The Union Budget 2026 announcement allowing Special Economic Zone (SEZ) units to supply goods to Domestic Tariff Area (DTA) units at a concessional rate of duty marks a significant policy shift aimed at optimising SEZ capacity. Currently, SEZ units primarily serve export markets and must seek case-by-case approval to sell domestically, proving insufficient export orders and triggering full customs duty and IGST on such clearances. The proposed change would permit SEZ units to sell a defined percentage of output domestically without prior approvals, reducing procedural delays and lowering duty costs for domestic buyers. While this is expected to benefit both SEZ manufacturers and DTA units—especially in high-export, high-domestic-demand sectors like electronics and automobiles—key details remain awaited. Questions persist around the permissible domestic sales percentage, sectoral coverage, and the exact concessional duty rate. The government has indicated that detailed guidelines will be issued within two to three months, which will ultimately determine the breadth and impact of this reform.
SEZs allowed to supply to DTA units under concessional rate of duty – guidelines expected in two months
In the Budget 2026 Honourable Finance Minister said that Government will now allow SEZ units to make supplies to DTA units (Units in Domestic Tariff Area) by paying concessional rate of duty to optimise capacity of SEZ units.
This is one of the most welcomable announcement for SEZ units and also for the Domestic units which intend to buy from SEZ units.
Let us understand why it is beneficial
Present process
SEZ units – by default supplies to Export customers. Government provides subsidies and other benefits for SEZ units for encouraging more Exports from India.
At present if an SEZ unit doesn’t have sufficient export order, they can approach AO (Authorised Officer) to permit sales to Domestic market (DTA units). For this the SEZ units has to prove they don’t have sufficient export order to utilise their full production capacity with proper documents like Customer Purchase order and other allied documents.
If there are insufficient export orders the AO will grant permission after reviewing the documents and allow SEZ units to supply certain quantity to DTA units.
In such case, the domestic unit has to clear the goods from SEZ units by paying applicable Customs Duty and IGST.
Proposed process
Govt announces that SEZ units can supply certain percentage of their total sales to Domestic market with concessional rate of duty.
This will remove the procedure to get approval from AO since the law itself allows certain percentage of domestic sales. Also the customs duty payable by domestic unit reduced which is also economically beneficial.
Commerce Secretary said that the detailed framework and guidelines for this new procedure within two to three months
Expected Challenges
The real questions now naturally arise are:
What will be the percentage allowed for Domestic sales?
There are speculations that it could be around 15-20% of the Export sales. This will minimise the manual approval process but also restrict domestic sales within that %.
Which are the sectors get this benefits?
It is understood this proposal is predominantly issued for the benefit of Electronics (Cell phone/Laptop manufacturers) and Automotive Industries. They have high exports as well as huge demand in domestic market for their products. Present process requires a separate unit to be set up out of SEZ for supplying to domestic market which may not be feasible for many companies. So Govt giving an option to split SEZ units turnover – majority to Exports and a minimum portion to domestic – so that SEZ units can leverage their capacity without opting additional capex for a new manufacturing unit.
But the issue here is, if the new relaxation is given only to specific sector, other sectors may not able to supply their products to Domestic market because the legal framework close all other options by implementing this sector specific permission. This will be a huge setback for the industries which were not covered by the new relaxation.
I wish the relaxation should be given to all kind of SEZ manufacturers irrespective of sector so that all industries can be beneficial.
What will be the reduced duty?
Presently on an average the Customs duty is 7.50% and 10% SWS both put together 8.25%. In all probability I guess the reduced duty could be 4% so that it won’t impact Domestic manufacturers and maintain a fair level playing field
But all these questions can be answered only by the fine print of the new procedure which will be rolled out in two to three months.
We all need to wait to see the real benefits
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