Concessional-duty SEZ sales may hurt MSMEs, distort competition: Report

The report cautions that easing domestic sales by SEZ units could undermine the export-focused framework, weaken MSMEs and distort competition unless accompanied by strict safeguards

The government's decision to allow concessional-duty supplies from Special Economic Zone (SEZ) units to the domestic market could hurt micro, small and medium enterprises (MSMEs) and distort competition, according to a think tank report.

 

"While framed as a temporary capacity-utilisation measure, this relaxation fundamentally alters the core bargain of the SEZ framework," Think Change Forum said in its report. "Units that enjoy duty-free inputs, simplified compliance, and export-linked fiscal concessions may now access the same domestic markets in which non-SEZ manufacturers operate with higher input duties, GST working capital costs, credit costs and regulatory burdens."

 

Finance Minister Nirmala Sitharaman, in the Budget for FY27, announced a special one-time measure to facilitate sales by manufacturing units in SEZs to the Domestic Tariff Area (DTA) at concessional rates of duty. Under the scheme, eligible SEZ units can sell up to 30 per cent of their highest annual free-on-board export value achieved in any of the previous three financial years into the domestic market between April 1, 2026, and March 31, 2027.

   

"Unless ring-fenced tightly, this risks converting SEZs from export-earning enclaves into subsidised domestic supply platforms, causing irreversible long-term damage to the delicate balance required to protect domestic producers from cheaper imports," the report said.

 

The think tank noted that the Centre's notification allowing eligible SEZ units to make concessional-duty sales into the domestic market was intended as a temporary response to weak global demand. However, it cautioned against making such relaxations a permanent feature of the SEZ regime.

 

The report comes at a time when the commerce ministry is consulting stakeholders on a broader overhaul of the SEZ framework under the proposed 'SEZ 2.0' policy. A key proposal at the stakeholder meeting held earlier this month in the commerce ministry was to permanently allow SEZ units to sell into the DTA by paying only the customs duty foregone on imported inputs.

 

The report estimated that SEZ supplies to industrial clusters could reduce domestic suppliers' order books by 25-35 per cent within a quarter. It also estimated that every ₹1,000 crore of high-margin products sold into the domestic market under the concession could displace around ₹420 crore of MSME sales.

 

"The 2026 DTA relaxation should not become the template for a broader SEZ reset," the report said. "If India is to expand SEZs under a China+1 and Viksit Bharat manufacturing strategy, the expansion must be tied to export deepening, domestic value addition, R&D and supply-chain integration—not to easier access to the domestic market."

 

The report argued that the original objective of SEZs was to promote exports by allowing duty-free imports of raw materials and components while requiring units selling into the domestic market to pay customs duties equivalent to those applicable to imports.

 

Former chairman of the Central Board of Indirect Taxes & Customs Najib Shah said the temporary concession was understandable given the slowdown in exports. "From the government's perspective, this is justified because global uncertainty has impacted exports. SEZs have been having a difficult time and the present relaxation is for a short window," Shah said.

 

At the same time, he acknowledged that the impact on domestic industry would need to be monitored. "These are early days, and we don't know how much the impact on the domestic industry will be," he said.

 

The report said the policy objective should be to strengthen SEZs as export-oriented manufacturing hubs rather than transform them into subsidised suppliers to the domestic market. Any expansion of domestic sales should be accompanied by strict safeguards and stronger customs oversight, the think tank recommended.