SEZ Units and Export Oriented Units (EOUs)
Both exist to export. One is a zone outside customs territory; the other can sit anywhere.
A Special Economic Zone (SEZ) unit and an Export Oriented Unit (EOU) are both built to export, and both import and buy their inputs largely free of duty. They differ in where they sit legally and physically. An SEZ unit operates inside a notified zone under its own Act; an EOU can be located anywhere and is governed by Chapter 6 of the Foreign Trade Policy (FTP) 2023.
For an AD branch the difference shows up in daily work: whether a domestic customer's sale to the unit is an export or a deemed export, and which account the unit pays from.
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SEZ Units
- Legal base
- The Special Economic Zones Act, 2005, which received Presidential assent on 23 June 2005 and came into effect with the SEZ Rules on 10 February 2006.
- Status of the zone
- A duty-free enclave treated as a territory outside the customs territory of India for its authorised operations.
- Approvals
- The Board of Approval, headed by the Secretary, Department of Commerce, is the apex body. Each zone is headed by a Development Commissioner, who chairs the zonal Approval Committee that approves units.
- Performance test
- Units must achieve positive Net Foreign Exchange (NFE), calculated cumulatively over five years from commencement of production.
- Selling into India
- Sales into the Domestic Tariff Area (DTA) attract full customs duty and the import policy in force, as if imported.
- Tax position
- Section 10AA of the Income Tax Act gave units 100% exemption on export income for 5 years, 50% for the next 5, and 50% of ploughed-back profit for 5 more. The sunset clause for units took effect from 1 April 2020. Supplies to SEZs are zero-rated under the IGST Act.
Export Oriented Units
- Legal base
- Chapter 6 of FTP 2023, alongside the parallel EHTP, STP and BTP schemes. Units receive a Letter of Permission (LoP) from the Development Commissioner.
- Core undertaking
- Export the entire production of goods and services, except permitted DTA sales. Trading units are not covered.
- Minimum investment
- ₹1 crore in plant and machinery, with exceptions for sectors such as handicrafts, agriculture, IT and services; the Board of Approval may allow less.
- Performance test
- Positive NFE, calculated cumulatively in blocks of five years from commencement of production.
- Duty position
- Imports and procurement from bonded warehouses are free of customs duty, IGST and compensation cess. Procurement from the DTA is on payment of GST, which the supplier can claim back.
- Foreign exchange
- Under para 6.08, EOUs may retain 100% of export earnings in an EEFC account.
SEZ Unit vs EOU at a Glance
Governing law
SEZ unit
SEZ Act, 2005 and SEZ Rules, 2006
EOU
FTP 2023 Chapter 6
Location
SEZ unit
Inside a notified zone
EOU
Anywhere in India
Supply from DTA to the unit
SEZ unit
Treated as an export
EOU
A deemed export (para 7.02(b))
NFE requirement
SEZ unit
Positive, cumulative over five years
EOU
Positive, cumulative in five-year blocks
Approval document
SEZ unit
Approval by the zone's Approval Committee
EOU
Letter of Permission from the Development Commissioner
| Point | SEZ unit | EOU |
|---|---|---|
| Governing law | SEZ Act, 2005 and SEZ Rules, 2006 | FTP 2023 Chapter 6 |
| Location | Inside a notified zone | Anywhere in India |
| Supply from DTA to the unit | Treated as an export | A deemed export (para 7.02(b)) |
| NFE requirement | Positive, cumulative over five years | Positive, cumulative in five-year blocks |
| Approval document | Approval by the zone's Approval Committee | Letter of Permission from the Development Commissioner |
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Where the AD Bank Comes In
When a domestic exporter holding an Advance Authorisation supplies an SEZ unit, the supply counts towards its export obligation only if payment comes from the SEZ unit's foreign currency account (para 4.20). Supplies to an SEZ developer or co-developer can count even if paid in rupees. The same test appears in para 6.07: an EOU's sale to an SEZ unit counts towards its export FOB only when paid from the SEZ unit's foreign currency account.
That makes the debit account a compliance fact, not a detail. Banks financing supplier EOU or SEZ units through PCFC also look to the foreign exchange paid by the receiving unit to close the advance.
How CCFE Tests This
Questions test classification: is a DTA supply to this unit an export or a deemed export? SEZ is an export; EOU is a deemed export. Others test the NFE period (five years, cumulative) and the payment source for supplies to SEZ units. The common trap is treating SEZ and EOU as interchangeable and answering "deemed export" for both.
FAQs
What is the difference between SEZ and EOU?expand_more
An SEZ unit operates inside a notified zone under the SEZ Act, 2005, treated as outside India's customs territory. An EOU can be located anywhere and works under Chapter 6 of FTP 2023. Both must achieve positive net foreign exchange over five years.
Is a supply to an EOU a deemed export?expand_more
Yes. Supply of goods to an EOU, STP, EHTP or BTP unit by a manufacturer is a deemed export under para 7.02(b) of FTP 2023. A supply to an SEZ unit is treated as an export instead.
What is the NFE requirement for an EOU?expand_more
An EOU must be a positive net foreign exchange earner, calculated cumulatively in blocks of five years from the start of production.
Can an EOU sell in the domestic market?expand_more
Yes, within limits. Para 6.07 allows DTA sale of finished goods subject to positive NFE and payment of applicable duties and GST; services units can sell up to 50% of the FOB value of exports.
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