Draft Cabinet note on rupee payment for SEZ services floated for inter-ministerial view
The Commerce Department circulated a draft Cabinet note for inter-ministerial consultation proposing to amend the Special Economic Zones (SEZ) framework to allow SEZ-based service providers to receive payment in Indian rupees for eligible services rendered to customers in the Domestic Tariff Area (DTA).
The proposal targets a long-standing foreign-exchange requirement under which DTA customers must pay SEZ-based service providers in foreign currency, even when both parties are located in India.
Sectors flagged as most affected by the current rule include Maintenance, Repair and Overhaul (MRO), Information Technology (IT) services, and defence manufacturing/engineering firms operating out of SEZs.
The note is being circulated for inter-ministerial views before it can move toward Cabinet approval and any consequential legislative or rule-level amendment.
Special Economic Zone (SEZ) Framework and the SEZ Act, 2005
An SEZ is a designated duty-free enclave treated, for trade and tariff purposes, as territory outside India's customs area, even though it is geographically within the country. The SEZ Act, 2005 (in force from February 2006), along with the SEZ Rules, 2006, provides the statutory basis for setting up, operating, and regulating these zones, offering fiscal incentives (customs/excise exemptions, income-tax benefits under Section 10AA of the Income Tax Act) to attract export-oriented investment and generate employment.
Key Details
- Nodal ministry: Ministry of Commerce and Industry, Department of Commerce.
- SEZs are administered by a Development Commissioner for each zone, with a Board of Approval at the central level clearing new zone proposals.
- Units in an SEZ enjoy exemptions from customs duty on imports/exports, and were originally conceived primarily as export platforms, which is why transactions with the DTA (the rest of India) are treated akin to cross-border trade.
The draft Cabinet note proposes changes within this SEZ Act, 2005/SEZ Rules, 2006 architecture to ease how SEZ-based service firms transact with DTA customers, without altering the SEZ's core export-incentive structure.
Domestic Tariff Area (DTA) and the Foreign Exchange Requirement
The Domestic Tariff Area refers to the whole of India excluding SEZs, Export Oriented Units (EOUs), and similar notified zones (EHTP/STP/BTP). Because an SEZ is legally treated as "outside" India's customs territory, sales from an SEZ unit into the DTA have historically been treated on par with imports, and — for services in particular — payment has had to be settled in foreign exchange rather than rupees, even for a purely domestic transaction between two India-based entities.
Key Details
- Goods/services supplied from the DTA into an SEZ are treated as "exports" and get export benefits (e.g., zero-rating under Section 16 of the IGST Act, 2017).
- Conversely, supplies from an SEZ into the DTA are treated as "imports," attracting customs duties and, for services, the foreign-exchange payment condition now under review.
- Foreign exchange transactions in India are governed by the Foreign Exchange Management Act (FEMA), 1999, administered by the Reserve Bank of India; any relaxation allowing rupee settlement would need to align SEZ rules with FEMA's regulatory framework.
The forex-payment mandate being targeted for removal is a direct consequence of DTA-SEZ transactions being treated as cross-border trade; the reform would let SEZ-based MRO, IT, and defence firms invoice DTA clients in rupees, cutting currency-conversion costs and easing access to India's own domestic market.
Ease of Doing Business and Sectoral Impact (MRO, IT, Defence)
Maintenance, Repair and Overhaul (MRO) is a niche, capital-intensive services segment (notably in aviation) where India has sought to build a competitive domestic base; many MRO and IT service providers are set up inside SEZs to access the Act's tax benefits, but this exposes them to the forex-payment friction when serving Indian domestic customers. Removing this friction is expected to make it more attractive for such SEZ units to bid for and win domestic contracts, rather than losing them to non-SEZ competitors who can already invoice in rupees.
Key Details
- MRO is a priority sector under India's broader civil aviation and defence self-reliance push, given India's dependence on foreign MRO hubs for aircraft/engine servicing.
- SEZ-based IT/ITeS units have historically been export-oriented; the reform specifically targets their ability to also serve the domestic market competitively.
- Defence manufacturing firms located in SEZs face similar cost disadvantages when supplying components or services to India's own defence public sector undertakings or private primes.
The draft note explicitly names these three sectors as the intended beneficiaries, since removing the forex mandate would let them compete for domestic contracts without the added currency-conversion cost currently baked into DTA transactions.
- Governing statute: Special Economic Zones Act, 2005, in force since February 10, 2006; supported by SEZ Rules, 2006.
- Nodal authority: Department of Commerce, Ministry of Commerce and Industry.
- Sectors cited as affected: MRO, IT/IT-enabled services, defence manufacturing/engineering.
- Current stage: draft Cabinet note circulated for inter-ministerial consultation; Cabinet approval (and any statutory amendment) still pending.
- Underlying rule being addressed: mandatory foreign-exchange payment for SEZ-to-DTA services, arising from SEZs' treatment as customs-territory-outside-India.