Understanding the Special Economic Zone (SEZ) Scheme in India

India’s export economy received a significant boost in 2000 when the government introduced a policy designed to create world-class infrastructure and a stable fiscal environment for businesses focused on international trade. This policy framework-the Special Economic Zone (SEZ) scheme-has since transformed into one of the country’s most successful trade promotion initiatives, contributing billions of dollars to exports annually and employing millions of workers. For businesses involved in food processing, manufacturing, or service industries, understanding how SEZs operate is essential for leveraging the competitive advantages they offer.

What is a Special Economic Zone? 🔗

A Special Economic Zone is a designated duty-free enclave treated as territory outside India’s customs jurisdiction for the purposes of authorized operations. Unlike regular industrial areas, SEZs operate under more liberal economic regulations designed to attract investment, promote exports, and generate employment. The fundamental principle behind SEZs is to provide businesses with a competitive environment free from the bureaucratic hurdles and tax burdens that typically affect domestic operations.

The concept evolved from Export Processing Zones (EPZs), with Asia’s first EPZ established in 1965 at Kandla, Gujarat. However, EPZs faced challenges including regulatory complexities, inadequate infrastructure, and fiscal instability. The SEZ policy of 2000 and subsequent Special Economic Zones Act, 2005 addressed these shortcomings by creating a comprehensive legal framework with attractive incentives and streamlined procedures.

The foreign territory concept 🔗

The most distinctive feature of the SEZ scheme is that SEZ areas are considered foreign territory for trade operations, duties, and tariffs. This legal fiction has profound implications for how transactions between SEZs and the rest of India-known as the Domestic Tariff Area (DTA)-are treated.

DTA to SEZ: treated as exports 🔗

When goods or services move from the DTA into an SEZ, the transaction is treated as deemed exports. This means DTA suppliers can avail benefits typically available for actual exports, including duty drawback and other export incentives. Under the GST regime, supplies to SEZs are zero-rated under the IGST Act, 2017, meaning they are not taxed. Suppliers can either pay IGST and claim refunds later or furnish a Letter of Undertaking (LUT) to supply without payment of tax.

SEZ to DTA: treated as imports 🔗

Conversely, when goods move from an SEZ into the DTA, they are treated as imports into India and subject to applicable duties. The person receiving supplies in the DTA must pay customs duties and other import duties on such goods. This mechanism prevents duty-free goods manufactured in SEZs from entering the domestic market without appropriate taxation, maintaining a level playing field with DTA manufacturers.

Key benefits for SEZ units 🔗

The SEZ scheme offers multiple incentives designed to reduce operational costs and promote export-oriented activities. These benefits make SEZs attractive destinations for both domestic and foreign investors.

Duty exemptions 🔗

SEZ units enjoy duty-free import and domestic procurement of goods for development, operation, and maintenance. This includes raw materials, capital goods, machinery, and components required for production. No import license is required for bringing goods into the SEZ, significantly reducing administrative burden and procurement costs.

Income tax benefits 🔗

Under Section 10AA of the Income Tax Act, SEZ units receive 100% income tax exemption on export income for the first five years. This is followed by 50% exemption for the next five years, and 50% of ploughed-back export profit for an additional five years. However, it’s important to note that the sunset clause for new units became effective from April 1, 2020, meaning units established after this date may not avail these benefits.

GST and other exemptions 🔗

Supplies to SEZs are zero-rated under the IGST Act, 2017, which means goods and services can be procured without GST liability. Additionally, SEZ units benefit from exemption from various state-level taxes and levies as determined by respective state governments.

Simplified procedures 🔗

One of the most significant advantages is the single window clearance mechanism for both central and state-level approvals. SEZ units also enjoy freedom from routine customs inspections of export and import cargo, enabling faster movement of goods. The units only need to achieve positive net foreign exchange, calculated cumulatively over five years from production commencement.

Types of Special Economic Zones 🔗

SEZs in India are classified based on their focus areas and land requirements. Understanding these categories helps businesses identify the most suitable zone for their operations.

Multi-product SEZs 🔗

These large zones accommodate multiple business sectors and require a minimum of 1000 hectares of land. Examples include the Kandla SEZ in Gujarat and the MIHAN SEZ in Nagpur, Maharashtra. They offer integrated infrastructure for diverse manufacturing and service activities.

Sector-specific SEZs 🔗

These zones focus on particular industries such as pharmaceuticals, textiles, engineering, or food processing. The minimum land requirement is 50 hectares, though relaxations exist for certain sectors. For instance, IT/ITES, biotech, and health services SEZs have no minimum land requirement-only minimum built-up area specifications apply.

Free Trade and Warehousing Zones 🔗

FTWZs are specifically designed for trading, warehousing, and logistics operations. They require a minimum area of 40 hectares and facilitate storage and distribution of goods for both export and domestic consumption.

IT/ITES SEZs 🔗

These zones cater to information technology and IT-enabled services sectors. Given their lower infrastructure requirements, they have the most relaxed land norms-focusing instead on minimum built-up area ranging from 25,000 to 100,000 square meters depending on the city category.

Governance and administration 🔗

The SEZ ecosystem operates under a structured administrative framework that ensures smooth functioning while maintaining regulatory oversight.

Board of Approval 🔗

The Board of Approval (BoA) is the highest decision-making body for SEZs, responsible for reviewing and sanctioning proposals for new zones and major policy decisions. All applications for establishing SEZs must be submitted to the BoA through the concerned state government.

Development Commissioner 🔗

Each SEZ or group of SEZs has a Development Commissioner who oversees operations, compliance, and dispute resolution. The DC also heads the Unit Approval Committee, which grants permissions for setting up units within the zone.

Operational requirements 🔗

Units within SEZs must fulfill certain obligations, including achieving positive net foreign exchange earnings over five years. While domestic sales are permitted, they attract full customs duties and must comply with prevailing import policies.

Current status and economic impact 🔗

As of early 2025, India has 276 operational SEZs employing over 3.19 million people. The majority are concentrated in five states-Tamil Nadu, Telangana, Karnataka, Andhra Pradesh, and Maharashtra-which together host approximately 64% of all operational zones.

The contribution of SEZs to India’s export economy has been substantial. According to IBEF, SEZs accounted for 38% of India’s total exports in FY24, with exports growing at a 10% compound annual growth rate between FY18 and FY24. This share represents a sixfold increase from just 6% in FY06, demonstrating the scheme’s success in promoting export-oriented activities.

Recent developments and future outlook 🔗

The government continues to refine SEZ policies to address emerging economic priorities. Recent amendments in June 2025 reduced minimum land requirements for semiconductor and electronic component SEZs from 50 hectares to 10 hectares, signaling focus on high-tech manufacturing.

Additionally, these specialized SEZ units can now sell products in the domestic market (subject to applicable duties), marking a departure from the traditional export-only model. The proposed Development of Enterprise and Service Hubs (DESH) Bill aims to further modernize the framework by allowing zones to serve both export and domestic markets more flexibly.

Considerations for food industry businesses 🔗

For food processing and related industries, SEZs offer compelling advantages. Sector-specific food processing SEZs require only 10 hectares of land, making them accessible for focused investments. Units can benefit from duty-free import of processing equipment, packaging materials, and ingredients while enjoying simplified export documentation.

However, businesses must carefully evaluate compliance requirements, including food safety standards, quality certifications, and positive net foreign exchange obligations. The choice between operating within an SEZ versus the DTA depends on factors such as export orientation, raw material sourcing patterns, and target markets.

What do you think? Given the evolving policy landscape, how might the proposed DESH framework change the attractiveness of SEZs for food processing businesses? What factors would you prioritize when deciding whether to establish operations within an SEZ or the domestic tariff area?

References

1. https://sezindia.gov.in/FAQ
2. https://www.india-briefing.com/news/guide-indias-special-economic-zones-9162.html/
3. https://www.eximguru.com/exim/indian-customs/customs-manual/special-economic-zone-scheme.aspx
4. https://cleartax.in/s/sez-eway-bill-gst-applicability
5. https://lookuptax.com/docs/explainers/SEZ-in-India
6. https://sezindia.gov.in/facilities-and-incentives
7. https://byjus.com/free-ias-prep/special-economic-zone/
8. https://www.ibef.org/blogs/special-economic-zones-in-india-catalysts-for-economic-growth-and-global-competitiveness