Exploring Investment Opportunities In India’s Sezs And SEZ Benefits In India

Exploring Investment Opportunities In India. SEZ Benefits in India

Special Economic Zones remain one of the most established routes for export-oriented businesses and foreign investors to operate within India under a distinct fiscal and regulatory framework. This guide sets out what an SEZ and SEZ benefits in India available under the SEZ Act, 2005 and the SEZ Rules, 2006, the compliance obligations that attach to an SEZ unit, and the process for applying to set up in a Special Economic Zone. It also records the recent regulatory developments that have reshaped SEZ policy, including the Special Economic Zones (Amendment) Rules, 2025 and the concessional duty window notified for supplies to the domestic market. Several of the tax positions described below carry sunset dates and conditions; each load-bearing figure and statutory reference should be verified against the current statute and notifications before it is relied upon.

What Is Special Economic Zone?

A Special Economic Zone (SEZ) is a designated area within a country, A precisely defined duty-free enclave, considered as foreign territory for trade operations, customs duties, and tariffs. Items and services entering the SEZ zone from the domestic tariff area are regarded as exports, whereas items and services arriving from the SEZ are classified as imports. The SEZ Act of 2005, in conjunction with the SEZ Rules, streamlines processes and offers a one-stop solution for matters involving both the Central and State Governments.

The SEZ policy was first announced in the year 2000 and was later given a statutory basis through the Special Economic Zones Act, 2005, which came into force on 10 February 2006 along with the Special Economic Zones Rules, 2006. India was the first country in Asia to establish an export processing zone, set up at Kandla in 1965, and the SEZ framework grew out of that earlier model. A Special Economic Zone is administered through a Development Commissioner for each zone, a Unit Approval Committee at the zone level, and a Board of Approval at the Central level, each of which performs distinct functions under the Act and Rules.

A Special Economic Zone (SEZ) offers various incentives and benefits to promote economic growth, exports, and foreign investment.

• Customs, Excise, And Gst:

  One of the main SEZ Benefits in India is that SEZ units can freely import or obtain goods from various sources without licenses or approvals, including items for setting up the unit. The Goods imported/procured locally duty-free must be utilized within the validity period of LOP and eligible for Merchandise Export from India Scheme (MEIS) and served from India Scheme (SFIS) incentives.

A point of caution is warranted here. The Merchandise Exports from India Scheme (MEIS) and the Service Exports from India Scheme (SEIS) have since been discontinued and replaced by later export-promotion measures such as the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme. Reliance on MEIS or SEIS incentives is no longer appropriate for units set up today, and the applicable incentive scheme should be confirmed at the time of establishment. On the indirect tax side, supplies to an SEZ unit or developer for authorised operations are treated as zero-rated supplies under the Integrated Goods and Services Tax Act, 2017, which allows the domestic supplier either to supply under a bond or Letter of Undertaking without payment of tax, or to pay the tax and claim a refund. These indirect tax positions require verification against the current GST law before publication.

• Income Tax:

  SEZ units get 100% income tax exemption for the initial 5 years (Section 10A) and 50% for the next 3 years (if set up before 1.4.2005) and For SEZ units starting from 1.4.2006 to 1.4.2021, there’s full income tax exemption for 5 years (Section 10AA), 50% for the next 5 years, and 50% of reinvested profits.

This position must be read together with the sunset clause introduced by the Finance Act, 2016. Under Section 10AA of the Income Tax Act, 1961, the profit-linked deduction is available only to SEZ units that commenced manufacture or the provision of services on or before 31 March 2020. Units that began operations after that date are not eligible to claim the deduction. Units that commenced operations on or before 31 March 2020 continue to enjoy the phased fifteen-year benefit, namely a hundred per cent deduction of export profits for the first five years, fifty per cent for the next five years, and a further fifty per cent for the subsequent five years subject to the reinvestment condition. Prospective investors should therefore treat the direct-tax holiday as a benefit that is now closed to new units, while the customs, GST, and operational benefits described elsewhere in this article continue to apply. The exact eligibility position and the interaction with Minimum Alternate Tax should be verified with a tax advisor for each specific case.

• Cess:

  The SEZ units are exempted from Cess on goods related to various Acts, including the Agricultural Produce Cess Act, Coffee Act, and more.

• Foreign Direct Investment:

  FDI up to 100% is allowed for manufacturing in SEZs, except for specific restricted activities. The Services follow government-notified norms, and non-automatic cases are approved by the Board of Approvals.

Foreign direct investment into an SEZ unit continues to be governed by the Foreign Exchange Management Act, 1999, the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, and the consolidated FDI Policy read with the relevant press notes, including Press Note 3 of 2020 for investments from countries sharing a land border with India. Sector caps, entry routes, and any government-approval requirements applicable outside the SEZ framework apply equally to units within it. The current entry route and sectoral conditions should be confirmed against the FDI Policy in force at the time of investment.

• Off-Shore Banking Units (Obus):

  SEZs allow Off-shore Banking Units (OBUs) with 100% income tax exemption for 5 years, 50% for the next 5 years, and access to international finance rates.

The offshore banking function has, in practice, migrated substantially to the International Financial Services Centre established in GIFT City, Gujarat, which operates under the International Financial Services Centres Authority Act, 2019 and is regulated by the IFSCA. Investors evaluating banking, fund, or aircraft-leasing structures within a duty-free financial enclave should assess the IFSC framework alongside the traditional OBU provisions.

• Banking/ External Commercial Borrowings:

  SEZ units enjoy multiple financial benefits, including up to $500 million in annual external commercial borrowings, no time limit on bringing in export proceeds, full flexibility with export proceeds, permission for commodity hedging, exemption from interest rate surcharge on import finance, and write-off of unrealized export bills.

• Exemption From Central Sale Tax:

  Exemption from payment of Central sales tax on sales made from Domestic Tariff Area to the SEZ units in terms of section 26(1)(g) of SEZ Act, 2005 in respect of goods which are outside the purview of GST

• Requirement Under Environment (Protection) Act:

  Another major SEZ benefits in India caters to IT. IT SEZ units do not need environment clearance, but they must obtain it as per the law. Public hearing and Environmental Impact Assessment are required for SEZ development.

• Concession Under Companies Act:

  Enhanced limit of Rs. 2.4 crores per annum allowed for managerial remuneration, regional office of Registrar of Companies in SEZs and Exemption from requirement of domicile in India for 12 months prior to appointment as Director.

• Concession Under Drugs And Cosmetics Act:

  Exemption from port restriction under Drugs & Cosmetics Rules.

• Sub-Contracting:

  SEZ units may sub-contract part of production or production process through units in the Domestic Tariff Area or through other EOU/SEZ. Units, SEZ units may also sub-contract part of their production process abroad. And SEZ units may also undertake job-work from DTA unit for export.

• Labour Laws For Sez Units:

  Labor laws apply to all SEZ units, but some State Governments declare SEZs as public utilities, allowing the Development Commissioner to have Labor Commissioner powers. Public utility status has been granted in several states, and powers have been delegated in Andhra Pradesh, West Bengal, Karnataka, and Uttar Pradesh.

• Exemption From Employees’ Provident Funds Act And Esi Act:

  State Government can seek a 5-year exemption from the Employees’ Provident Funds Act for SEZs under Section 16(2). Decided case by case.

• Benefits To Domestic Supplies/Supplier To Sezs:

  Domestic Tariff Area to SEZ supplies are treated as physical exports, allowing SEZ benefits in India like duty drawback, duty exemption, CST exemption, and more. DTA suppliers can claim duty drawback with a disclaimer from the SEZ unit/Developer.

Recent Regulatory Developments: The SEZ (Amendment) Rules, 2025

The Special Economic Zones (Amendment) Rules, 2025, notified by the Department of Commerce on 3 June 2025 through Notification G.S.R. 364(E) under Section 55 of the SEZ Act, 2005, introduced a set of targeted relaxations aimed principally at semiconductor and electronic component manufacturing. The principal changes are as follows.

Reduced minimum land requirement. Rule 5 was amended so that an SEZ set up exclusively for the manufacture of semiconductors or electronic components requires a minimum contiguous land area of ten hectares, reduced from the earlier fifty hectares. The explanation to the amended rule records that electronic components for this purpose include display module sub-assemblies, camera module sub-assemblies, battery sub-assemblies, printed circuit boards, lithium-ion cells for batteries, mobile and information technology hardware components, and hearables and wearables.

Relaxation of the encumbrance-free condition. Rule 7 was amended to allow the Board of Approval to relax the requirement that SEZ land be encumbrance-free in cases where the area is mortgaged or leased to the Central Government, a State Government, or their authorised agency, for reasons to be recorded. This eases financial closure for developers who use land as security for project finance.

Net Foreign Exchange treatment. Rule 53 was amended so that, for units providing manufacturing services in the semiconductor sector, the value of goods received and supplied on a free-of-cost basis is included in Net Foreign Exchange calculations, with such value determined under the applicable customs valuation rules.

Following these amendments, the Board of Approval accorded approval to proposals from Micron Semiconductor Technology India Private Limited for a facility at Sanand, Gujarat, and from the Aequs group for an electronics components facility at Dharwad, Karnataka. These figures and the notification reference should be verified against the official gazette before publication.

Selling to the Domestic Market: Concessional Duty Window for 2026-27

Because goods moving from an SEZ into the Domestic Tariff Area are treated as imports under Section 30 of the SEZ Act, 2005, such clearances ordinarily attract full customs duty. To address underutilised manufacturing capacity affected by global trade disruptions, and in line with the Union Budget 2026-27 announcement, the Central Board of Indirect Taxes and Customs notified a conditional concessional duty regime through Notification No. 11/2026-Customs dated 31 March 2026, issued under Section 25(1) of the Customs Act, 1962.

The concession is temporary and applies to clearances made between 1 April 2026 and 31 March 2027. The principal conditions are that the SEZ unit must have commenced production on or before 31 March 2025, that the goods must have undergone value addition of at least twenty per cent over inputs, and that the aggregate value of goods cleared under the window in a financial year must not exceed thirty per cent of the highest annual Free-on-Board export value achieved in any of the three immediately preceding financial years. Duty drawback and other export SEZ benefits in India are not available on such clearances, so as to prevent a double benefit, and Free Trade Warehousing Zone units are excluded. Units availing the concession must furnish a Development Commissioner’s certificate confirming compliance and remain subject to audit under the SEZ Rules, 2006. The scope, rates, and conditions of this notification are load-bearing and should be verified against the notification text and any subsequent circulars before publication.

Ongoing Reform: SEZ 2.0 and the Amendment Bill

The broader SEZ framework has been under review for several years. The Development of Enterprise and Service Hubs (DESH) Bill was proposed in 2022 to overhaul the SEZ Act, permit production for both domestic and international markets, and move away from the net foreign exchange criterion in order to align with World Trade Organization principles. That bill did not proceed, and the Government has since indicated a preference for amending the existing SEZ Act rather than enacting new legislation, an approach commonly referred to as SEZ 2.0. Prospective investors should treat the SEZ framework as one that is actively evolving, and should confirm the position in force at the time of any decision.

Setting Up a Unit in an SEZ

The process for establishing a unit within an existing Special Economic Zone is prescribed under the SEZ Rules, 2006. The principal stages are set out below. This is a general outline and does not substitute for advice on a specific proposal.

• Secure developer consent. Identify a notified SEZ and obtain a consent or offer letter from the SEZ developer confirming the intention to lease the premises.
• Prepare the application and project report. The applicant prepares a detailed project report setting out the proposed business activity, projected exports, foreign exchange earnings, manpower, and financial projections for the first five years. Company documents such as the Memorandum and Articles of Association or the LLP agreement, promoter know-your-customer documents, the Importer Exporter Code, and a board resolution are assembled as annexures.
• File Form F. A consolidated application seeking permission to set up the unit is made to the Development Commissioner in Form F, filed online through the SEZ Online portal and submitted in physical copies with the annexures, with a copy to the developer.
• Approval by the Unit Approval Committee. The Development Commissioner places the application before the Unit Approval Committee, which considers the proposal. Where the Committee declines an application, the applicant may take the matter before the Board of Approval.
• Letter of Approval. On approval, the Development Commissioner issues a Letter of Approval specifying the items of manufacture or service activity, projected exports and Net Foreign Exchange for the first five years, and any conditions. The applicant confirms acceptance of the terms, executes a lease deed with the developer, and executes a Bond-cum-Legal Undertaking. The unit is ordinarily required to commence operations within one year, extendable in accordance with the Rules, and the Letter of Approval operates in five-year blocks that are renewable.
• Post-approval registrations and compliance. Before operations begin, the unit bonds its premises with Customs, obtains GST registration, and registers on the SEZ Online portal. On an ongoing basis, an SEZ unit must maintain positive Net Foreign Exchange assessed over each five-year block, file Annual Performance Reports, file Softex forms for software exports where applicable, maintain prescribed stock and import-export registers, and pay the applicable duty on any sales into the Domestic Tariff Area. The forms, timelines, and undertaking references above should be confirmed against the SEZ Rules, 2006 as currently in force.

Conclusion

In conclusion, despite the stringent and lengthy procedures involved in setting up a Special Economic Zone (SEZ) unit. the SEZ Act and Rules provide a comprehensive package of exemptions and SEZ benefits in India, including customs, excise, and GST concessions, income tax exemptions, relief from various cesses, encouragement of foreign direct investment, offshore banking units, favourable banking arrangements, and exemptions from central sales tax. Additionally, there are concessions under the Companies Act and Drugs and Cosmetics Act, provisions for sub-contracting, and specific labor law considerations. The SEZ framework offers a unique and advantageous environment for economic growth, trade, and investment.

That said, the framework is not static. The direct-tax holiday under Section 10AA has closed to new units, the SEZ Rules were amended in 2025 to attract semiconductor and electronics investment on relaxed land terms, a time-bound concessional duty window has been opened for domestic-market sales in 2026-27, and a wider reform of the SEZ Act remains under consideration. A business evaluating an SEZ today should therefore weigh the operational and customs advantages, which remain substantial, against a direct-tax position that has narrowed, and should take current advice on the specific SEZ benefits in India available to its proposed activity and location. Every statutory figure, deadline, and notification reference in this article should be verified by an advocate against the law in force before any decision is taken.