unit being placed on the caution list.

Recent FTP 2023 Changes Affecting EOUs

The Foreign Trade Policy 2023 introduced several changes that affect EOU operations. Here are the key updates.

Extended Block Period for NFE

The block period for NFE calculation has been extended in certain cases, giving units more time to achieve positive NFE. This is particularly beneficial for capital-intensive units that take longer to ramp up export volumes. The extension is available on application to the DC with justification.

Simplified Exit Norms

FTP 2023 has streamlined the exit procedure with clearer timelines for duty assessment, simplified documentation requirements, and provision for provisional duty payment to enable faster exit. Units with clean compliance records and positive NFE can expect a smoother process.

Digital Filing of APR

Annual Performance Reports must now be filed digitally through the DGFT portal . This replaces the earlier paper-based submission process, reducing processing time and enabling better monitoring by the DC. The digital format also standardises the NFE computation methodology.

Relaxed DTA Sale Limits for Certain Sectors

Specific sectors including agri-exports, gems and jewellery, and certain MSME categories have received relaxed DTA sale permissions beyond the standard 50% of FOB value. Check the sector-specific provisions in the Handbook of Procedures for your product category.

Frequently Asked Questions

Update history

• 2026-08-12 First published.