For SEZ 2.0 policy, shift focus from concessions to better governance

As the Centre reviews export promotion schemes, experts call for SEZ 2.0 reforms and shifting SEZ policy oversight to DGFT to better align with India's trade framework

The committee constituted this February to study the harmonisation of export promotion schemes is scheduled to hold a stakeholder meeting on June 30 and recommend a roadmap for broad-based reforms to formulate a SEZ 2.0 policy.

It should consider shifting policy and regulatory responsibility for special economic zones (SEZs) from the SEZ Division of the Department of Commerce to the Directorate General of Foreign Trade (DGFT). 

The committee’s mandate is wide. It includes review of the existing framework, recent reforms, export competitiveness, global alignment, investment and employment outcomes, operational bottlenecks and fiscal implications. The issues listed for discussion include duty on Domestic Tariff Area (DTA) clearances on duty-foregone basis, job work by SEZ units for DTA units without insisting on export of job-worked goods, payment in Indian rupees by DTA units for services received from SEZs, changes in SEZ laws and harmonisation of export promotion schemes. 

These are useful issues. However, my concern is more basic. The SEZ Division has not kept pace with developments in Customs, Goods and Services Tax (GST), Foreign Exchange Management Act (Fema) and foreign trade law. The evidence is available in the SEZ framework itself. GST was introduced in July 2017, but consequential amendments in SEZ laws came only in September 2018. Export Oriented Units (EOUs) ceased to be bonded warehouses from August 2016, but SEZ laws still treat procurements from EOUs as procurements from bonded warehouses. Some provisions prescribe duty payment when goods procured from DTA are returned, while other provisions deal with similar transactions differently. 

The definition of services effectively requires SEZ service providers to obtain payment in foreign currency from DTA buyers, but such amounts cannot be credited to their foreign currency accounts. SEZ instructions appear contrary to legal provisions on storage in, or export of goods through SEZ trading units or service providers. Suppliers of imported duty-paid goods to SEZ buyers do not get drawback under Section 74 of the Customs Act, 1962 because of the restricted definition of export in the related Drawback Rules. These are not drafting niceties. They affect business decisions, cash flows and compliance positions.

The SEZ scheme was introduced in 2006 to address complaints of inspector raj, high interest costs, unstable regulation, multiple compliances and poor infrastructure. Tax concessions for developers and units raised expectations of a transformational impact. Yet, after 20 years, expectations have been only partly met, especially in manufacturing. Government data show 368 notified SEZs, investment of ₹7.86 trillion, employment of over 3.173 million people and exports of over ₹11.70 trillion during 2025-26 up to December 2025. In several cases, businesses merely shifted exports from DTA

to SEZ. The revenue cost is material. The Receipt Budget puts the income-tax impact of Section 10AA at ₹28,866 crore and the customs-side revenue impact of SEZs at ₹46,689 crore for 2024-25.  SEZ 2.0 cannot mean much merely by amendinga few duty provisions. The institutional design must change. SEZs are integrated with DTA and operate within a complex matrix of Foreign Trade Policy (FTP), Customs, GST, Fema, FTAs and other trade regulations. DGFT administers export promotion schemes and is better placed to draft, coordinate and administer SEZ reforms within India’s integrated foreign trade policy. Customs, GST and issues concerning the Reserve Bank of India (RBI) will still need consultation with respective authorities, but the anchor for the SEZ scheme should be an institution that understands exports, export obligations, trade facilitation and the legal architecture of foreign trade. 

Email: tncrajagopalan@gmail.com