Sub: DETAILED ANALYSIS OF THE NEW EXIM POLICY BY SHRI L. B. SINGHAL, DIRECTOR GENERAL, EXPORT PROMOTION COUNCIL FOR EOUS & SEZ UNITS

Revised edition 2003-04 of EXIM Policy 2002-07 has been released by the Honourable Commerce Minister on March 31, 2003. Some of the prominent changes, incorporated in this edition, in the EOU/SEZ Scheme are given as follows:-

1. Export Oriented Units are now required to maintain only positive Net Foreign Exchange Earning. The requirement of export commitments has also been done away with. As you are aware in the last EXIM Policy there was an Appendix 1 in the EXIM Policy which prescribed various NFEP requirements for different categories of EOUs. This NFEP varied from positive to 25%. Similarly, this Appendix also required that EOUs shall have to achieve minimum export performance level of US$ 3.5 million or three times the CIF value of imported capital goods whichever is higher. This Appendix 1 has been deleted in this EXIM Policy. Accordingly the requirement of minimum export performance has been deleted. Now, Paragraph 6.5 of the EXIM Policy simply prescribe that EOUs/EHTP/STP Units shall be a positive net foreign exchange earner. NFE shall be calculated cumulatively for a period of 5 years from the commencement of the production.

This is a major change for EOU Scheme. Earlier, because of export performance commitments, many units had to face adjudication proceedings because inspite of achieving minimum prescribed NFEP, they were not able to achieve export performance level.

2. Export Oriented Units have been allowed to export all goods except the items which are prohibited and the items which are SCOMET items. Earlier, Paragraph 6.1 of the EXIM Policy has provided that EOUs can export all products except restricted and prohibited items on export. Now Paragraph 6.2 of the EXIM Policy prescribes that it can export al items except prohibited items and SCOMETE items. However, in this context, Paragraph 17.7 of Appendix 14-I of Handbook of Procedures may please be referred to.

3. Agriculture/horticulture processing EOUs have now been allowed to provide inputs and equipments to contract farmers in DTA to promote production of goods. Paragraph 6.2(e) of the EXIM Policy now provides that such units may be permitted to take specific goods for use outside the bonded area. List of these goods have been given in Appendix 14-I J of Handbook of Procedure Volume-I.

This should provide a major boost to agriculture EOUs as this kind of requests have been coming specifically from GHERKINS units from Karnataka.

4. Jewellery sector has been given a major thrust in this EXIM Policy. Paragraph 3.10 of EXIM Policy identifies areas as thrust sectors for exports.

a) Electronic hardware

b) Textiles including garments

c) Auto components/ancillary

d) Gem & Jewellery

e) Agriculture

f) Service Sector.

In view of identification of Gem & Jewellery Sector as thrust sector, following major changes have been incorporated for Gem & Jewellery Sector in the EOU/SEZ Scheme.

i) Job work facility has been extended for jewellery units in EOUs. Accordingly Paragraph 6.15(a) of the EXIM Policy has been amended. Earlier, Paragraph 6.15(a) provided that EOUs other than gem & Jewellery units may sub-contract in DTA. Now Paragraph 6.15(a) of EXIM Policy provide that EOUs including Gem & Jewellery Units may sub-contract in DTA.

ii) Jewellery units have also been allowed wastage for sub-contracting. Earlier Paragraph 6.15(d) of EXIM Policy specifically prescribed that EOUs/SEZ Units shall not be eligible for wastage of manufacturing loss against jewellery. Now Paragraph 18.2(d) of Appendix 14.I of Handbook of Procedures specifically prescribe that EOUs shall be eligible for wastage as applicable for sub-contracting and against exchange.

iii) Jewellery EOUs are permitted to export jewellery on the submission of national rate certificate issued by the nominated agency. The time period of this certificate has been increased to three days from the existing one day. In this context Paragraph 6.4 of Appendix 14-I of Handbook of Procedures Volume I may please be seen. This was also a major irritant for jewellery units which has been removed.

5. EOUs/EHTP/STP units have now been allowed to procure duty free goods and services from bonded warehouses in DTA/international exhibitions held in India. In this context Paragraph 7.1 of Appendix 14-I of Hanbook of Procedures Volume I may please be seen.

6. Time period for utilization of the goods by the EOUs has been extended from a period of 3 years. Earlier, Paragraph 6.2© (iii) had provided that goods shall be utilized by EOUs within a period of 2 years. Now Paragraph 7.8© of Appendix 14-I of Handbook of Procedures Volume I prescribes that goods shall be utilized within a period of 3 years or as may be extended by customs authorities.

7. Second hand capital goods have been permitted to be imported without any age limit. Earlier, paragraph 6.3 of the EXIM Policy provided that second hand capital goods may also be imported without payment of duty. Now this has been amended to read as second hand capital goods may be imported duty free without any age limit.

8. In Paragraph 9.1 of Appendix 14-I of Handbook of Procedures Volume I it has been specifically provided that NFE shall be calculated cumulatively for a period of 5 years from the commencement of production. This was not prescribed in Paragraph 6.5 of the Handbook of Procedures.

9. Another substantive change has been brought about regarding amortization of capital goods. Earlier, as per Paragraph 6.5 of the EXIM Policy (not iii) imported capital goods had to be amortized over a period of 8 years where investment was above Rs. 5 crore and in 5 years in other cases. Now Capital Goods can be amortized over a period of 10 years at a uniform rate of 10% for all the units irrespective of level of investment. Paragraph 9.4 of Appendix 14-I of Handbook of Procedures Volume I may please be referred to.

This change coupled with the requirement of only positive foreign exchange earning and deletion of condition of export performance will help in a big way to these units and chances of default have been minimized. It is expected that with these changes our exporters will be able to increase their exports in substantial way.

10. In EOU sector only projects having minimum investment of Rs. 1 crore and above in building, plant and machinery shall be allowed. This limit was earlier Rs. 50 lakhs. Accordingly, Paragraph 6.7(a) of the EXIM Policy has been amended.

11. Duty structure on the DTA sale has been continued as earlier.

12. Sector specific requirements which were given earlier in Appendix 14B of Handbook of Procedures have been now indicated in Appendix (1) © of Handbook of Procedures. Now sector specific conditions are there for coffee, high grade iron ore, sale of surplus power, plastic units. Sector specific conditions relating to rice, tea, granite is not appearing this time.

13. LOP/LOI shall be valid for a period of 5 years from the date of commencement of production. This period can be extended further by the Development Commissioner concerned for a period of 5 years at a time. EOUs shall have separate earmark premises for separate LOPs. Paragraph 4.9 and 4.10 of Appendix 14-I of Handbook of Procedures may please be seen.

14. Sale of scrap/waste/remnants arising out of production process or in connection therewith in DTA shall be as per the standard input/output norms notified under the Duty Exemption Scheme. Paragraph 12.1(d) of Appendix 14-I of Handbook of Procedure Volume I may please be seen.

15. For export of samples, a major simplification has been brought about. Earlier, certain limit of supply of samples in DTA up to 1% of value of previous years exports was there. Now Paragraph 24.3 of Appendix 14-I of Handbook of Procedures Volume I prescribes that EOUs may export free samples without any limit including samples made in wax moulds, silver moulds and rubber moulds through all permissible mode of export including through courier agencies/post.

Similarly, Paragraph 24.1 of EXIM Policy permits supply or sale of samples in DTA for display for market promotion without any limit.

16. Another substantial change has been brought about in the depreciation norms. As per Paragraph 6.20(d) of earlier Handbook of Procedures, the depreciation norms for capital goods of units including electronics were subject to overall limit of 90%. However, now, Paragraph 29.6 of Appendix 14-I of Handbook of Procedures Volume I prescribes that the depreciation upto 100% is permissible for capital goods in 5 years in case of IT items and 10 years in case of other items.

17. Export/import of all products through post, parcel/courier have been allowed sale of products through exhibitions and duty free shops or shops set up abroad. Paragraphs 20, 21 and 22 of Appendix 14-I of Handbook of Procedures may please be seen.

18. Chapter 6 of Handbook of Procedures has been deleted. Comprehensive regulations have been given in Appendix 14-I of Handbook of Procedures.

19. Domestic Sale from EOUs have been exempted from SAD. Though, Highlights mentions exemption of SAD for sale from SEZs only, but Ministry of Commerce has confirmed that this exemption is also applicable for sale from EOUs.

20. Council has been requesting that unified customs notification must be issued. This request has also been accepted and unified customs notification is being issued.

SPECIAL ECONOMIC ZONE

Changes relating to agriculture sector, exemption from SAD, wastage for gem & jewellery units, exports/imports of all products through post, parcel/courier, amortization period of capital goods over a period of 10 years, sale of all products through exhibitions, duty free capital goods over a period of 10 years, sale of all products through exhibitions, duty free shops or shops set up abroad, validity of LOP/LOI, sale of scrap/waste/remnants as per standards input/ output norms, 100% depreciation of capital goods, import of second hand capital goods without age restrictions, export of samples without any limit etc. as explained above have been applicable for SEZ units also. The detailed guidelines relating to SEZs are given in Appendix 14.2 (Page No. 198-219) of Handbook of Procedures Volume I. Chapter 7 of earlier Handbook of Procedures has been deleted.

In addition to the above stated changes following other changes have been brought about in SEZs:-

1. Supply from DTA to SEZs shall be entitled for benefit of drawback or DEPB. Paragraph 7.9(a) of the EXIM Policy may please be seen.

2. SEZ Units shall be entitled for exemption from Central Sales Tax. Earlier Paragraph 7.9(a) (iii) had provided that SEZ units shall be entitled for reimbursement from CST. Now this paragraph prescribes that these units shall be entitled for exemption from CST.

3. Paragraph 7.1(b) of the EXIM Policy also has been amended to provide that goods and services going into SEZ area from DTA shall be treated as exports.

4. Paragraph 7.2(a) has been amended. Accordingly, now prohibited items and SCOMET items cannot be exported from SEZ units.

5. Paragraph 7.2(f) of the EXIM Policy has been amended. Earlier, Paragraph 7.2(f) had permitted SEZ Units to import/procure goods from DTA without payment of duty for setting up of units in the Zone. Now SEZ units are permitted to import/procure goods and services without payment of duty for setting up, operation and maintenance of units in the Zone.

6. A substantive change has also been brought about in Para 7.2(d) of the EXIM Policy. As per earlier para SEZ units were allowed to import without payment of duty, all types of goods by creating a central facility for use by software development units in SEZ. Now, as per the amended Paragraph 7.2(d) all SEZ units have been extended this facility for creating a central facility for use by units in SEZs.

7. Supply of all Information Technology Agreement Items (ITA-1) in DTA shall be taken into account for the purpose of NFEP for both EOUs and SEZ units. Paragraphs 6.9(h) and 7.8© (vii) of the EXIM Policy have been amended accordingly.

8. Paragraph 20.2 has been specifically incorporated in Appendix 14.II of Handbook of Procedures providing for exemption from Service Tax.