India Special Economic Zones (SEZ): Tax Benefits, Setup & Compliance Guide 2025
What is an SEZ?
A Special Economic Zone (SEZ) is a geographically defined area within India that operates under a distinct economic regulatory framework. SEZs are governed by the Special Economic Zones Act, 2005 and SEZ Rules, 2006, administered by DPIIT. They are designed to create world-class infrastructure and offer incentives to attract foreign and domestic investment, especially for export-oriented businesses.
Types of SEZs in India
- Multi-product SEZ: Open to any manufacturing or service sector
- Sector-specific SEZ: For a defined sector — IT/ITES, gems & jewellery, pharma, textiles, etc.
- Free Trade and Warehousing Zone (FTWZ): For trading, warehousing, and logistics without manufacturing
- Port-based SEZ: Integrated with a major port for ease of import/export
India has over 380 notified SEZs as of 2025, with major hubs in Maharashtra (SEEPZ, Navi Mumbai), Andhra Pradesh, Tamil Nadu, Karnataka, Gujarat, and Telangana.
Tax and Duty Benefits for SEZ Units
Income Tax Exemptions (Section 10AA)
- 100% exemption on export profits for the first 5 years
- 50% exemption for the next 5 years
- 50% exemption on reinvested profits for the next 5 years (via Internal Business Expansion Pool account)
Customs and GST Benefits
- Zero customs duty on import of capital goods, raw materials, and components for authorised operations
- Zero CGST/IGST on procurement of goods and services from Domestic Tariff Area (DTA) for authorised operations
- No foreign exchange controls on receipts and payments in foreign currency
Other Benefits
- Single window clearance for all approvals via the Development Commissioner's office
- Exemption from state taxes in most SEZ-notified states (stamp duty, electricity duty)
- Labour law flexibilities in some states for extended working hours
Net Foreign Exchange (NFE) Requirement
SEZ units must be net foreign exchange positive over a 5-year block — total foreign exchange earned from exports must exceed foreign exchange spent on imports. This is evaluated by the Development Commissioner and is mandatory for retaining SEZ benefits.
Setting Up an SEZ Unit: Step-by-Step
- Choose the right SEZ: Match your sector to the SEZ type; check available space with the Development Commissioner
- File Letter of Approval (LoA) application: Submit project report, investment details, projected exports, employment creation, and company documents to the Development Commissioner
- Unit Approval Committee (UAC) approval: Comprising DGFT, Customs, EPCES, state government, and SEZ developer representatives — typically granted within 45 days
- Build or fit-out the unit within the SEZ boundary — customs officials seal and bond the premises
- Obtain commencement certificate from the Development Commissioner and begin operations
Ongoing SEZ Compliance Obligations
- Annual Performance Review: Submit export performance vs. projections to the Development Commissioner
- NFE Calculation: Submitted once every 5 years
- Bond-cum-Legal Undertaking (BLUT): Executed in favour of the President of India for all duty-free imports
- Quarterly progress reports: Procurement, sales, and employment details
- GST Compliance: Supply to DTA is treated as a notional import (full GST applicable); services exported from SEZ are zero-rated
SEZ vs. STPI: Which Is Right for You?
| Parameter | SEZ | STPI |
|---|---|---|
| Eligible Sectors | Multi / Sector-specific | IT/ITES only |
| Income Tax Benefit | Section 10AA (limited post-2020) | None (Section 10A expired) |
| Customs Duty on Imports | Exempt | Exempt on hardware |
| Location Flexibility | Must be within SEZ boundary | Any location in India |
| Compliance Burden | Higher (DC, Customs, NFE) | Lower |
Conclusion
SEZs remain attractive for large export-oriented manufacturers and IT companies seeking customs duty exemptions and regulatory simplicity through single-window clearance. However, a detailed cost-benefit analysis weighing the compliance burden against duty savings is essential before committing. Statura's global entry team advises on SEZ feasibility, LoA applications, and ongoing Development Commissioner compliance.