India SEZs Get One Year to Sell Domestically with Duty Cuts
Starting April 1, 2026, Indian Special Economic Zone (SEZ) companies will be allowed to sell some of their goods into the domestic market at lower duties for one year. This new plan aims to help SEZs use idle factory space and cope with global trade issues, like rising geopolitical tensions and protectionist policies. But questions remain about how well this relief will actually help SEZs compete in the domestic market, as many in the industry point to the strict conditions attached to the concessions.
How the Duty Concessions Work
The government announced this one-time measure in its 2026-27 budget. Eligible SEZ manufacturing units can sell goods in the domestic market until March 31, 2027. The lower duty rates are intended to make SEZ prices more competitive with domestic producers. These rates will generally fall between 6.5% and 12.5%. For example, items previously taxed at 7.5% will now face 6.5%, and those at 20% will be taxed at 12.5%. This policy responds to industry requests to use factories that are not fully utilized due to weak global demand and trade uncertainties, such as recent disruptions from conflicts. The government hopes this will encourage domestic buying from SEZs instead of imports, aiming to create jobs.
Why Competition Remains a Challenge
However, industry groups and researchers have voiced concerns. The Global Trade Research Initiative (GTRI) pointed out that the duty cuts are small, often only a percentage point. Crucially, there is no reduction in Integrated Goods and Services Tax (IGST). This lack of IGST relief, combined with the fact that goods from countries with Free Trade Agreements (FTAs) can enter India at very low or zero duties, severely limits the ability of SEZ units to compete. SEZ companies usually face full import duties when selling domestically, which can be higher than the rates under FTAs. While the new policy offers some help, the duty reductions are considered too small by some to truly compete with duty-free imports.
Strict Rules for SEZ Domestic Sales
The relief comes with strict rules to ensure SEZs remain focused on exports and to protect local industries. Companies must have started production by March 31, 2025, and shown at least 20% value added to their products. Domestic sales are limited to 30% of a unit's highest annual export value from the past three years. Materials that already received export benefits cannot be used for domestic sales. Some industries are excluded to protect them. Getting certification from Development Commissioners could also cause delays.
Concerns About Policy's Limited Impact
Experts predict the overall effect of this temporary measure will be limited. Ajay Srivastava, founder of GTRI, noted that the rules, such as value addition and sales limits, could restrict how flexible companies are. He suggested it might be more of a way for some units to clear inventory rather than a true market expansion. Krishan Arora from Grant Thornton LLP added that while the move shows the government is adaptable, the small duty cuts and strict conditions restrict its wider use. The policy is only for one year, adding uncertainty for companies planning ahead. Small and medium-sized businesses (MSMEs) are also concerned about unfair competition, as SEZs already benefit from duty-free imports for their materials. There's also a worry that if global trade problems continue, this temporary measure might become permanent, which could hurt the main export focus of SEZs.
SEZs' Export Performance Faces Global Headwinds
SEZ exports have been a major driver of growth for India, making a large contribution to the country's trade. Exports reached over ₹11.70 lakh crore in the period up to December 2025 for fiscal year 2025-26. However, SEZ performance is facing challenges from current global economic conditions. These include weak demand from other countries, increased protectionist policies, and geopolitical instability that affects supply chains and shipping costs. The Indian stock market has seen ups and downs due to these issues, but analysts expect some sectors like Auto, Metals, and Financials might lead a recovery. The new SEZ domestic sales policy offers some flexibility, but its real success will depend on how well it supports SEZs while protecting domestic industries during these complicated global economic times.