SEZ to DTA Duty Relief: A Time-Bound Opportunity with Stringent Conditions | Understanding the Scope, Eligibility, Compliance and Risks under Notification No. 11/2026-Customs
Executive Summary: Notification No. 11/2026-Customs introduces a time-bound customs duty relief framework for goods manufactured in Special Economic Zones (SEZs) and cleared into the Domestic Tariff Area (DTA). Effective from 1 April 2026 to 31 March 2027, the notification caps Basic Customs Duty (BCD) and, in certain cases, the Agriculture Infrastructure and Development Cess (AIDC) for specified goods. However, the benefit is subject to strict eligibility criteria, value addition thresholds, and quantitative limits on DTA clearances. The scheme also imposes significant compliance obligations and carries interpretational ambiguities, potentially leading to disputes. Businesses carefully evaluate eligibility, feasibility, and litigation risks before availing exemption.
1. Introduction
The Government has introduced a targeted customs duty relief mechanism through Notification No. 11/2026-Customs dated 31 March 2026. The notification provides conditional duty concessions for goods manufactured in SEZ units and subsequently cleared into the DTA.
While the measure appears to incentivize domestic supply from SEZs, it is not a blanket exemption. Instead, it is a tightly controlled framework with multiple qualifying thresholds, operational conditions, and compliance requirements. The benefit is also time-bound, creating a limited window for eligible units to evaluate and operationalize the opportunity.
This article provides a structured analysis of the notification, covering its applicability, conditions, procedural requirements, and potential areas of litigation.
2. Scope and Applicability
2.1 Nature of Relief
The notification provides:
- A cap on Basic Customs Duty (BCD), and
- In certain specified cases, a cap on Agriculture Infrastructure and Development Cess (AIDC)
- for goods listed in the relevant tables of the notification.
The relief applies only when such goods are:
- Manufactured within an SEZ unit, and
- Cleared into the Domestic Tariff Area.
2.2 Eligible Persons
The benefit is available exclusively to:
- Units operating within a notified Special Economic Zone,
- Engaged in manufacturing activities,
- Supplying finished goods into the DTA.
2.3 Time Validity
| Particulars | Period |
| Effective Date | 1 April 2026 |
| Expiry Date | 31 March 2027 |
| Duration | One financial year |
The relief is strictly time-bound and cannot be claimed beyond the specified period unless extended through further notification.
3. Eligibility Criteria
The notification prescribes specific eligibility conditions that must be cumulatively satisfied. Failure to meet any one condition renders the unit ineligible.
3.1 Manufacturing within SEZ
The goods must be manufactured within the SEZ unit.
- Mere import and re-export activities do not qualify.
- Trading operations are excluded.
- The manufacturing process must result in a new product.
3.2 Cut-off for Commencement of Production
| Condition | Requirement |
| Production Start Date | On or before 31 March 2025 |
Units commencing production after this date are not eligible for the benefit.
3.3 Exclusion of FTWZ Units
Units established in:
- Free Trade and Warehousing Zones (FTWZs)
are explicitly excluded from the scope of the notification.
3.4 Restriction on “As Such” Removal
The following are not eligible:
- Goods imported into SEZ and cleared to DTA without processing
- Goods removed after minimal or incidental use
- Only goods that undergo qualifying manufacturing processes are eligible.
4. Core Conditions for Availing Benefit
The exemption is subject to three primary operational conditions, each of which must be strictly complied with.
4.1 Minimum Value Addition Requirement
Threshold
- Minimum 20% value addition is mandatory.
Formula
Value Addition (VA) is calculated as:
VA = {A – (B + C)} / {B + C} * 100
Where:
| Component | Description |
| A | Assessable value of finished goods |
| B | Value of imported inputs |
| C | Value of domestically procured inputs |
Implication
- Both imported and domestic inputs are included in the denominator.
- This structure significantly affects units with high domestic procurement.
4.2 Cap on DTA Clearances
Quantitative Restriction
| Condition | Limit |
| Maximum DTA Clearance | 30% of highest FOB export value |
Reference Period
- Highest annual FOB export value achieved in any one of the three preceding financial years
Implication
- Units with strong export performance gain higher flexibility.
- Newer units may face significant restrictions.
4.3 Restriction on Dual Benefits
The notification imposes a strict prohibition on overlapping incentives.
Restriction
- No duty drawback or export benefit can be claimed on inputs used in manufacturing.
Applicability
| Entity | Restriction Applies |
| SEZ Unit | Yes |
| Input Suppliers | Yes |
This ensures that the same inputs do not receive multiple fiscal incentives.
4.4 Definition of Manufacture
The term “manufacture” is interpreted narrowly.
Qualifying Criteria
Process must result in a new product with:
- Distinct name
- Distinct character
- Distinct use
Excluded Activities
The following do not qualify:
- Packing or repacking
- Labelling or relabelling
- Refrigeration
- Repair or refurbishment
5. Procedural and Compliance Requirements
To avail the benefit, SEZ units must adhere to specific procedural steps.
5.1 Filing of Bill of Entry
- A Bill of Entry for home consumption must be filed.
- Filing must be done through the customs electronic portal.
- Assessment will be conducted by the proper officer.
5.2 Certification by Development Commissioner
At the time of clearance, a certificate must be furnished containing:
| Particular | Requirement |
| Production Start Date | Confirmation of eligibility |
| Export Performance | FOB value for last 3 years |
| Value Addition | Verified percentage achieved |
This certification is critical for substantiating eligibility.
5.3 Declaration and Undertaking
The unit must provide a formal undertaking:
- To pay full duty without exemption, if conditions are violated.
This creates a contingent liability exposure.
5.4 Audit Exposure
Units availing the benefit are subject to:
- Audit under Rule 79 of the SEZ Rules, 2006
Implication
Detailed scrutiny of:
- Input-output records
- Value addition computation
- Export and DTA data
6. Areas of Ambiguity and Litigation Risk
The notification contains several interpretational issues that may lead to disputes.
6.1 Value Addition Formula
Issue
Domestic inputs (C) are:
- Deducted from numerator
- Added to denominator
Impact
- Reduces calculated value addition
- Disincentivizes domestic sourcing
Risk
Potential challenge on policy intent versus drafting error
6.2 Applicability to New Units
Issue
Units commencing production on or before 31 March 2025 may have:
- Limited or negligible export history
Impact
- Difficulty in computing 30% cap
- Potential under-utilization of benefit
6.3 Scope of Inputs vs Capital Goods
Defined Inputs Include
- Raw materials
- Components
- Consumables
- Packing materials
Excluded
- Capital goods
Unresolved Issue
Treatment of:
- Depreciation
- Amortisation of tooling
- High-value equipment usage
6.4 Interpretation of “Manufacture”
Concern
Industries with integrated processes (e.g., electronics, pharma) may face:
- Classification disputes
- Denial of benefit for borderline activities
Litigation Potential
- Whether assembly + testing qualifies as manufacture
- Whether packaging-linked processes qualify
7. Strategic Considerations for Businesses
SEZ units must undertake a structured evaluation before availing the benefit.
7.1 Eligibility Assessment
- Verify production commencement date
- Confirm nature of manufacturing activities
- Review SEZ approvals and registrations
7.2 Value Addition Modelling
- Compute value addition using prescribed formula
- Assess impact of domestic vs imported inputs
- Conduct sensitivity analysis
7.3 Export Benchmark Analysis
- Identify highest FOB export value in past three years
- Compute allowable DTA clearance limit
- Evaluate commercial feasibility
7.4 Legal Risk Review
- Analyse interpretation of “manufacture”
- Evaluate exposure to retrospective demands
- Obtain expert opinion where ambiguity exists
7.5 Documentation Preparedness
Ensure availability of:
- Input-output records
- Costing sheets
- Certification from Development Commissioner
- Undertakings and declarations
8. Risks and Limitations
| Risk Area | Description |
| Compliance Burden | High documentation and certification requirements |
| Litigation Exposure | Ambiguities in valuation and definitions |
| Financial Risk | Duty demand if conditions not met |
| Limited Applicability | Strict eligibility conditions |
| Time Constraint | Benefit available only for one year |
9. Conclusion
Notification No. 11/2026-Customs introduces a structured but restrictive duty relief mechanism for SEZ units supplying goods to the Domestic Tariff Area. While the measure offers potential cost advantages through duty caps, it is accompanied by stringent eligibility criteria, operational limitations, and significant compliance obligations.
The requirement of minimum value addition, coupled with a cap on DTA clearances and prohibition on dual benefits, restricts the practical applicability of the scheme. Further, interpretational ambiguities in key provisions—particularly relating to value addition and definition of manufacture—create substantial litigation risk.
Accordingly, SEZ units must adopt a cautious and well-documented approach. A detailed evaluation of eligibility, financial impact, and legal exposure is essential before availing the benefit. Proactive engagement with regulatory authorities and robust internal controls will be critical in mitigating risks and ensuring compliance within the limited validity period.
