SEZ Units Secure Duty Exemption Under Domestic Supply Promotion Policy

(INDIA) — The Central Board of Indirect Taxes and Customs issued Notification No. 11/2026-Customs dated March 31, 2026, granting one-time customs duty exemptions for eligible Special Economic Zone manufacturing units selling specified goods to the Domestic Tariff Area under a Domestic Supply Promotion Policy aimed at easing pressure from global trade disruptions.

The relief takes effect April 1, 2026, through March 31, 2027, and operates through an exemption under Section 25 of the Customs Act, 1962. Finance Minister Nirmala Sitharaman announced the measure in the Union Budget 2026-27.

Eligible SEZ Units that manufacture notified goods for sale into the domestic market will receive lower customs duties for that one-year window. The measure applies to supplies from Special Economic Zone manufacturing units into the DTA, rather than to all units operating in special zones.

India rolled out the policy as SEZ capacity has faced underutilization tied to US tariffs, West Asia geopolitical tensions, including Iran conflict, and weakness in global demand. The government framed the step as a way to preserve the export focus of SEZs while also increasing domestic supply.

That balance sits at the center of the new arrangement. SEZs were created with an export orientation, but the latest Duty Exemption gives some manufacturing units a limited route to serve the domestic market on concessional terms.

The policy also places clear limits on who can use the concession and how much they can sell. Those conditions appear designed to prevent the scheme from turning into a broad opening for domestic sales by zone-based units.

Under the new rates, notified goods that otherwise face 20% duty will attract 12.5%. Goods in the 20-30% band will attract 15%, while those in the 30-40% band will attract 20%.

The notification also provides lower rates in other cases, including 7.5% → 6.5% and 10% → 9%. Relief under the measure extends to Agriculture Infrastructure and Development Cess for certain goods.

For manufacturers in SEZ Units, the rate cuts may change the economics of supplying the Indian market during the policy period. For domestic buyers, the move forms part of the government’s push to improve local availability of some goods while external demand remains weak.

Access to the concession is limited to units that had started production on or before March 31, 2025. That cutoff excludes newer units from the one-time benefit.

Goods sold under the policy must also show minimum 20% value addition over inputs. That condition draws a line between manufacturing activity and simple trading.

CBIC also capped domestic sales at 30% of the highest annual FOB export value from the prior three financial years. That formula ties DTA access to an exporter’s earlier overseas performance rather than allowing unrestricted local sales.

Several categories fall outside the scheme. The notification excludes free trade warehousing zones, imports without manufacturing, and select sensitive sectors, a design meant to protect DTA units from direct pressure.

Those exclusions reinforce the government’s effort to keep the measure narrow. Only manufacturing-led activity qualifies, and some sectors remain shielded even as the policy opens a temporary domestic channel for others.

The processing mechanism will run through CBIC’s automated faceless assessment system. Units using the concession will also remain subject to audits under the SEZ Rules, 2006.

That administrative structure gives customs officials a centralized route for assessment while keeping the established SEZ compliance framework in place. The arrangement links the Duty Exemption to existing customs and SEZ governance systems rather than creating a separate approval model.

The one-time character of the measure is also central to how the government has presented it. The concession starts on April 1, 2026 and ends on March 31, 2027, giving eligible units a defined period to plan domestic clearances under the revised rates.

For SEZ manufacturers with idle capacity, the policy offers a temporary route to shift some output into the Indian market without abandoning export-linked operations. For the government, it is a targeted response to strains that have hit export-oriented production through tariffs, regional tensions and softer demand abroad.

The design suggests that domestic supply support will not come without guardrails. Production had to begin by March 31, 2025, value addition must reach 20%, and local sales cannot exceed 30% of the highest annual FOB export value from the prior three financial years.

Those conditions narrow the pool of beneficiaries to established producers with a manufacturing base and an export record. They also support the stated goal of helping SEZ Units use spare capacity while avoiding a wider shift away from the export purpose of the zones.

The concessional slabs mark one of the clearest operational features of the policy. A reduction from 20% to 12.5%, from 20-30% to 15%, and from 30-40% to 20% can materially alter landed duty costs for notified goods entering the domestic market from qualifying SEZ units.

The additional cuts, such as 7.5% → 6.5% and 10% → 9%, show that the notification does not rely on a single rate formula across all covered products. By also extending relief to Agriculture Infrastructure and Development Cess for certain goods, the measure reaches beyond the basic customs duty component in some cases.

The reference to specified goods means the concession is not universal across all items produced in special zones. Only notified goods can move under the reduced duty structure, and only if the supplying unit meets the policy’s production, value addition and sales-limit tests.

That matters for companies assessing whether the Domestic Supply Promotion Policy changes near-term production decisions. Eligibility depends not only on being in an SEZ, but on being a manufacturing unit, producing the right goods, meeting the minimum value threshold and staying within the domestic sales cap.

The exclusion of imports without manufacturing addresses a long-running dividing line in tax and trade policy between processing and mere movement of goods. By denying the benefit to simple imports, the government has limited the concession to activity that adds value inside the zone.

The bar on free trade warehousing zones follows the same logic. Warehousing operations do not meet the policy’s focus on manufacturing-led supply, and the new framework keeps those activities outside the one-time exemption.

Select sensitive sectors are also excluded. That carve-out aligns with the government’s stated aim of protecting DTA units even as it offers temporary relief to some export-oriented manufacturers.

In practice, the policy creates a narrow domestic release valve for established exporters based in special zones. It does so at a time when global trade disruptions have left some capacity underused, yet it preserves the broader structure that treats SEZs as export-focused production hubs.

The choice of faceless assessment may also shape how quickly claims are processed during the one-year window. At the same time, the continuing role of SEZ Rules, 2006 audits keeps the policy tied to post-clearance scrutiny and compliance checks already familiar to zone-based businesses.

For companies, the message is twofold: the government is willing to lower duties temporarily to support domestic supply, but it wants that support confined to manufacturers that already have an operating base and an export track record. For the wider market, the measure shows how India is using customs policy to respond to external shocks without fully redrawing the boundaries between export zones and the domestic tariff regime.

The notification leaves SEZs with their export focus intact while giving eligible manufacturers a one-year chance to sell more at home under lower duties, a calibrated response to global disruptions that have left capacity waiting for demand.