Designed in backdrop of US tariffs, SEZ sops come into effect amid West Asia conflict

The relief given to SEZs has excluded select sensitive sectors “to safeguard domestic industry”, the Ministry said. “Certain sensitive sectors, especially where domestic industry needs protection or where tariffs are already low, are kept outside the relief measure. This shows that the government is being selective and cautious, rather than opening the domestic market completely,” a Finance Ministry source said.

SEZs enjoy various tax benefits, including duty-free imports and domestic procurement and employ over 31 lakh people in various labour-intensive sectors. Broader SEZ reforms have been in discussion between the Ministry of Commerce and Industry and the Ministry of Finance for years, as units have not performed as expected. Official data shows that over 450 units have closed in the last five years till FY25 in seven SEZs across the country.

However, Finance Ministry sources said this measure should be viewed strictly as a one-time relief, with no implied commitment toward institutionalisation or expansion. “The Department of Commerce is simultaneously working on a broader framework on harmonisation of various export promotion schemes with a key focus on enhancing exports,” the source said.

Former trade officer, Ajay Srivastava, founder of the Global Trade Research Initiative, said the benefit covers a wide range of products — from chemicals and fertilisers to textiles, footwear, and machinery. However, petrol and diesel are excluded, with only limited refinery products like petroleum coke included, he said.

Under the notified concessions, the Ministry said SEZ units claiming benefit under this relief window should have commenced production of goods on or before March 31, 2025 and that the goods manufactured by such units, for which benefit is claimed under this relief window, should have undergone value addition of a minimum 20% over the inputs.

“The emphasis on exports by SEZ units shall remain. DTA sales at concessional rates by the eligible SEZ units shall not be more than 30% of the highest annual Free on Board (FOB) value of exports in any of the three immediately preceding financial years. The relief window will be implemented through CBIC’s automated system, and the assessment of bills of entry for DTA clearances under this relief window will be done under the faceless assessment mechanism,” the ministry said.

Experts said the impact of the measure is likely to be modest. “The duty cut is small — around 1 percentage point for many products. The absence of any relief on IGST further limits the incentive. In addition, the requirement of at least 20% value addition and the cap of 30% on domestic sales restricts flexibility for SEZ firms. The exclusion of petrol and diesel further weakens the policy, particularly for refinery-linked SEZs. If the objective is to boost domestic supply, stronger measures — such as restricting exports of petrol, diesel and ATF, as practised by countries such as China and Singapore — may be needed,” Srivastava said.

A government official said by allowing SEZ units to sell up to 30% of their export turnover in the domestic market, the one-time relief window introduces a calibrated and controlled flexibility, which will ease the pressure faced by the existing units in SEZ due to global trade disruptions.

“This 30% cap is critical — it ensures that SEZs remain primarily export-focused, while still providing a meaningful buffer against global demand shocks. This domestic sales enablement would act as a stabilisation mechanism for manufacturing operations. The impact of this one-time relief extends beyond individual firms. Stable production supports employment continuity and sustains the broader industrial ecosystem. Ancillary industries such as logistics, raw materials, and services would also benefit from predictable demand and steady operations, improving overall economic resilience,” the official said.

Nearly 466 units have closed in the last five years till FY25 in seven SEZs across the country, according to data shared by the Commerce and Industry Ministry in a written response to a Lok Sabha question in December last year. The official data showed 100 units shut shop in FY25 alone, most after FY22 when Covid-19 resulted in the closure of 113 units. The employment in SEZs also declined to 31.77 lakh in FY25 compared with 31.94 lakh during the previous financial year.

Chandrajit Banerjee, Director General, Confederation of Indian Industry, said, “Amid ongoing global trade uncertainty, evolving tariff measures, and persistent supply chain disruptions, businesses, particularly MSME exporters, continue to face operational as well as demand-side challenges. The continuation of policy measures to create predictability is important in these difficult times.”

Krishan Arora, Partner and Leader, Indirect Tax and India Investment Advisory, Grant Thornton Bharat, said that the recent SEZ notification is a critical turnaround in the backdrop of that much-awaited Budget commitment.

“This relaxation provides cushion to the industry from inevitable outside shocks, permitting these units to smoothly shift towards the domestic market and resolving undercapacity challenges. At the same time, the domestic industry also benefits by exploiting available capacity of SEZ and shall have reduced reliance on imports, which are getting both delayed and expensive, owing to the war era global economy is currently grappling with,” Arora said.