Special Economic Zones in India: Key Benefits and Legal Considerations

Special Economic Zones (“SEZs”) have become a major tool for the Indian government making India an international hub for manufacturing and services industry. SEZs were introduced in India with an intent to boost consumer-based manufacturing and services in India at an international level. The aim is to boost foreign investment by creating a friendly business environment with a host of tax, regulatory and compliance related incentives. This article will be helpful for the businesses who wants to understand the benefits available upon setting up of business in an SEZ in India and the legal landscape governing the same. 

Introduction 

A special economic zone is a specific geographical area with India to which a separate set of trade laws, custom duties and tax tariffs apply. The idea is to provide certain tax, customs and regulatory incentives to the businesses willing to establish their businesses within a particular SEZ. SEZs are regulated under the Special Economic Zones Act, 2005 read with the Special Economic Zones Rules, 2006. Establishment of SEZs in India has proven to attract foreign investment within various sectors in India such as IT/ITES, Manufacturing, Textiles, Electronics and Pharmaceuticals. 

This blog is a part of our Company Incorporation in India blogpost.

Benefits provided under the SEZ Act, 2005 

As per the SEZ Act, 2005, every developer and entrepreneur shall be entitled to the following exemptions: 

1. 1. Exemption of Custom Duty on import: exemption from any duty of customs on goods imported into, or services provided in an SEZ unit to carry on authorized operations by the developer or entrepreneur. 
   2. Exemption of Custom Duty on Export: exemption from any duty on customs on goods exported from or services provided from an SEZ unit to any place outside India.  
   3. Exemption from excise duty: exemption from any duty of excise on goods brought from domestic tariff area to an SEZ unit to carry on the authorized operations by the developer or entrepreneur.   
   4. Exemption from GST: exemption from GST applicable on availing any service or procuring any goods for business operations within the SEZ unit.  
   5. Exemption from Cess: A certain percentage of cess is payable to the Government in India on the goods which are regulated under different statutes such as the Agricultural Produce Cess Act, Coffee Act etc. However, the relevant developer or entrepreneur is exempted from the payment of such cess on the specified goods if the business operations are carried out from an SEZ. 
   6. Single window clearance: Any person who intends to set up a unit for carrying on any authorized operations in an SEZ has to submit a proposal to the Development Commissioner. The Approval Committee shall subsequently have the right to either accept or reject the application. Additionally, as per the applicable rules, the relevant person has to fill and submit a single application form for obtaining all the applicable licenses and permissions from the authority. This simplified procedure helps in ease of doing business through SEZ. 

Benefits available under other applicable laws 

SEZ unit holders are provided with other benefits from time to time by the Government of India. Some noteworthy benefits which are applicable to SEZ unit holders have been enumerated below: 

1. 1. Off-Shore Banking Units: Interested stakeholders are allowed to set up offshore banking units in an SEZ with an exemption on income tax up to 100%. 
   2. Flexibility in compliance of labor laws: With an intent to provide ease of doing business, certain SEZ in India allow flexibility in terms of compliance with the labor laws which are applicable in India. This relaxation has proved to be monumental for various industry players in setting up business in an SEZ in India. 
   3. 100% Foreign Direct Investment: Hassle free up to 100% foreign investment is possible in SEZs in India in most of the sectors subject to compliance with the requirements as laid by the Reserve Bank of India from time to time. 

Relevant legal considerations for SEZ Unit holders 

The following are the key legal considerations which shall be relevant for the businesses intending to establish their unit in a SEZ: 

Approval and Licensing: While single window clearance for approval certainly adds to the ease of doing business, the stakeholders must bear in mind all the required licenses to operate in an SEZ and in India in a legally compliant manner. In this view, it is recommended that an expert who is well versed with the requirements is consulted by the businesses to ensure full legal compliance and avoidance of regulatory penalties. This activity is more important for the businesses who are engaged in regulated sectors such as pharmaceuticals, insurance etc. 

Compliance and reporting: SEZ unit holders are required to file annual returns with the relevant authority on the production, exports, employment and stocks (whichever is applicable). Additionally, adherence to foreign exchange regulations as laid down by the Reserve Bank of India is also required to be monitored. 

DTA Sales: Sales from SEZs to Domestic Tariff Area (DTA) are treated as imports and may attract custom duty and Integrated GST depending on the nature of import.  

Land use and transfer of land: A unitholder in an SEZ can utilize the allotted land as per the authorized usage at the time of application. In the event the unitholder wants to change the authorized usage or transfer the land to a third party, approval from the Approval Committee as established under the SEZ Act, 2005 shall be required.  

SEZs have played a pivotal role in shaping India’s export-oriented industrial strategy. By offering a unique blend of tax incentives, regulatory relaxations, and infrastructure support, SEZs have become magnets for investment—particularly in sectors like IT/ITES, pharmaceuticals, electronics, and manufacturing. 

However, navigating the SEZ landscape requires more than just an understanding of the benefits. Businesses must also stay on top of legal obligations, sector-specific compliance requirements, and evolving regulatory frameworks. This is especially important with India now considering a policy shift through the proposed DESH Bill, which could bring about significant changes in how these zones function—expanding their scope, introducing new compliance norms, and potentially opening them up to domestic-market-facing businesses. 

For entrepreneurs, investors, and legal professionals, SEZs represent both an opportunity and a responsibility. While the incentives are attractive, the onus lies on businesses to maintain compliance with: 

• • Tax filings and export performance norms 

• • Licensing conditions and sectoral caps 

• • Reporting obligations under foreign exchange regulations, GST, and customs law 

As India continues to reposition itself as a global manufacturing and services powerhouse, SEZs are likely to remain a cornerstone of that ambition. Whether you’re a startup seeking tax efficiency, an MNC exploring market entry, or a compliance officer managing regulatory risk—understanding the full spectrum of SEZ operations is not just useful, but essential. 

In conclusion, while the promise of SEZs is strong, success lies in strategic planning, proactive compliance, and staying aligned with evolving legal norms. 

Have questions about setting up in an SEZ Unit or navigating the legal requirements? Drop a comment or reach out—we’d love to help