Govt plans policy changes to boost domestic demand for SEZ manufacturers

Govt plans SEZ reforms to offset US tariff hit, enabling duty relief on domestic sales and support for labour-intensive exporters

The government is working on policy changes to create domestic demand opportunities for special economic zones (SEZ) manufacturers, in a bid to protect the local industry, and absorb excess production from cancelled export orders due to the 50 per cent tariff imposed by the United States (US) on several Indian products, according to government officials.

 

One of the ways could be by allowing the sale of products manufactured in SEZs to the domestic market on a ‘duty foregone basis’ on raw materials, instead of the finished product, the officials said. At present, SEZs pay full Customs duty, in case a finished product is sold outside these zones or the domestic area. 

 

The change, if implemented, is expected to spur value addition and manufacturing in SEZs as the import tax levies on units are expected to be lower. 

 

The department of commerce and the finance ministry’s revenue department are working to bring in several SEZ reforms to weave in policy flexibilities. 

 

The issue also figured in high-level deliberations on trade earlier this month.

 

Government officials said that a critical risk emanating from these additional tariffs has been a drop in order levels, particularly in SEZ-based units, which contribute significantly to labour-intensive exports, including sectors such as gems and jewellery, and electricals.

 

Allowing SEZs to maintain production volumes will help spread costs scale over larger output, improving economies of scale and competitiveness. This will, in turn, benefit exports in the long term, a government official said.

 

Currently, SEZs can sell their products in the domestic market, but they are subject to payment of various taxes, including Customs duties, making the products more expensive. 

 

This is because SEZs are areas within the country subject to different economic regulations, effectively treated as foreign territory, with a primary focus on promoting exports.

 

Alok Chaturvedi, director general of Export Promotion Council of Export Oriented Units (EOUs) and SEZs (EPCES), said that SEZ units and EOUs exporting to the US face a similar additional burden of higher US tariffs, and they should be covered under the support package that the government is working on. Exports to the US from such zones stood at $21.60 billion during the financial year 2024-25.

 

“A direct measure can be that the government neutralises part of this additional 50 per cent tariff on exports to the US for three months or so. The increase may be shared by exporters, their (American) buyers and the government equally. About 30 per cent of additional tariffs on exports to the US may be borne by the government urgently and given to exporters in terms of drawbacks or scrips or some alternate mechanism,” Chaturvedi said, adding that if implemented, it can give exporters some immediate relief to bear the impact for at least a quarter and then they can adjust to the new reality.