EXPORT PROMOTION COUNCIL FOR EOUs & SEZ UNITS

(Ministry of Commerce & Industry, Government of India)

705, BHIKAJI CAMA BHAVAN, BHIKAJI CAMA PLACE, NEW DELHI 110 066
TEL : 26165805, 26167042, FAX: 26165538, EMAIL : epces@vsnl.net

L.B. Singhal
Director General

EPCES CIRCULAR NO.19 DATED 15.6.2006

SUB : Comments regarding removal or continuance of exemption and deduction under
Income Tax Act, 1961

Central Board of Direct Taxes, Ministry of Finance has placed Circular No. 149/124/2006-TPL(Pt.)
on its website http://www.incometaxindia.gov.in. In this circular CBDT has listed existing
exemption and deductions under the Income Tax Act, 1961 and has invited comments with
supporting rationale for their removal and continuance. The comments have been invited by 5-7-
2006.

Under this list CBDT has listed Section 10B of the Income Tax Act.

We have sent a detailed note from Shri Sharad Jaipuria, Chairman EPCES to CBDT making
a strong plea for removal of sunset clause under Section 10B of the Income Tax Act and continuance
of income tax benefit to EOUs beyond 31-3-2009. A copy of this note is enclosed for your
information. I suggest that all the EOUs should also send detailed representations for continuance of
income tax benefits to EOUs immediately. Your comments may be sent by email and/or post to the
following officers:-

Ms. Anita Kapur, Joint Secretary, TPL-I, DoR, Ministry of Finance, Room No. 147-B/I, North
Block, New Delhi, Email : jstpl1@nic.in
Ms. Monica Bhatia, Director, TPL-I, DoR, Ministry of Finance, Room No. 147-D, North Block,
New Delhi, Email : dirtpl1@nic.in
Ms. Pragya S. Saxena, Director, TPL-I, DoR, Ministry of Finance, Room No. 147-E, North Block,
New Delhi, Email : dirtpl2@nic.in
________________________

EXPORT PROMOTION COUNCIL FOR EOUs & SEZ UNITS

705, BHIKAJI CAMA BHAVAN, BHIKAJI CAMA PLACE, NEW DELHI 110 066
TEL : 26165805, 26167042, FAX: 26165538, EMAIL : epces@vsnl.net

Sharad Jaipuria EPC/SEZ/AM05/F-5

Chairman June 15, 2006

Dear Madam,

This is with reference to your circular F.No. 149/124/2006-TPL(Pt.) from Ms.

Vandana Ramachandran, Under Secretary (TPL-I), as displayed in the Ministry’s website,
calling for comments from all stake holders regarding removal or continuance of exemption
listed therein. The comments are required to be given by 5-7-2006.
 In this context I would like to submit my comments on Section 10B of the Income
Tax Act, listed at Sl. No. 108 of this circular.100% EOU Scheme was started in 1981 and this
Scheme has been contributing immensely in creation of manufacturing activity, employment
generation and value addition in the country. The exports from 100% EOUs were to the
extent of Rs. 36,476 crore in the year 2005-06. EOUs have been showing a consistent growth
of 30% in the last one decade and have been giving net foreign exchange of over 60%. If the
sunset clause is not removed then no exporter would like to operate under the 100% EOU
Scheme as operating under EOU Scheme involves accepting export obligations, operating in
the custom bonded area, payment of cost recovery charges, obtaining procurement
certification before every import and a number of other regulations of custom bonding. A
detailed note giving justification and rationale for continuance of the exemption under
Section 10B of the Income Tax Act for 100% EOUs is enclosed alongwith.

I had represented this issue in the Board of Trade meeting as well. Board of Trade
had a meeting with Hon’ble Prime Minister on 17-6-2005. Recently a committee constituted
under the Chairmanship of Shri R. R. Shah, Planning Commission member, has
recommended continuance of income tax benefits for Software Technology Park (STP) Units
as well. Empowered Group of Ministers (EGOM), under the Chairmanship of Shri Pranab
Mukherjee, has asked Ministry of Finance to look into this suggestion. I would like to
strongly emphasize that the income tax benefit needs to be continued for 100% EOUs as well
alongwith the units in SEZ and STP. 100% EOU and STP Scheme are part of Chapter 6 of
the Foreign Trade Policy and operate within the same parameters. Similarly 100% EOUs are
operating in the customs bonded area like SEZ units. In view of the detailed note enclosed
alongwith I shall be grateful for kind consideration of this issue and continuation of the
benefit under Section 10B of the Income Tax Act.

With warm regards,

Yours sincerely,

Sd/-

(Sharad Jaipuria)
Ms. Anita Kapur,
Joint Secretary (TPL-I),
Department of Revenue,
Ministry of Finance,
Room No. 147-B/1, North Block,
New Delhi 110 001

REMOVAL OF SUNSET CLAUSE UNDER SECTION 10B OF THE INCOME TAX ACT

100% Export Oriented Units (EOUs) are entitled for exemptions from the income tax under
Section 10B of the Income Tax Act for a period of 10 years. However, these units shall not be
entitled for exemption under Section 10B of the Income Tax Act for the exports affected after
31.3.2009.

Section 10B of the Income Tax Act incorporates the following provision:

“Provided also that no deduction under this section shall be allowed to any undertaking for
the assessment year beginning on the 1st day of April, 2010 and subsequent years”.
 The provision, as stated above, should be removed from Section 10B of the Income Tax Act
and the EOUs should be provided IT exemption for a period of 10 consecutive assessment years.
Removal of Sunset Clause under Section 10B of the Income Tax Act is absolutely imperative, for
the continuation of the EOU Scheme, for the following reasons:

(1) 100% EOU Scheme was started in the year 1981 and has consistently performed well.
The exports from EOUs was to the extent of Rs. 36,476 crore last year. Exports under
this scheme has shown a consistent growth of over 30% in the last decade. The net
foreign exchange earning by the EOUs is over 60%.

(2) The emphasis of the Government is to encourage manufacturing sector and increase
employment. 100% EOU Scheme is a Scheme which allows only manufacturing
activities and no trading activity is allowed under this Scheme. Manufacturing activities
are carried out by the EOUs under the customs bonded premises. Hence under this
scheme dedicated manufacturing capabilities have been created, for exports, over a
period of time. This Scheme needs to be nurtured further for encouraging creation of
further dedicated manufacturing activities for exports.

(3) If the sunset clause is not removed then no fresh investment will come under 100% EOU
Scheme, as normally big units will have some gestation period in commencement of
production. If no income tax exemption is provided from March 2009 onwards, then
there is no reason why any industrialist will set up a unit under this Scheme and accept
vigorous custom bonding regulations, procedure of obtaining procurement certificate for
every import consignment or CT3 procedure for every domestic procurement, and other
procedural hassels like repeated registration with customs. No industrialist would like to
pay unnecessary cost recovery charges for the Central Excise officers posted for these
units even for discharge of their sovereign functions.

(4) EOUs do not get any other additional benefit like the benefit of the Status Holder
Scheme under Duty Entitlement Scheme or Target Plus Scheme etc. As a matter of
principal all exporters must be exempted from all indirect taxes. However, EOUs have to
suffer various indirect taxes from the state governments and levies imposed by the local
bodies like purchase tax, entry tax, electricity duty, sales tax, professional tax, octroi
duty, stamp duty, property tax, works tax, mining royalty, water cess, education cess,
mandi tax, local area development tax, commercial tax, etc., which are not refunded.
This disadvantage needs to be offset in some way or the other. In order to partially
compensate these indirect taxes the EOUs must be provided exemption from income tax.
Hence sunset clause must be removed.

(5) EOUs are permitted to sell 1/3rd of its production (50% of FOB value of exports) in the
market. However, average sale in the domestic market by EOUs is less than 10%. But
the income tax exemption is provided only on the profits derived from exports. Profits
derives from domestic sale are in any case not eligible for income tax exemption. Section
10B(1) clearly provides that income tax exemption shall be available form the export of
articles or things or computer software for a period of 10 consecutive assessment years
beginning with the assessment year relevant to the previous year the export undertaking
begins to manufacture or produce articles or things or computer software. Hence, income
tax exemption is available only for export of manufactured goods from the EOUs.

(6) EOUs and SEZ units are basically operating within the same parameter as both EOUs and
SEZ units operate within the customs bonded premises. Hence these units which are
broadly classified in the category of "in-bond manufacturing" should be extended the
 same benefit. Since on the SEZ units there is no upper cap or sunset clause, on EOUs also
there should not be any sunset clause.

(7) Being located in underdeveloped and/or developing locations, the EOUs have to plan and
develop their own infrastructure, comply with local regulations, employ unskilled local
populace, train them and make them technically competitive, incur higher cost on account
of poor logistics, local taxes, inherent incompetence of work force, and lack of adequate
infrastructure to compete with others located in better conduce business environment.
While the SEZ developers and, SEZ units are entitled for duty free inputs for establishing
SEZs/SEZ Units, the EOUs are not given such duty free facility for development of civil
infrastructure/setting up of EOUs.
Let them continue their commercial and manufacturing activities in the rural and semi
urban areas, by giving them the same benefits a unit in SEZ will enjoy with reference to
direct and indirect taxation.

(8) As EOUs are engaged in real manufacturing activities, their investment in building
technology, plant and machinery is quite high. They need to have certainty in matters of
finance management to make investment as the lead time from conceiving a project to
commencement of commercial sale would be comparatively large. In a developing
economy, a consistent taxation policy would be of great help in planning a business
venture.

(9) With reference to income tax benefits, the EOUs can also be asked to re-invest the
portion of profits to make them comparable with SEZ units. By charging income tax
on their profits, the capability of EOUs in making further investments in modernization
of expansion of their manufacturing capabilities is restricted, which results into no or
lower employment generation and utilization of resources which are plenty available in
this country.
The policy adopted for SEZ units are conducive for industrial growth and the same
could be thought about for EOUs too, as they are comparable from the point of view of
Foreign Trade Policy, Customs Laws & Regulations. EOUs being located in all states,
the developing and least developed states could also benefit by such policies.

(10) 100% EOUs do not get benefits like drawback and DEPB, at the same time they suffer
almost similar transaction cost as DTA. Assuming normal profitability of 10% on sales and
rate of income tax as 35%, the tax outflow is about 3.5% of sales, which is the bare
minimum that 100% EOU need to be reimbursed to compensate for their high transaction
cost.
Hence I would like to emphasize that sunset clause under Section 1OB of the Income Tax
Act must be removed immediately. If the sunset clause is not removed then no exporter
would like to accept cumbersome procedure of customs bonding, procurement certificate
procedure, cost recovery charges and no fresh investment will come under this Scheme
from next year onwards. In such an eventuality the Scheme will die its natural death.
Deputy Chairman, Planning Commission has also stated that" A case could be made out for
providing SEZ status to certain categories of producers" (Business Standard, December 29,
2004). Since EOUs and SEZ units are operating within the same customs bonded premises,
logically and rationally, the same benefits which is available to SEZs should be extended to
this category of producers as well.

In view of the above stated facts, it is suggested that for continuation of this time tested
Scheme, which encourages creation of dedicated manufacturing capabilities for exports, we must remove
the sunset clause under Section 10B of the Income Tax Act immediately as otherwise no fresh investment
will come under this Scheme and the Scheme will die its natural death.