Changes to SEZ rules may not only boost chip, electronic manufacturing but also investor interest

In what could give a boost to both special economic zones as well as to high tech manufacturing such as semiconductors and electronic components in the country, the Centre has unveiled fresh measures that would enable investors to set up shop easily in these demarcated zones for the sectors.

The Ministry of Commerce and Industry has recently notified changes to the Special Economic Zones Rules, 2006, that have reduced contiguous land area requirement to 10 hectares, permitted use of encumbered land for setting up SEZs and liberalised the method of computing Net Foreign Exchange (NFE).

The relaxations will be available for manufacturing of semiconductors and electronic components including “display module sub-assembly, camera module sub-assembly, battery sub-assembly, various types of other module sub-assemblies, printed circuit board, li-ion cells for batteries, mobile and information technology hardware components, hearables and wearables,” as per the notification.

The move is in sync with the government’s focus on pitching India as a hub for manufacturing of semiconductors and high tech electronics. As of now, India already has six semiconductor units, with five in advanced stage of constructions.

However, in recent years, SEZs seem to have lost their sheen after the tax exemption came to an end.

Mayank Arora, Director- Regulatory, Nangia Andersen India noted that the recent amendments to SEZ Rules, 2006 are aimed at improving the attractiveness of SEZs, especially for semiconductor and Electronic Component manufacturing plants. “However, the key selling point for SEZs was the direct tax holiday offered to both the developers and Units in an SEZ that has been withdrawn after the sunset clause kicked in,” he said

He pointed out that with respect to Semiconductor fabrication and Outsourced Semiconductor Assembly and Test (OSAT)/ Assembly Testing Marking and Packaging (ATMP) plants, it is pertinent to note that of the six approved units, most have commenced construction work in Domestic Tariff Area (DTA) locations. 

“One of the biggest stumbling blocks for SEZs in India, other than the expiry of direct tax holiday, has been the inability of SEZs to move their products from SEZ to DTA without payment of applicable duties,” he said.

According to him, the movement of goods from SEZ to DTA is even more relevant for electronic component manufacturers, since most of these units supply to Electronics Manufacturing Services (EMS) units located within India. “By imposing duties on such movements, SEZ Units are treated at par with a foreign manufacturer even though they create investment and employment opportunities within India.  Providing SEZ Units the flexibility to export and sell to domestic markets would truly unlock the potential of SEZs for the electronics industry in India,” he pointed out.

Ritesh Kumar Adatiya, Director, NPV & Associates LLP, also pointed out that the market has given a cold shoulder to SEZs initiatives in last few years. “To rejuvenate interest, it needed boosters like ease of exit and entry, operational clarity, rationalised compliances. which this circular will try to achieve. However, this is too little, too late. Industry may want further boosters, especially on tax benefits and operational facilities,” he said.

SEZs have proved to be a key part of the government’s strategy to boost domestic manufacturing and exports by offering several incentives to developers and manufacturers setting up and working out of these zones. A key highlight in the past was income tax exemptions, which have now wound up. The Centre offered income tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. The sunset clause for developers was effective from April 1, 2017. Similarly, a 100% income tax exemption was also offered on export income for SEZ units under Section 10AA for first the first five years, 50% for the next five years thereafter and 50% of the ploughed back export profit for next five years. The sunset clause for units was effective from April 1, 2020.

As of March 31, 2025, 416 SEZ had been formally approved, of which 368 have been notified and 276 are operational. A total investment of Rs 7.07 lakh crore has been made by March 31, 2025 and exports worth $172.28 billion were made from SEZs in FY25.