The government is considering a significant reform under SEZ Policy 2.0 that would allow Special Economic Zone units to pay customs duty only on imported inputs used in domestic sales, rather than on finished products. According to reports from Business Standard, the inter-ministerial committee (IMC) comprising representatives from the Department of Commerce, Department of Revenue and NITI Aayog is expected to discuss this proposal shortly. The commerce ministry is preparing a consolidated report containing several policy recommendations, including allowing SEZ units to make sales into the domestic market on a duty-foregone basis.
Under the current system, SEZs are treated as foreign territories for customs purposes, allowing units to import raw materials duty-free. However, when they sell finished goods in the domestic market, they currently pay customs duty on the finished products. As reported by Business Standard, if the proposal is approved, SEZ units would instead pay only the customs duty that had been foregone on the imported inputs used to manufacture those goods. Since duties on finished products are usually higher than those on raw materials, this change would significantly lower the duty burden on domestic sales.
According to Abhishek Jain, partner and national head, indirect tax at KPMG, the duty on finished goods is usually higher than that on raw materials. As reported by Business Standard, if domestic sales are allowed on a duty-foregone basis, SEZ units would no longer pay duty on the finished goods but would pay duty only on the imported input products. This reform would improve the competitiveness of SEZ units while ensuring a level playing field for domestic manufacturers.
The IMC is also expected to consider revising the definition of services under the SEZ Act to facilitate payments in Indian rupees, according to Business Standard reports. The government established SEZs nearly two decades ago to boost exports, attract foreign investment and generate employment, with units receiving fiscal incentives including duty-free imports and tax exemptions on export income. However, under-utilisation of capacity has become a growing concern, particularly amid global trade disruptions.
In February, the government announced a one-time measure allowing eligible SEZ units to sell goods in the domestic market at concessional customs duty rates. Under this scheme, units that commenced production before March 31, 2025, can sell goods worth up to 30 per cent of their highest annual free-on-board export value achieved in any of the previous three financial years into the domestic market between April 1, 2026, and March 31, 2027. While the proposal could improve SEZ unit competitiveness, it has raised concerns within the government over potential revenue implications given that SEZ units already enjoy several fiscal incentives aimed at promoting exports.
