Made in India, but taxed like an import: Industry pushes for SEZ duty relief

As industry sharpens its wishlist ahead of the Union Budget 2026, a key demand gaining traction is the easing of customs duties on goods sold by Special Economic Zone (SEZ) units into the domestic market, a move companies argue is essential to keep SEZs relevant amid India’s expanding free trade agreement (FTA) landscape.

Under current rules, while domestic manufacturers can supply raw materials and inputs to SEZ units without restrictions, finished or semi-finished goods sold by SEZs into the domestic tariff area attract full import duties. Industry bodies say this creates a competitive imbalance at a time when India is pursuing aggressive manufacturing and export-led growth under initiatives such as Make in India.

Speaking to CNBC-TV18, Anurag Sehgal, Managing Director at Price Waterhouse & Co LLP, said the industry’s ask is limited and aligned with the government’s stated policy objectives. According to him, SEZ units should be required to pay customs duty only on the portion of inputs that were imported duty-free, rather than on the entire value of goods cleared into the domestic market.

Sehgal said the demand needs to be viewed in the context of India’s evolving trade and manufacturing ecosystem. With multiple FTAs being negotiated and signed, companies are re-evaluating supply chains and manufacturing locations. In this environment, SEZs, he argued, should be allowed to realise their full potential not just as export enclaves but as competitive manufacturing hubs that also support domestic industry.

He added that this approach was envisaged earlier under the proposed DESH Bill, which sought to replace the SEZ Act but has remained stalled. While the Bill included both procedural and fiscal reforms, Sehgal noted that the government has already taken steps towards regulatory easing by amending SEZ rules, including relaxing land requirements for priority sectors such as semiconductors and electronics. Fiscal easing, he said, would complete that reform arc even without a new law.

However, former Central Board of Indirect Taxes and Customs (CBIC) chairman Najib Shah pushed back strongly against the industry’s demand, cautioning against diluting the original purpose of SEZs.

Shah said SEZs were created as specialised export-oriented zones designed to overcome India’s domestic infrastructure, logistics and regulatory constraints. These zones, he noted, already enjoy significant advantages, including duty-free imports, easier compliance norms and superior infrastructure, benefits that are not available to manufacturers operating in the domestic tariff area.

He argued that free trade agreements and SEZs serve different policy objectives. While FTAs focus on tariff reduction and market access, SEZs are meant to enable competitive exports by providing a frictionless manufacturing environment. Allowing SEZ units to sell into the domestic market at lower duty rates, Shah said, would distort tariff parity and disadvantage domestic manufacturers who do not enjoy similar benefits.

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Shah also pointed out that SEZs have not underperformed. He cited export numbers of around $170 billion in the previous year, suggesting that the zones continue to deliver on their core mandate. In his view, SEZs can complement FTAs by producing competitive export goods rather than seeking preferential access to the domestic market.

The debate highlights a deeper policy question confronting the government ahead of Budget 2026: whether SEZs should evolve beyond their export-first design to support India’s broader manufacturing ambitions, or whether maintaining tariff parity and the original export focus remains critical to protecting domestic industry.

With Budget discussions intensifying, the government will have to balance industry’s call for manufacturing flexibility against concerns over revenue impact and competitive fairness. Whether it chooses targeted duty tweaks, further procedural reforms, or maintains the status quo, the decision is likely to shape the future role of SEZs in India’s trade and industrial strategy.

Watch accompanying video for entire discussion.