India plans SEZ reforms to allow freer flow of goods, services with domestic market: Report

Currently, sales from SEZs to the domestic market attract full customs duty, which industry representatives argue limits competitiveness and scale

India is exploring ways to ease the restrictions between its Special Economic Zones (SEZs) and the domestic market to allow smoother movement of goods and services, The Economic Times reported. The plan aims to strengthen manufacturing and exports by making SEZs more flexible and competitive amid growing global trade uncertainty.

Discussions are currently underway between the Prime Minister's Office (PMO), the commerce ministry, and the revenue department on possible policy changes to the existing SEZ framework, which has been in place since 2000. The discussions seek to identify reforms that can help SEZs achieve the scale and efficiency originally envisioned when these duty-free manufacturing enclaves were established, The Economic Times said, citing government officials.

The proposed measures include rationalising customs duties on goods sold to the Domestic Tariff Area (DTA), permitting domestic payments for services in Indian rupees, and allowing domestic manufacturers to send goods to SEZs for outsourcing. These steps, officials told The Economic Times, could help boost the integration of SEZs with the domestic economy and attract new investments.

One government official said the challenges faced by SEZs are being examined closely, while another stressed the need for a more adaptive framework that can respond to changing business dynamics and global uncertainties. The proposals, still at an early stage, may require amendments to the SEZ Act of 2006, which governs the operations of these export zones.

In FY25, exports from the 6,300 units operating across 276 SEZs stood at Rs 14.57 lakh crore, a 7.4% increase from the previous year, The Economic Times noted. Currently, sales from SEZs to the domestic market attract full customs duty, which industry representatives argue limits competitiveness and scale.

Experts told The Economic Times that the government's focus appears to be shifting from a purely export-driven model toward creating "development hubs" that cater to both international and domestic demand. Pratik Jain, partner at Price Waterhouse & Co LLP, said easing customs norms and allowing domestic supplies to SEZs on a duty-foregone basis, along with greater state-level participation, could turn these zones into engines of job creation and advanced manufacturing in sectors like semiconductors and green energy.

Industry bodies have also raised concerns that Indian SEZs are at a disadvantage compared to competitors in countries that have Free Trade Agreements (FTAs) with India. Ajay Sahai, director general of the Federation of Indian Export Organisations, told The Economic Times that SEZs need a "structural reboot" to restore export competitiveness through integration with the domestic economy, faster digital clearances, and reduced transaction costs.

Industry representatives have further suggested aligning the duties on SEZ-to-DTA sales with the rates applicable under FTAs, pointing to the MOOWR (Manufacturing and Other Operations in Warehouse Regulations) scheme as a precedent. The MOOWR framework allows duty foregone on input materials when goods are sold domestically, and stakeholders believe a similar approach should apply to SEZs.

In addition, industry experts have urged the government to allow SEZ units to undertake subcontracting for domestic firms during export slowdowns and to enable payments in Indian rupees for domestic services. EY partner Bipin Sapra told The Economic Times that reforms should focus on "allowing domestic sales with duty recovery equal to the duty foregone on imported inputs, enabling reverse job work to use idle SEZ capacity, and permitting domestic sale of services without the foreign currency condition."

The ongoing discussions, The Economic Times reported, reflect the government's intent to reorient SEZs into more integrated, future-ready hubs that can support India's manufacturing and export ambitions while ensuring sustained competitiveness in global value chains.