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India's Special Economic Zones (SEZs) are facing urgent calls for reform. While the government has formed a committee to update the SEZ policy for 'SEZ 2.0', industry groups feel the panel's pace is too slow for current global trade challenges. Businesses need quicker, structural changes for selling goods domestically, especially as international pressures like U.S. tariffs mount. This speed difference raises concerns about India's export competitiveness and its finances.
Committee Tasked With SEZ Reforms
The 17-member committee's job is to create a plan for 'SEZ 2.0' by recommending policy and legal updates within six months. A key focus is merging SEZs with other export programs and examining the government's costs from SEZs, such as lost duties and taxes. SEZ companies have long pushed for permanent permission to sell goods in India's domestic market on a 'duty-foregone' basis. They argue that temporary measures, like a recent one-time allowance from the 2026-27 Union Budget, aren't enough. The industry prefers basing duties on raw material costs instead of the final product, which lowers the overall tax burden.
Global Trade Pressures Drive Reform Need
Global economic shifts and trade disputes, particularly U.S. tariffs, are driving the need for SEZ reform. The government's recent one-time move allowing SEZs to sell goods domestically at reduced duties was partly a response to these U.S. tariffs, which have hurt Indian exports and led to order cancellations in some sectors. Allowing SEZs to tap into the local market more easily could help shield them from global demand swings and protectionism, boosting overall manufacturing strength. However, relying on temporary fixes instead of permanent policy changes hinders India's ability to compete with countries like Vietnam and Bangladesh that offer simpler export incentives.
Fiscal Concerns and Changing Advantages
While SEZs aim to boost exports and investment, their impact on government finances is a constant concern. Studies show SEZs result in substantial revenue loss due to tax breaks and duty exemptions. The industry's preferred 'duty-foregone' model for domestic sales could worsen these revenue issues if not carefully managed. Since the shift from Export Processing Zones (EPZs) to SEZs in 2005, the SEZ regime has aimed for better fiscal and regulatory terms. However, the withdrawal of some tax benefits, like MAT and Dividend Distribution Tax for SEZs, has made selling in the normal domestic market more appealing for some companies, slowing the creation of new SEZs as tax advantages faded.
Criticisms of Slow Pace and Limited Impact
Critics point to the slow pace of SEZ reforms and their fiscal cost. The significant revenue lost through SEZ incentives worries policymakers. The industry's push for permanent 'duty-foregone' domestic sales, while intended to boost competitiveness, could add to these fiscal pressures. Questions also remain about how effectively SEZs create jobs, especially in manufacturing, as they have largely benefited the services sector. The continued delays in implementing reforms, including past attempts like the DESH Bill, leave industry frustrated. This cautious government approach risks delaying crucial changes, allowing competitors to gain an advantage.
Path Forward for SEZ Policy
The current committee is working towards an 'SEZ 2.0' policy, potentially creating a more modern and unified system. Reforms are expected to align SEZs with other export programs and make them more appealing amidst global economic shifts. Both industry demands for permanent duty breaks and the government's recent concessions signal a recognition of the need for more flexibility. Ultimately, the success of these reforms will depend on the committee's recommendations and how quickly the government can turn them into effective policy, balancing financial caution with the urgent need to boost India's export competitiveness.