The commerce ministry has proposed a three-year extension of tax benefits given to Export-oriented Units in an attempt to encourage export industries at a time when global demand is expected to slump further.

The move will benefit more than 2,700 companies operating within the EoUs, like the Reliance Industries Ltd's [Get Quote] 33-million-tonne-per-year petroleum refinery in Jamnagar, Gujarat.

Under Section 10(B) of the Income Tax Act, EoUs do not need to pay tax on profits provided they fulfil some conditions, including exporting not less than 50 per cent of their total production. This benefit is to expire at the end of next fiscal 2009-10.

"We have taken up the issue of extending the sunset clause by another three years," said Commerce Minister Kamal Nath at the annual award function of Export Promotion Council for EoUs and Special Economic Zones (EPCES) here today. Sunset clause refers to a law that expires at a specified point of time.

Exports by these EoUs stood at Rs 1,54,428 crore in 2007-08, about 24.7 per cent of the total exports (in rupee terms). Chemical and pharmaceutical units account for about 18 per cent of the exports from the EoUs, followed by engineering companies at about 10 per cent.

Experts say the proposed extension will enable units in EoUs to plan better. "EoU exports have been increasing at an average rate of 20 per cent in the past 10 years, generating manufacturing activity and employment. Extending the scheme will add clarity to these units' expansion plans, which will lead to additional manufacturing and exports as well as employment," said L B Singhal, director general of EPCES.

Government sources, however, said a decision on this will probably be finalised only after a new government takes over after the general elections, likely to take place after April.

The EoU tax benefits were originally scheduled to expire on March 31, 2009. Last year, while releasing the foreign trade policy, Nath had announced that the scheme would be extended till March 31, 2010. This was after a committee headed by National Manufacturing Competitiveness Council headed by V Krishnamurthy had recommended the extension of the tax benefits to EoUs. A finance ministry-sponsored study, conducted by economic think-tank Indian Council for Research on International Economic Relations made a similar recommendation.

The EoU scheme, introduced in December, 1980, allows manufacturing units in the zones to enjoy 100 per cent income tax exemption on profits from overseas sale and also get to import raw materials duty free.

EoUs differ from Special Economic Zones in terms of the level and time-period of tax breaks to which they are entitled. SEZs get income-tax breaks for 15 years. They are also exempt from sales tax and excise, among other local imposts. The SEZs are governed by the SEZ Act of 2005.

EoUs are governed by the Foreign Trade Policy, which is supervised by the commerce ministry. Existing factories can be converted to EoUs, but not into SEZs.

Experts maintain that the extension of EoU benefits will not impact SEZs. "SEZs have their own benefits, which include a more comprehensive package of tax benefits as well as procedural benefits like single-window clearances. The extension will not have any impact on the zones," Singhal added.