Budget 2026 likely to overhaul SEZ norms to boost local sourcing

The proposed reform could explore a more rational duty framework for SEZ sales in the domestic market

The Centre is likely to announce changes to the special economic zone law in the Budget 2026 to make it easier for Indian manufacturers to source goods from SEZ units, a senior government source said.

At present, these transactions attract full customs duties on finished products, making domestic sourcing commercially unviable.

“The objective is not to dilute the export focus of SEZs but to allow them to operate as part of a larger manufacturing network rather than as isolated enclaves,” a source said.

The existing legal framework treats SEZs as outside India’s customs territory and mandates that all sales to the domestic market be treated as imports. The restrictive import status has led to distortions by limiting coordination between SEZ units and domestic manufacturers, sources said.

“Domestic manufacturers can freely supply inputs to SEZ units but when they try to procure goods from SEZs, those transactions are treated as imports under the law. This one-way flow prevents SEZ units from operating as regular suppliers within domestic supply chains,” an official told Moneycontrol on condition of anonymity.

Gauba panel recommendation

The change has been suggested by a committee chaired by NITI Aayog member Rajiv Gauba. The panel was tasked with identifying structural bottlenecks affecting trade, investment and industrial competitiveness.

Sources said the panel flagged the rigid separation between SEZs and the domestic market as a key constraint and called for modernising the framework.

Since these changes would involve redefining how SEZs interact with the domestic market, sources said amendments to the SEZ Act would be required, which would need Parliament’s approval.

Duty rationalisation

According to sources, the proposed reform could explore a more rational duty framework for SEZ sales in the domestic market, including options that reduce the burden of levying full customs duties on finished goods.

“There is a strong case to examine whether duties should apply only to imported inputs used in production rather than the entire finished product. This would remove cost disadvantages,” the government source said.

Such an approach could make domestic sourcing from SEZs more competitive and help improve capacity utilisation in export zones amid uneven global demand.

Easing business flows

The proposal may also facilitate closer operational links between SEZs and domestic firms, including allowing SEZ units to undertake processing and job work for Indian manufacturers and enabling smoother movement of goods and services between the two.