Debonding from EOU: Step-by-Step Compliance & Duty Implications in India

Export Oriented Units (EOUs) enjoy tax and duty exemptions in return for meeting export obligations and maintaining positive Net Foreign Exchange (NFE). When a unit chooses to exit, or debond, it must settle these benefits and convert into a Domestic Tariff Area (DTA) unit.

For CFOs and compliance managers, debonding is a critical closure event. It requires accurate reconciliations, duty payments, and approvals from multiple authorities. Done right, the process can be smooth. Done poorly, it can lead to penalties and heavy financial outflows.

Step 1: Pre-Exit Compliance Check

Before applying for exit, carry out a full compliance audit:

• NFE Status: Check if the unit has achieved positive NFE. Negative NFE means repayment of duty benefits.
• Reports: File all Quarterly Progress Reports (QPRs) and Annual Performance Reports (APRs). Pending filings delay approvals.
• Stock Reconciliation: Match imports, raw materials, finished goods, scrap, and capital goods with exports and consumption.
• Bond Status: Review the B-17 bond balance. It must cover duty foregone.
• No-Dues Certificates: Obtain clearances from Customs, Development Commissioner, developer, and utility providers.

Pro Tip: Strong documentation at this stage avoids disputes during Customs verification.

Step 2: Filing the Exit Application

To initiate exit, submit the following to the Development Commissioner:

• Board Resolution approving debonding
• Application with reasons and proposed date of exit
• Legal Undertaking confirming compliance
• Inventory and asset statements (raw materials, WIP, finished stock, capital goods)
• NFE calculation and APR acknowledgements
• No-dues certificates from relevant authorities

The DC issues in-principle approval. After this, Customs verifies liabilities before final exit is granted.

Step 3: Customs & GST Implications

This stage determines how much duty and GST you’ll pay at exit.

Raw Materials & Stock

• Options include export, destruction under Customs supervision, transfer to another bonded unit, or DTA clearance.
• For DTA clearance, file a Bill of Entry and pay customs duty plus IGST at current rates.

Capital Goods

• Allowed to debond at depreciated value as per notified rates.
• If NFE not achieved, depreciation benefits may be curtailed and duty foregone must be repaid.
• Depreciation rates differ for machinery and IT equipment, so precise workings are essential.

Scrap & Waste

• Scrap within permitted norms can be cleared into DTA with duty.
• Excess scrap requires reversal of exemptions enjoyed.

GST Adjustments

• Amend or cancel GST registration linked to EOU status.
• Reverse Input Tax Credit (ITC) or refunds claimed for zero-rated supplies.
• Ensure all GST liabilities are cleared before exit.

Step 4: Post-Approval Compliance

After Customs confirms payments and clearances:

• The Development Commissioner issues the final exit order
• Surrender the B-17 bond and release bank guarantees
• Hand over statutory registers, challans, and stock records to Customs
• Archive the complete exit dossier for audit and compliance purposes

Duty Implications – At a Glance

• Positive NFE: Only pay duty on unutilised stock; depreciation available on capital goods.
• Negative NFE: Repay proportionate duty foregone, with interest.
• Capital Goods: Duty payable on depreciated value; depreciation may be restricted if NFE is not achieved.
• Scrap & Waste: Duty payable on quantities beyond permitted norms.
• Bond Re-credit: Units can claim re-credit for consumed materials after verification.

Common Pitfalls

• Ignoring NFE until exit time
• Missing QPR or APR filings
• Poor stock and consumption registers
• Errors in depreciation calculations
• Delay in GST adjustments after exit

Pro Tip: Start planning at least six months before exit to avoid last-minute liabilities.

FAQs

Q1: Can an EOU exit before completing the block period? Yes, but if NFE is negative, duty exemptions must be repaid proportionately.

Q2: How is depreciation calculated on capital goods? Depreciation follows notified quarterly rates. Computers and peripherals depreciate faster than general machinery.

Q3: What happens to GST benefits after debonding? Refunds or ITC claimed under zero-rated supplies must be reversed. GST registration may also need amendment.

Q4: How long does debonding take? If filings, clearances, and payments are in order, final approval can be obtained in weeks. Delays usually stem from incomplete records.

Conclusion

Debonding from an EOU is far more than a formality—it’s a compliance-heavy financial settlement. Businesses that maintain clean records, track NFE, and prepare depreciation workings in advance typically exit smoothly with minimal duty outflows.

Early preparation and strong compliance make the process predictable and reduce the risk of penalties. For CFOs and compliance heads, proactive planning ensures a smooth transition from EOU to DTA operations.