The issue of extending income-tax benefits to export-oriented units (EOU) beyond 2009 hangs in balance with the commerce ministry making a case for its extension in Budget 2007.

The matter assumes significance as export growth from EOUs plummeted to 1% in 2005-06 from an average growth of 30% in the last decade. Officials claim that in the next fiscal, units may register a negative growth in exports if tax benefits under Section 10B of the Income-Tax Act are not restored to EOUs.

This could affect economic activity as well as employment generation. It will be difficult to convince the finance ministry to remove the sunset clause on tax benefits for EOUs as the ministry has already raised a hue and cry about revenue implications for tax benefits given to special economic zones (SEZ).

Direct tax benefits to EOUs cost the exchequer Rs 2,320 crore in 2004-05. The finance ministry, which is apprehending revenue loss to the tune of Rs 1,02,621 crore by 2009-10, is wary of continuing with multiple incentive schemes for exports.

While the revenue department is of the view that taxes should not be exported, it wants to restrict the number of schemes as they are difficult to administer. Also, with multiple schemes chances of misuse are much high. The ministry is therefore unwilling to extend the EOU facility further.

It is also of the view that the scheme has served its objective and therefore the sunset clause must be adhered to. According to Export Promotion Council for EOUs and SEZs director-general LB Singhal, the EOU scheme is a time-tested programme that has not only given a boost to exports but generated employment at all levels.

The EOUs employ 2.75 lakh people in India and encourage manufacturing activity since trading is not allowed under the scheme, he said. Exports from EOUs increased from $1.2 billion in 1992-93 to $12.04 billion in 2004-05, registering an average growth of 30%.

In 2005-06, however, exports stood at $13.48 billion, registering a growth of just 1%. Since a unit has a gestation period of at least two-three years and the tax incentives are set to run out in 2009, insignificant fresh investments were made last year, Mr Singhal said.