For years, SEZs were a cornerstone of India’s export-led growth strategy, offering fiscal incentives that attracted global and domestic investors. However, the SEZ’s has lost it’s key competitive advantage when the income tax exemption under Section 10AA which granted 100% income-tax exemption on export profits for the first five years, and partial benefits thereafter was withdrawn in 2021. Companies resort to alternative schemes, as the SEZ schemes are less attractive and creating structural challenges for India’s industrial ambitions.
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There are primarily four areas where the Government can focus to regain the lost sheen for SEZs along with considering the modern realities in manufacturing/ services sector needs.
Firstly, the impact is most evident with respect to the cost structure for SEZ units supplying goods to the Domestic Tariff Area (DTA). Under current rules, such domestic clearances are treated as imports into India, attracting full duties and taxes on the sale/ transaction value, including processing and value addition. This significantly inflates costs for SEZ manufacturers who wish to tap into India’s growing domestic market. In stark contrast, units operating under the MOOWR (Manufacture and Other Operations in Warehouse) scheme enjoy a more favourable regime, paying applicable duties only on the cost of raw materials when finished goods are cleared in the domestic market.
Industry experts and trade bodies are calling for urgent reforms to strengthen the Special Economic Zone (SEZ) framework and align SEZ rules in line with the principles of MOOWR by adopting input-based duty payments for sales to the Domestic Tariff Area (DTA). Such a move would not only reduce costs for companies but also revive the investment appeal of manufacturing SEZ zones, enabling them to operate as dual-market hubs serving both exports and domestic consumption. This approach is consistent with India’s broader industrial policy objectives and could unlock idle capacity within SEZs, attract fresh investment, and create jobs while maintaining export orientation.
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Secondly, going beyond duty structures, stakeholders emphasize the need to resolve tax ambiguities while transacting with Free Trade Warehousing Zones (FTWZ) units. The manufacturing ecosystem requires companies to ensure their offshore vendors maintain inventory near assembly units, rather than each component supplier having to ship individual parts to multiple factories in India. Similarly, companies ramping up production in India to cater to the export market are required to sell and store finished goods until the products are launched globally. FTWZs, a specialized category of SEZs, serve as strategic hubs for foreign vendors and foreign buyers. The offshore vendors go through a protracted Know-Your-Customer (KYC) approval process for SEZ/ FTWZ units, which slows down onboarding and discourages new investments. Digitizing and centralizing KYC checks through interoperable databases could compress turnaround times from weeks to days, aligning with India’s digital governance agenda and boosting investor confidence.
Industry representatives argue that the companies should enjoy zero rating status when finished goods are shipped to FTWZ to hold goods temporarily before dispatch to overseas market. Interim warehousing steps do not alter export intent or foreign exchange realization and should therefore retain zero-rating until final export. Harmonizing these policies would create a seamless environment for bonded manufacturing and warehousing, reducing compliance complexity and boosting operational efficiency.
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Thirdly, experts also highlight operational bottlenecks that need urgent attention. Mandatory endorsements in respect of goods procurement by SEZ units add unnecessary compliance burdens and it is suggested that the endorsement process be shifted to intimation process at the most. In addition, goods manufactured in the SEZ are allowed to be transferred to another SEZ unit without payment of duty. However, the process of zone-to-zone transfer is extremely cumbersome and requires multiple levels of approvals. This can lead to loss of valuable days of the units which can be used for revenue generation. The process can be tweaked to maintaining documents by SEZ units which can be reviewed periodically by the authorities.
Finally, the current regulatory framework imposes limitations on SEZ units regarding supply of services to DTA hindering their flexibility and competitiveness in the domestic market. By allowing SEZ units to conduct DTA supplies in INR, the Government can remove these barriers and unlock significant opportunities for growth and innovation of services sector within the SEZ ecosystem.
These changers are not merely technical adjustments—they are strategic imperatives for India’s economic future. The Government could propose to undertake the above suggested changes by way of suitable amendments to SEZ Act/ Regulations during the Budget session scheduled in February 2026. A modern SEZ regime will strengthen India’s position as a global manufacturing and logistics hub, reaffirming its commitment to self-reliance and competitiveness in an increasingly interconnected world. By addressing structural gaps and embracing forward-looking reforms, India can ensure that its SEZs remain relevant and resilient, driving industrial growth and supporting the nation’s ambition to emerge as a leading player in global supply chains.
Jaising is Partner & Indirect Tax Leader, Deloitte India with inputs from Mounika Vemula, Director and Adarsh, Manager
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