Export Processing Zones and Export Oriented Units

In order to encourage exports, the Government of India has provided special incentives for units set up primarily for manufacturing goods for export. Such units can be set up in designated Export Processing Zones (EPZs) or can be 100% Export Oriented Units (EOUs) outside EPZs.

These EPZs are designed to provide an internationally competitive duty free environment at low cost for export production. Each of the zones provide basic infrastructure facilities like developed land, standard design factory buildings, roads, power, water supply, drainage and customs clearance facilities.

The terms Free Trade Zones and Export Processing Zones in the Indian context are synonymous. The first EPZ set up in India was in 1965 - the Kandla Free Trade Zone. Subsequently, six more EPZs have been set up at

Santa Cruz (Bombay)
Falta (West Bengal)
Madras (Tamil Nadu)
Noida (UP)
Cochin (Kerala), and
Visakhapatnam (Andhra Pradesh).

While the Santa Cruz Electronics Export Processing Zone (SEEPZ) is meant exclusively for the exports of electronics and gems and jewellery, all other zones are multi-product zones.

The scheme for EOUs is complementary to the EPZ schemes. It adopts the same production regime but offers wider locational options with reference to sourcing of raw material part of the exports, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project.

100% foreign equity is welcome in EOUs and EPZs.

25% of the production in value terms may be sold in the Domestic Tariff Area (DTA) at concessional duty rates subject to fulfilment of minimum value addition norms. A higher DTA access of 35% and 50% is allowed for electronics and agro-industries respectively, again subject to fulfillment of minimum value addition norms. However, no DTA sales are permissible for rice, jewellery, diamonds, precious and semi-precious stones and gems, motor cars, liquor, silver bullion and some other items.

EOUs and units in the EPZs will be treated on par in matters relating to value addition and DTA sales. The specified value addition norms that need to be achieved by EOUs and EPZ units are expressed in terms of the difference between the FOB value realised and the cost of all inputs, including the value of payments made in foreign exchange for royalty, fees, etc. The value of indigenous inputs is excluded from the computation of value addition. A special dispensation for capital intensive units is also provided in the formula for calculation of value addition.

Minimum value addition norms are prescribed for various items of manufacture. However, it is possible to set up a project in the electronics hardware sector without any minimum value addition, in which case there would also be no access to the Domestic Tariff Area. Automatic approval is available for setting up EOUs and EPZ units under certain conditions.

Applications for aproval of EOUs and EPZ units are to be addressed to the Development Commissioners of Export Processing Zones in the case of EPZs and to the Secretariat for Industrial Approvals (SIA) in the case of EOUs.

Where the proposals fulfill the conditions for automatic approval, they are cleared within 15 days. In other cases, they are normally cleared within 45 days.

Recently, with a view to augmenting infrastructural facilities for export production, government has permitted the setting up of EPZs in the private and joint sectors including those by Non Resident Indians and foreign companies.

Value Addition Norms for Electronic Hardware Products
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 Value addition achieved          Permissible sale in the DTA
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Less than 15%                          Nil
15-25%                   Upto 30% of production in value terms
More than 25%            Upto 40% of production in value terms
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Applications for setting up such EPZs may be made to the Development Commissioner of the EPZ in whose jurisdiction the proposed zone is to be located.

Further details may be obtained from the SIA and the Development Commissioner of the EPZ in whose jurisdiction the proposed zone is to be located.

Further details may be obtained from the SIA and the Development Commissioners of the EPZs.

Some incentives given to EPZs and EOUs

Single Window Clearance
No import licences are required
Import of all industrial inputs exempt from customs duty
Supplies from the DTA to EOUs and EPZ units are regarded as deemed exports and are hence exempt from payment of excise duty which means that high quality inputs are available at lower costs.
On fulfilment of certain conditions, EPZs, and EOUs are exempted from payment of corporate income tax for a block of 5 years in the first 8 years of operation. Export earnings continue to be exempt from tax even after the tax holiday is over.
Industrial plots and standard design factories are available to EOUs and EPZ units at concessional rates.
Private bonded warehouses in the 7 EPZs can be set up for
- Import and sale of goods including in the DTA, subject to payment of applicable duties at the time of sale
- Trading including re-export after repacking/labeling
- Re-export after repair, reconditioning or re-engineering
EOUs and EPZs are permitted to sub-contract part of their production processes for job work to units in the DTA on a case by case basis.
Supplies to the DTA under international competitive bidding against payment in foreign exchange to other EOUs and EPZ units and against import licenses are considered towards fulfilment at the export obligation.
The FOB value of exports of EOUs and EPZ units can be clubbed with that of parent companies located in the DTA for the purpose of obtaining a Trading or Export House status
EOUs and EPZ units may export goods through Trading and Export Houses or other EOU and EPZ Units.

Centre for Monitoring Indian Economy, Bombay
Contact Addresses for More Information
Last updated: May 1995.