FTA impact, import substitution, rupee payments at SEZ reforms panel meet June 30

A government-constituted committee reviewing India's Special Economic Zone (SEZ) policy is scheduled to hold a stakeholder consultation meeting on June 30, 2...

What Happened

A government-constituted committee reviewing India's Special Economic Zone (SEZ) policy is scheduled to hold a stakeholder consultation meeting on June 30, 2026, focusing on three reform themes: the competitive impact of Free Trade Agreements (FTAs) on SEZ exporters, expanding import substitution within SEZ units, and enabling rupee-denominated payments for services within SEZs.
The 17-member panel — constituted in March 2026 — has been mandated to modernise the SEZ Act 2005, align SEZ policy with evolving global trade dynamics, and address structural bottlenecks including under-utilised land, regulatory overlaps, and WTO-related subsidy concerns.
A key reform under examination is the provision already notified under the Union Budget 2026–27, allowing eligible SEZ manufacturing units to sell up to 30% of their highest annual export value (over the preceding three years) to the Domestic Tariff Area (DTA) at concessional customs duty rates.
The panel will also examine whether SEZ units — whose competitiveness has been eroded by FTAs that give duty-free access to competing imports — should be allowed expanded DTA access as a compensatory mechanism.
Allowing rupee-denominated payments for services within SEZs is a specific ask from the IT/ITES sector, which currently must route foreign exchange for intra-SEZ transactions, adding compliance complexity.

Static Topic Bridges

Special Economic Zones (SEZs): Legal Framework and Policy Architecture

A Special Economic Zone is a geographically defined area within which goods, services, and investment operate under rules more liberal than those prevailing in the rest of the country (the "Domestic Tariff Area" or DTA). In India, SEZs are governed by the Special Economic Zones Act, 2005, which came into force on February 10, 2006, and the SEZ Rules 2006.

India's SEZ history begins with Asia's first Export Processing Zone (EPZ), established at Kandla, Gujarat in 1965.
The SEZ Policy was announced in April 2000 to overcome limitations of EPZs (multiplicity of controls, poor infrastructure, unstable fiscal regime).
The SEZ Act 2005 received Presidential assent on June 23, 2005; came into force February 10, 2006.
The Act provides for: duty-free import/procurement of goods; no import licensing requirements; single-window clearance through the Board of Approval (BoA); fiscal incentives for developers and units; simplified procedures.
SEZ units are treated as "foreign territory" for trade and tariff purposes — goods moving from the DTA into an SEZ are treated as exports, and from an SEZ into the DTA as imports (subject to applicable duties).
Mandatory requirement: SEZ units must demonstrate Positive Net Foreign Exchange Earnings (PNFE) cumulatively over five years from the start of production.
Board of Approval (BoA), chaired by the DPIIT Secretary, is the apex body for SEZ governance.
As of February 28, 2026: 368 notified SEZs; 280 operational SEZs in India.
SEZ exports: ₹11.70 lakh crore (through December 2025-26), up 32.02% year-on-year.
SEZs account for approximately 38% of India's total goods exports (up from 6% in FY06).
Employment in SEZs: over 31.73 lakh persons (as of December 2025).

Connection to this news: The June 30 panel meeting is examining structural reforms to the SEZ Act 2005 framework — including DTA sales access, FTA impact mitigation, and service payment rules — to revitalise zones that have shown signs of stress since 2012.

FTA Impact on SEZ Competitiveness: The Tariff Erosion Problem

A key structural challenge facing Indian SEZs is "tariff preference erosion." SEZ units compete with non-SEZ importers who are buying from countries with which India has FTAs — meaning those imports enter the DTA at preferential (reduced) duty rates. This narrows the cost advantage that SEZ units enjoy from duty-free procurement, making it harder for SEZ units to price competitively when selling into the DTA.

India's active FTAs: ASEAN (2010), Japan (2011), South Korea (CEPA, 2009), UAE (CEPA, 2022), Australia (ECTA, 2022), UK (FTA, in force July 2026), EU (FTA framework, January 2026).
Under each FTA, goods from partner countries enter the DTA at reduced duties — compressing the margin that SEZ units earn from duty-free inputs when competing domestically.
The EU activated its Carbon Border Adjustment Mechanism (CBAM) on January 1, 2026 — imposing an effective carbon tax on imports — which has already reduced India's steel exports to the EU by ~24%, compounding SEZ stress.
The proposed concessional DTA sales provision (Budget 2026-27) allows SEZ units to sell to the DTA at reduced (not zero) customs duty — up to 30% of the highest annual FOB export value in any preceding 3 years — to improve capacity utilisation.
This provision is expected to benefit approximately 1,200 SEZ manufacturing units.
The panel must balance this with WTO rules: SEZ export subsidies that benefit domestic sales may be challengeable under the WTO Agreement on Subsidies and Countervailing Measures (ASCM), particularly since India has graduated above the per capita income threshold that previously exempted it.

Connection to this news: The June 30 meeting will examine whether the concessional DTA sales provision is adequately calibrated and what additional relief SEZ units need given FTA-driven competitive pressure.

Rupee Payments in SEZs and the FEMA Framework

SEZs are treated as foreign territory under India's Foreign Exchange Management Act (FEMA), 1999. Transactions between an SEZ unit and a domestic entity (DTA) are treated as cross-border transactions requiring foreign exchange. This creates compliance friction for IT/ITES companies in SEZs that serve domestic clients — they must route payments through foreign currency accounts even for transactions within India.

FEMA, 1999 (replacing FERA, 1973) governs foreign exchange transactions in India; the Reserve Bank of India (RBI) administers FEMA regulations.
IT/ITES companies in SEZs export services and earn foreign exchange, but increasingly also service Indian clients. Under current rules, payment for services rendered to DTA entities must be in foreign exchange (or its equivalent).
The SEZ reforms panel is examining whether to allow rupee-denominated payment for intra-India (DTA-to-SEZ) service transactions — a change that would require amendment to FEMA's SEZ provisions.
Separately, India's push for rupee trade settlement globally (bilateral agreements with Russia, Sri Lanka, UAE, and others) aligns with the broader policy of internationalising the rupee — allowing INR payments within SEZs fits this direction.
The RBI's framework for Rupee Vostro accounts (for cross-border rupee settlements, circular dated July 11, 2022) is the closest parallel regulatory instrument.

Connection to this news: The June 30 stakeholder meeting will hear from IT/ITES industry representatives advocating for rupee payment rules within SEZs — a change that would simplify compliance for the sector without reducing foreign exchange earnings from actual export clients.

Key Facts & Data

SEZ Act 2005: assent June 23, 2005; in force February 10, 2006
Asia's first EPZ: Kandla, Gujarat, 1965
Notified SEZs as of February 28, 2026: 368
Operational SEZs: 280
SEZ exports (through December 2025-26): ₹11.70 lakh crore (up 32.02% YoY)
SEZ share of India's total exports: ~38% (vs. 6% in FY06)
SEZ employment: over 31.73 lakh persons (as of December 2025)
Concessional DTA sales cap: 30% of highest annual FOB export value in preceding 3 years
Units expected to benefit from DTA sales provision: ~1,200 SEZ manufacturing units
SEZ reforms panel: 17 members, constituted March 2026; June 30 stakeholder meeting
Key reform areas: FTA impact mitigation, concessional DTA sales, rupee service payments, import substitution
WTO ASCM: governs export subsidy rules; India's export subsidy exemption status changed after 2018 (income threshold crossed)
FEMA, 1999: governs foreign exchange; SEZ transactions treated as cross-border under FEMA
India's active FTAs: ASEAN, Japan, South Korea, UAE, Australia, UK (in force July 2026), EU (framework January 2026)