India Offers SEZs Limited Domestic Sales Amid Trade Pressures
The Indian government has introduced a one-time concession for Special Economic Zone (SEZ) manufacturing units, letting them sell goods into the Domestic Tariff Area (DTA) at lower customs duties. This measure, effective from April 1, 2026, to March 31, 2027, aims to ease pressures SEZ manufacturers face from global trade tensions, including the conflict in West Asia, and the lasting effects of US tariffs. While seen as a flexible response to weak global demand, the relief's strict limits have drawn attention from experts. The Central Board of Indirect Taxes and Customs (CBIC) introduced these concessions to aid DTA sales, offering a buffer against trade disruptions and boosting capacity use in SEZs that have faced underutilization.
SEZ Challenges: Unit Closures, Job Losses, and Strict Sales Limits
Historically, SEZs were set up as export hubs, offering incentives like duty-free imports and tax breaks to boost international trade. However, the sector has struggled with challenges like policy uncertainty, loss of tax benefits, and tough global competition. Data shows 466 SEZ units closed across seven zones in the five years up to FY25, including 100 in FY25 alone. Employment also dipped slightly, falling to 31.77 lakh in FY25 from 31.94 lakh the year before. The current concessions, meant to help, come with strict rules. Eligible units must have started production by March 31, 2025, and reached at least 20% value addition. Crucially, domestic sales are limited to 30% of the highest annual Free on Board (FOB) export value from the past three years.
Experts like Ajay Srivastava from the Global Trade Research Initiative (GTRI) point out that duty cuts are small, usually about one percentage point. The lack of relief on Integrated Goods and Services Tax (IGST) also reduces the overall benefit. Moreover, key products like petrol and diesel are excluded, limiting benefits for refineries, though petroleum coke is allowed. This exclusion of sensitive sectors aims to protect local industries, indicating a cautious approach rather than a wide market opening. Compared to schemes like Production Linked Incentive (PLI) or Duty Drawback, SEZ benefits are thorough but can be inflexible, particularly given their previous strict export-only focus. The ongoing conflict in West Asia has worsened these pressures, disrupting supply chains and raising freight and oil costs, affecting sectors from textiles to electronics.
Experts Question if Concessions Address SEZ's Deep Issues
The effectiveness of this 'one-time' concession is questioned given SEZs' overall performance problems. Although SEZ exports doubled to Rs 14.63 lakh crore in FY25 from Rs 7.59 lakh crore in FY21, many units have still left the sector. Reasons cited include US tariffs reducing exports, policy uncertainty, and the removal of tax benefits. Unlike competitors such as Vietnam, which attract much more FDI due to flexible domestic links, Indian SEZs face issues like a lack of investment protection agreements and negative perceptions, deterring foreign investment. The concentration of SEZs in developed areas, sometimes worsening regional inequality, is also a debated topic. Furthermore, nearly 70% of India's SEZs are in IT and services. While these sectors perform well, they don't create many jobs, a major need for India's development. The current relief, while offering some buffer against external shocks, is unlikely to fix these deep structural problems. The strict 30% cap on domestic sales, intended to keep SEZs export-focused, also restricts flexibility, especially when demand falls. Excluding key sectors like petrol and diesel, along with modest duty cuts, suggests this is a tactical, short-term fix rather than a strategy to fully revive the SEZ model.
Government Says Concession is One-Time Measure
Government officials stress this is strictly a one-time relief, with no commitment to making it a permanent policy. The Department of Commerce is also developing a wider plan to better coordinate export promotion schemes. While this concession aims to stabilize manufacturing and support jobs, its long-term effect depends on global trade changes and possible future policy updates. The success of these limited concessions will likely be judged by whether they can stop more unit closures and help SEZs stay viable amid ongoing geopolitical and economic pressures.