Cabinet note in the works to end forex rule for SEZ services
A Cabinet note is being prepared to amend provisions of the Special Economic Zones (SEZ) Act, 2005 that currently require SEZ-based service units to receive payment only in foreign exchange, even when the client is located within India.
The proposed change would allow SEZ units engaged in services such as Maintenance, Repair and Overhaul (MRO), defence, engineering, and information technology to receive payment in Indian Rupees (INR) from domestic clients in the Domestic Tariff Area (DTA).
The reform is aimed at reducing compliance costs and currency-conversion friction for service providers whose end-clients are largely domestic, such as aircraft and defence-equipment MRO units.
The proposal requires Union Cabinet approval before the amendment can be moved for legislative or rule-level notification.
Special Economic Zones (SEZ) Framework
An SEZ is a designated duty-free enclave, treated as foreign territory for the purposes of trade operations, duties, and tariffs, established under the SEZ Act, 2005 (in force from 10 February 2006) and the SEZ Rules, 2006. SEZ units may be set up for manufacturing goods or rendering services, and the framework aims to promote exports, investment, and employment through fiscal and procedural incentives.
Key Details
- Every SEZ unit must be a positive Net Foreign Exchange (NFE) earner, computed cumulatively over a 5-year period from the commencement of production, without any fixed minimum export or value-addition requirement.
- Sales from an SEZ into the Domestic Tariff Area (DTA) are treated akin to imports and attract applicable customs duty and import policy conditions.
- Under the existing framework, service exports from SEZ units — including those consumed by clients within India — are required to be realised in foreign currency, unlike goods sold to the DTA which are transacted in rupees against duty payment.
The proposed Cabinet note targets exactly this asymmetry — it would let SEZ service units invoice and receive INR for services rendered to domestic (DTA) clients, aligning the services regime more closely with the goods regime and easing operations for sectors like MRO and defence that primarily serve the domestic market.
Foreign Exchange Management Act (FEMA), 1999
FEMA governs all foreign exchange transactions in India and is administered by the Reserve Bank of India (RBI) in consultation with the Central Government. It replaced the more restrictive Foreign Exchange Regulation Act (FERA), 1973, shifting from a "prohibited unless permitted" criminal-law approach to a "permitted unless restricted" civil-law approach, in line with post-1991 liberalisation.
Key Details
- FEMA came into force on 1 June 2000.
- Current account transactions are generally free unless specifically restricted, while capital account transactions are prohibited unless specifically permitted.
- SEZ foreign-exchange realisation requirements operate alongside FEMA's broader current-account rules, meaning any SEZ Act amendment on payment currency must also be consistent with FEMA's regulatory architecture.
Any relaxation of the SEZ forex-realisation mandate for services effectively carves out a rupee-settlement channel within the broader FEMA-RBI framework governing cross-border and SEZ-related payments.
MRO and Defence Manufacturing as Strategic Sectors
The Maintenance, Repair and Overhaul (MRO) industry — servicing aircraft, engines, and defence equipment — has been a policy focus area to reduce India's dependence on overseas repair facilities and retain revenue domestically. Government support has included a reduction in GST on MRO services (from 18% to 5%, effective April 2020) to make Indian MRO hubs more competitive.
Key Details
- Defence and aerospace MRO units are often located in SEZs to access duty benefits on imported spares and components.
- The push for domestic MRO and defence-services growth aligns with the broader Atmanirbhar Bharat (self-reliance) push in defence manufacturing.
Because MRO and defence-services clients are typically domestic (airlines, the armed forces, PSUs), the mandatory foreign-currency billing rule has been a practical hurdle; the proposed rupee-payment option is expected to directly benefit these sectors.
- SEZ Act, 2005 came into force on 10 February 2006.
- Net Foreign Exchange earning is assessed cumulatively over a 5-year window from the start of production under SEZ Rules, 2006.
- GST on MRO services was cut from 18% to 5% effective April 2020 to support the domestic MRO industry.
- FEMA, 1999 came into effect on 1 June 2000, replacing FERA, 1973.