India mulls major SEZ reforms to boost domestic integration and global competitiveness

India is considering a significant overhaul of its Special Economic Zone (SEZ) framework to enable a freer flow of goods and services between SEZs and the domestic market, according to a report. The move aims to make SEZs more flexible, competitive, and better aligned with India’s evolving manufacturing and export strategy amid global trade uncertainties.

It is reported that senior officials from the Prime Minister’s Office (PMO), the commerce ministry, and the revenue department are in discussions to update the two-decade-old SEZ policy, first introduced in 2000. The review focuses on removing structural bottlenecks that have limited the zones’ ability to scale and deliver on their original promise of becoming export powerhouses.

Among the key proposals under consideration are rationalising customs duties on SEZ-to-domestic sales, allowing service transactions in Indian rupees, and permitting domestic manufacturers to send goods to SEZs for contract work.

The reforms may require amendments to the SEZ Act of 2006, which currently governs the regime. In FY25, exports from 6,300 units operating across 276 SEZs reached ₹14.57 lakh crore — up 7.4% year-on-year. However, domestic sales from SEZs continue to attract full customs duties, a policy industry representatives say hampers competitiveness and prevents SEZs from achieving economies of scale.

Experts note that the government’s vision for SEZs is evolving from export-only enclaves to “development hubs” that serve both domestic and international markets. Industry associations have long argued that India’s SEZs lag behind counterparts in countries with Free Trade Agreements (FTAs) with India.

Stakeholders have also urged the government to align SEZ-to-DTA duty rates with those applicable under FTAs and to take cues from the MOOWR (Manufacturing and Other Operations in Warehouse Regulations) scheme, which allows duty exemptions on inputs for domestic sales.

Further, industry experts have proposed allowing SEZ units to take on subcontracting work from domestic firms during export slowdowns and to receive payments in rupees for local services.