A government policy allowing SEZ units to sell up to 30% of goods domestically at lower duties has raised concerns for MSME competitiveness. Experts are calling for a negative product list to prevent market displacement and potential tax revenue leakage. The temporary framework remains in effect through March 2027.
The central government’s decision to allow Special Economic Zone (SEZ) manufacturing units to increase sales within the domestic market has become a point of contention for smaller local manufacturers. Under the current policy, which runs from April 1, 2026, to March 31, 2027, SEZ units can sell goods worth up to 30% of their highest annual export value from the previous three years into the domestic tariff area. While this move aims to provide relief to SEZ units facing sluggish global export demand, industry experts argue it could inadvertently pressure domestic Micro, Small, and Medium Enterprises (MSMEs).
Impact on Domestic Market Competition
A report by the Think Change Forum highlights the potential for significant market share displacement. The analysis suggests that for every ₹1,000 crore worth of concessional SEZ products entering local markets, up to ₹420 crore of MSME market share could be affected. Because SEZ units operate with distinct tax advantages and compliance benefits not available to standard domestic firms, the ability to sell goods locally at concessional customs rates may create an uneven playing field. Critics point out that SEZs were originally designed with the primary objective of driving foreign exchange earnings rather than serving as domestic suppliers.
Balancing Export Focus and Industry Protection
To address these concerns, experts have recommended the creation of a negative list. This list would identify specific product categories—such as liquor, tobacco, and high-duty luxury goods—that would remain ineligible for the concessional sales framework. By restricting these categories, the government could mitigate risks like tax arbitrage, where the duty difference is exploited for profit, and potential undervaluation of goods. The objective is to ensure that the current one-year relaxation remains a temporary measure to assist struggling export units rather than a structural shift that undermines the domestic industrial base.
Ensuring Transparency and Regulatory Oversight
Beyond product exclusions, there is a push for stricter enforcement to prevent the misuse of the policy. Recommendations from policy experts include mandating real-time reconciliation between customs data and Goods and Services Tax (GST) invoices. Increased scrutiny of related-party transactions and more frequent post-clearance audits are also being suggested to ensure that the concessions are not being used for revenue leakage. Economists have noted that while the relaxation offers a temporary lifeline, long-term policy success will likely depend on whether the government can link these fiscal incentives more closely to measurable achievements like net foreign exchange generation, domestic value addition, and job creation. The primary monitorable for domestic businesses will be whether the government introduces a negative list or further tightens surveillance measures before the current window expires in March 2027.