India's Commerce Department is drafting a proposal to allow SEZ units to accept rupee payments from domestic clients. This amendment seeks to remove the requirement for foreign exchange in services like MRO, engineering, and IT, potentially boosting domestic competitiveness and reducing transaction costs for local companies.
The Ministry of Commerce and Industry is working on a plan to amend the Special Economic Zones (SEZ) Act, a move that could significantly alter the operational landscape for units located within these zones. Currently, SEZ units are generally required to receive payments in foreign currency for services provided to the Domestic Tariff Area (DTA), which refers to the rest of India. The proposed change would allow these units to accept payments in Indian rupees for services rendered to domestic clients.
Removing Barriers for Key Sectors
The existing foreign exchange mandate has been identified as a major bottleneck for several high-value sectors, including Maintenance, Repair, and Overhaul (MRO), defense manufacturing, engineering, and information technology. Under the current rules, domestic companies looking to procure services from SEZ-based providers face extra costs. These include bank commissions incurred when purchasing foreign currency to pay for services, followed by further conversion fees when SEZ units change those funds back into rupees. By removing this requirement, the government aims to lower transaction costs and make domestic sourcing more attractive.
Several companies and sectors have highlighted the limitations imposed by this rule. For instance, MRO facilities in locations such as Nagpur’s MIHAN SEZ or Hyderabad’s GMR Aero SEZ have found it difficult to offer services to domestic airlines because of the foreign currency requirement. Similarly, entities involved in defense manufacturing, such as the L&T MBDA Missile Systems facility in Coimbatore, have faced hurdles in providing maintenance support to the Indian Air Force. In the IT sector, government offices and public sector undertakings have occasionally been forced to look at international imports for software services, even when domestic capabilities exist within SEZs, simply because those SEZ units cannot accept rupee payments.
Aligning with Domestic Manufacturing Goals
The move is seen as a step toward strengthening the 'Make in India' initiative by better integrating SEZ production and service capabilities with the needs of the domestic market. Discussions regarding this policy shift have involved the Department of Commerce, the Reserve Bank of India, and the Finance Ministry. The proposal is currently being drafted as a Cabinet note. Once it receives Cabinet approval, the amendment will need to be passed by Parliament to become law.
Investors may monitor the progress of this proposal, as the policy shift could improve the operational flexibility and market reach of companies with significant SEZ presence, such as Larsen & Toubro (L&T) and GMR Group. The primary indicator for stakeholders will be the formal introduction of the bill in Parliament and subsequent regulatory clarifications regarding how these transactions will be recorded and taxed under the new framework.