EOUs losing charm: Ministry

But after the reforms were initiated in 1991, which conceded a number of incentives to domestic units, the commerce ministry feels strongly that the rationale behind the setting up of EOUs/EPZs has to be debated.

The commerce ministry’s analysis of the schemes reveal that the peak tariff duty has come down from over 300 per cent in 1991 to 40 per cent in the 1997-98 budget, following the rationalisation of the customs and excise structure.

The domestic industry also witnessed an open and liberal policy for setting up of industrial units with a foreign equity stake of over50 per cent. The policy of foreign direct investment and transfer of technology has also given the domestic industry a boost for export markets.

Further, the analysis notes that the import tariff is much lower than what it was in 1991 and the fiscal incentives like zero duty capital goods import under the export promotion capital goods scheme is available to domestic units only.

The domestic units also enjoy the benefit of 100 per cent tax deduction on their export profits under Section 80-HHC of the Income-tax Act, 1961, according to a formula laid down for the purpose. On the other hand, the only worthwhile incentive available to EOUs/EPZs is the five year tax holiday computed on a block period of eight years under Sections 10A & 10B of the Income-tax Act, 1961. While EOUs/EPZs are allowed to procure capital goods, free of customs duties, in actual practice, these duties are only deferred and become payable at depreciated rates and at the rates prevailing on the date of import.

The so-called facilityof 25 per cent sale of finished goods permitted to the EOUs/EPZs has also come a cropper with few units taking advantage of it because of the duty structure on such sale.

The domestic sale attracts customs or excise duties whichever is higher. But with customs duties being always higher than excise duties, the tendency for customs authorities to to opt for the former.

At present, there are 893 units are in operation under the EOU scheme and 51 under the EPZ scheme. The units broadly fall under the product group/categories of electronics, textiles and garments, gem and jewellery, engineering items, chemical and allied products and plastic and rubber products. In the past five years, exports by export processing zones have increased from Rs 1,376.31 crore in 1992-93 to Rs. 4,323.93 crore in 1996-97 (provisional).