SEZ / EOU Unit Registration

An SEZ unit operates within a Special Economic Zone notified under Section 4 of the Special Economic Zones Act 2005 and is approved by the Unit Approval Committee (UAC) under Rule 17 of the SEZ Rules 2006, while an Export Oriented Unit (EOU) is registered outside an SEZ under the Foreign Trade Policy 2023 Chapter 6 and is approved by the Development Commissioner of the nearest SEZ. SEZ units enjoy a 100% Income Tax deduction under Section 10AA of the Income Tax Act 1961 for the first five years (reducing thereafter), whereas EOU benefits are primarily customs and GST-related with no direct IT deduction post-2011. For a software company, an STPI unit under the Software Technology Parks of India scheme (notified under the STPI Act and Foreign Trade Policy Para 6.01(d)) often provides more flexibility than a full SEZ unit given lower compliance overhead. A CA should evaluate the NFE (Net Foreign Exchange) positive condition under Para 6.08 of the Foreign Trade Policy 2023 applicable to both structures.

An EOU is entitled to import capital goods and raw materials without payment of Basic Customs Duty under Notification No. 52/2003-Customs as amended, and is also exempt from IGST on imports subject to conditions under the Foreign Trade Policy 2023 read with IGST exemption Notification No. 78/2017-Customs. Procurement of goods from the domestic tariff area (DTA) for use in manufacturing exports is treated as a deemed export under Section 147 of the CGST Act 2017, entitling the supplier to claim refund of taxes paid. EOUs must maintain proper records and file periodic returns with the jurisdictional Development Commissioner confirming NFE compliance under Para 6.08 of the Foreign Trade Policy 2023. Non-compliance with NFE norms can lead to demand and recovery of the customs and IGST duty forgone with interest under Section 28 of the Customs Act 1962.

Under Para 6.08 of the Foreign Trade Policy 2023, an EOU must achieve a positive NFE cumulatively over a period of five years from the date of commencement of production. NFE is calculated as the FOB value of exports (A) minus the CIF value of all imports of capital goods, raw materials, consumables, and components (B), such that A minus B must be positive. For gem and jewellery EOUs, a separate NFE formula applies under Appendix 6B of the Handbook of Procedures 2023. Annual monitoring of NFE is done through a statement filed with the Development Commissioner, and shortfall in NFE can attract penalty under Para 9.02 of the Foreign Trade Policy 2023 equivalent to twice the duty forgone on imports.

Yes, an SEZ unit may sell goods or services in the DTA subject to payment of applicable customs duties as if the goods were imported, along with GST under the CGST Act 2017, as provided under Section 30 of the Special Economic Zones Act 2005. DTA sales are permitted up to 50% of the FOB value of exports in the preceding year for manufacturing SEZ units, per Rule 47 of the SEZ Rules 2006. Such DTA clearances do not count toward the unit's NFE calculation and are subject to full domestic tax incidence. Services provided by an SEZ unit to DTA entities are taxable under GST as the place of supply falls in the DTA, unlike inter-unit supplies within the SEZ which remain zero-rated.

The Unit Approval Committee (UAC) meeting is typically convened within 15–45 days of filing a complete application under Rule 17 of the SEZ Rules 2006, and the Letter of Approval (LoA) is issued within 15 days of UAC approval per Rule 19. Documents required include Form F (application for setting up an SEZ unit), a project report detailing investment, employment, and NFE projections, a lease agreement for SEZ premises, and details of capital goods to be imported. The LoA is valid for one year for construction and three years for commencement of production, extendable under Rule 20. Post-approval, the unit executes a legal undertaking (LUT) with the Development Commissioner and obtains a unique importer-exporter code (IEC) from DGFT if not already held.