Special Economic Zones (SEZs) have historically played an important role in industrial and trade policy across several countries. Economies such as China, Vietnam and Indonesia have used SEZs effectively to attract foreign investment, expand manufacturing capacity and integrate with global value chains. Although India was among the early adopters of export-oriented zones, the SEZ framework has not yielded outcomes at a similar scale, particularly in terms of manufacturing-led growth.
India is currently operating in a challenging global trade environment. With shifting geopolitical alignments and evolving trade frameworks, countries are increasingly focusing on self-reliance, strengthening domestic manufacturing and protecting local industries through tariff and non-tariff measures. In this backdrop, SEZ units in India are finding it increasingly difficult to rely solely on exports. There is therefore a strong case for enabling closer integration of SEZs with the domestic market, so that they can contribute more meaningfully to internal supply chains and align with the broader objective of promoting “Made in India” products.
Under section 53 of the Special Economic Zones Act, 2005, SEZs are treated as territories outside the customs territory of India for authorised operations. This legal fiction allows duty-free import or procurement of inputs and capital goods used for exports, ensuring that export output is not burdened with domestic indirect taxes.
However, when goods manufactured in an SEZ are cleared into the Domestic Tariff Area (DTA), section 30 of the SEZ Act read with rule 47 of the SEZ Rules, 2006 treats such clearances as imports into India. Consequently, finished goods supplied from SEZs to the DTA attract full customs duties, including basic customs duty, social welfare surcharge, anti-dumping or safeguard duty, where applicable, along with integrated GST. These duties are calculated on the entire transaction value of the finished goods. In addition, the SEZ unit also pays income tax in India on such supplies.
This approach overlooks the economic reality that the manufacturing activity takes place within India, using Indian labour, domestic inputs and local infrastructure. As a result, customs duty is effectively levied not only on imported inputs but also on the domestic value addition, which creates a structural disadvantage for SEZ units.
When compared with other export-oriented frameworks such as Export Oriented Units (EOUs) and units operating under the Manufacturing and Other Operations in Warehouse Regulations (MOOWR), the differential treatment becomes evident. Under these schemes, customs duty is either deferred or exempted until the point of clearance into the domestic market, and even at that stage, duty is payable only on the imported inputs used in the finished goods. Domestic inputs and value addition are not subjected to customs duty. Capital goods can also be used for both export and domestic production without duty implications, provided they remain within the bonded framework.
In contrast, SEZ units are required to discharge customs duty on the full value of finished goods supplied to the DTA, even where a significant portion of the inputs and value addition is domestic. This results in a higher duty burden for SEZ units as compared to similarly placed manufacturers operating under EOU or MOOWR schemes.
A similar disadvantage arises in the context of India’s Free Trade Agreements (FTAs). Importers in the DTA who source goods directly from FTA partner countries such as those covered under the ASEAN FTA or the India–Korea FTA are eligible for concessional or nil customs duty, subject to compliance with applicable rules of origin and submission of the prescribed certificate of origin. However, these benefits are not available when comparable goods are manufactured within Indian SEZs and supplied to the DTA. This creates an anomalous situation where imported goods from foreign manufacturers enjoy more favourable duty treatment than goods manufactured in India, despite SEZs contributing significantly to employment generation, domestic manufacturing and tax revenues.
In the Union Budget 2022–23, the Government had announced its intention to revamp the SEZ law. While such comprehensive reform will require detailed stakeholder consultation and inter-ministerial coordination, the current global trade scenario warrants immediate interim measures to ensure that SEZs remain viable and competitive.
Accordingly, in the forthcoming Budget, it is suggested that suitable customs notifications or clarifications be issued to allow customs duty on SEZ-to-DTA clearances to be limited to the duty applicable on imported inputs actually used in the manufacture of finished goods, and to extend duty concessions equivalent to those available under India’s FTAs for goods covered under such agreements. These measures would help remove existing distortions, encourage manufacturing within SEZs, strengthen domestic supply chains and enable SEZs to function as integrated manufacturing and employment hubs within India’s broader industrial framework.
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