SEZ 2.0 aims to revive export zones with easier domestic market access, simplified regulations, WTO-compliant incentives and stronger integration into global supply chains

The Indian government is preparing the most significant reform of the country's Special Economic Zone (SEZ) framework since the enactment of the SEZ Act, 2005, as it seeks to transform export-focused industrial enclaves into globally competitive manufacturing and investment hubs.

The proposed reforms, informally referred to as SEZ 2.0, are designed to align India's industrial ecosystem with changing global trade dynamics, evolving supply chains and the country's ambition of becoming a leading manufacturing destination. Policymakers are expected to introduce a more flexible framework that encourages investment, improves ease of doing business and enables SEZ units to participate more actively in both domestic and international markets.

The overhaul comes at a crucial time when multinational corporations are diversifying manufacturing bases under the China+1 strategy, creating a significant opportunity for India to attract fresh investments across electronics, pharmaceuticals, engineering, renewable energy and other strategic sectors.

Why India Is Revamping the SEZ Framework

When the Special Economic Zone Act came into force in 2005, India was primarily focused on accelerating exports, attracting foreign direct investment (FDI) and creating employment through dedicated industrial zones.

The policy offered several incentives including:

• Tax exemptions

• Duty-free imports

• Single-window approvals

• Better infrastructure

• Simplified customs procedures

The objective was to reduce bureaucratic hurdles and create globally competitive manufacturing and export ecosystems.

The policy proved successful in its initial years, with SEZs emerging as major contributors to India's exports, particularly in information technology, pharmaceuticals, engineering products, gems and jewellery and electronics.

However, two decades later, India's economic priorities have evolved significantly, requiring a fresh policy framework that addresses modern manufacturing challenges.

SEZs Played a Vital Role in India's Export Story

Since their introduction, SEZs have become one of the pillars of India's export economy.

The programme has helped:

• Increase merchandise and services exports.

• Attract billions of dollars in private investments.

• Generate direct and indirect employment.

• Develop modern industrial infrastructure.

• Create sector-specific manufacturing clusters.

Large domestic and multinational companies established manufacturing and service facilities inside SEZs due to easier regulatory processes and attractive fiscal benefits.

Despite these achievements, policymakers believe the framework has not fully delivered on its original objective of creating large-scale globally competitive manufacturing ecosystems.

Why the Original Model Lost Its Competitive Edge

Over the years, several structural issues gradually reduced the attractiveness of India's SEZ framework.

Tax Incentives Were Gradually Withdrawn

One of the biggest attractions of SEZs was their generous tax incentive package.

Developers and manufacturing units initially enjoyed:

• Income-tax holidays.

• Minimum Alternate Tax (MAT) exemptions.

• Dividend Distribution Tax (DDT) exemptions.

• Customs duty exemptions.

However, most of these fiscal benefits were either phased out or significantly reduced over time.

As these incentives disappeared, companies increasingly evaluated investment decisions based on operational efficiency rather than tax savings.

WTO Rules Limited Export-Based Incentives

Global trade rules also changed significantly during the past decade.

Several export-linked incentives came under scrutiny from the World Trade Organization (WTO), making it difficult for India to continue offering subsidies directly linked to export performance.

This forced policymakers to rethink the incentive structure and explore WTO-compliant alternatives that promote competitiveness without violating international trade commitments.

Operational Bottlenecks Reduced Efficiency

Industry experts also highlighted several practical issues affecting SEZ operations.

These included:

• Delays in approvals.

• Complex compliance procedures.

• Multiple regulatory authorities.

• Coordination challenges between central and state governments.

• Underutilization of several approved SEZs.

Many investors argued that administrative complexity offset many of the benefits originally offered by the policy.

Domestic Market Restrictions Became a Major Concern

One of the most frequently cited concerns among manufacturers has been limited flexibility in serving India's rapidly growing domestic market.

Under the existing framework:

• Goods sold from SEZs into the Domestic Tariff Area (DTA) attract customs duties.

• Meanwhile, imported products entering India under Free Trade Agreements often face lower duties.

This creates an uneven competitive environment for manufacturers operating within SEZs.

Industry bodies have therefore consistently demanded easier domestic market access under the proposed reforms.

MOOWR Emerged as a Strong Alternative

During the past few years, manufacturers increasingly shifted towards the Manufacture and Other Operations in Warehouse Regulations (MOOWR) scheme.

MOOWR offers several operational advantages:

• Duty deferment on imported raw materials and machinery.

• No positive Net Foreign Exchange (NFE) obligations.

• Freedom to establish manufacturing facilities anywhere.

• Greater flexibility to serve domestic as well as export markets.

• Lower compliance burden.

For many companies, especially those catering to both domestic and international demand, MOOWR became a more attractive manufacturing framework than conventional SEZs.

However, industry experts note that MOOWR primarily provides customs-related benefits, whereas SEZs continue to offer integrated infrastructure and dedicated industrial ecosystems.

India's Manufacturing Priorities Have Changed

Unlike 2005, India's industrial policy today is no longer driven solely by exports.

The government is simultaneously focusing on:

• Manufacturing expansion.

• Global supply chain integration.

• Domestic value addition.

• Technology transfer.

• High-quality employment.

• Export competitiveness.

• Sustainable industrial development.

Programmes such as:

• Make in India

• Production Linked Incentive (PLI) Scheme

• PM Gati Shakti

• National Logistics Policy

• Industrial Corridors

have fundamentally changed the country's manufacturing strategy.

SEZ 2.0 is expected to complement these initiatives rather than function as a standalone export promotion mechanism.

What Will Change Under SEZ 2.0?

Although the final policy is yet to be announced, discussions indicate several significant reforms.

Greater Domestic Market Access

Manufacturers are likely to receive greater flexibility in selling products within India.

The Union Budget 2026-27 has already taken the first step by allowing eligible manufacturing units to sell goods domestically at concessional customs duty rates linked to export performance.

This addresses one of the industry's longest-standing demands.

Simplified Compliance Framework

The government is expected to introduce:

• Digital approvals.

• Paperless documentation.

• Faster clearances.

• Lower compliance costs.

• Single-window regulatory mechanisms.

These measures aim to improve India's Ease of Doing Business and reduce project implementation timelines.

Integration With Global Supply Chains

Future SEZs are expected to function as integrated manufacturing ecosystems rather than isolated export parks.

The reforms could encourage:

• Contract manufacturing.

• Global supplier partnerships.

• Better logistics.

• Port connectivity.

• Participation in international value chains.

This would make Indian manufacturers more competitive globally.

Focus on Non-Fiscal Incentives

Instead of relying primarily on tax exemptions, policymakers are expected to emphasize:

• Infrastructure quality.

• Regulatory certainty.

• Faster approvals.

• Skilled workforce availability.

• Innovation support.

• Research and development.

Experts believe these structural improvements will have a more sustainable impact on investment decisions.

ESG and Sustainability to Play Bigger Role

Global buyers increasingly prioritize suppliers that meet stringent Environmental, Social and Governance (ESG) standards.

Future SEZ incentives may therefore encourage:

• Green manufacturing.

• Renewable energy adoption.

• Carbon reduction initiatives.

• Better labour standards.

• Workplace safety.

• Sustainable production practices.

These measures could help Indian exporters improve competitiveness in developed markets such as the US and European Union.

Which Industries Could Benefit Most?

The proposed reforms are expected to create new opportunities across several sectors.

Potential beneficiaries include:

• Electronics manufacturing.

• Semiconductor ecosystem.

• Pharmaceuticals.

• Medical devices.

• Engineering goods.

• Auto components.

• Chemicals.

• Textile exports.

• Renewable energy equipment.

• Defence manufacturing.

Industrial park developers, logistics companies, warehousing operators and infrastructure firms could also benefit from increased investment activity.

Industry Expectations From SEZ 2.0

Business associations have broadly welcomed the government's reform initiative.

Industry leaders are seeking:

• Stable policy framework.

• Long-term tax certainty.

• Easier domestic sales.

• Reduced compliance burden.

• Better Centre-State coordination.

• Faster environmental and operational approvals.

• Improved logistics infrastructure.

Experts believe these reforms are essential for making India globally competitive in manufacturing.

Can SEZ 2.0 Compete With Global Manufacturing Hubs?

Countries such as Vietnam, Indonesia, Thailand, Malaysia and the United Arab Emirates have aggressively expanded their industrial zones by offering streamlined regulations, robust infrastructure and investor-friendly policies.

To remain competitive, India must offer more than fiscal incentives.

The success of SEZ 2.0 will depend on:

• Policy stability.

• Efficient governance.

• Infrastructure quality.

• Skilled workforce.

• Supply chain integration.

• Predictable regulations.

If implemented effectively, the reforms could significantly strengthen India's attractiveness as an alternative global manufacturing destination.

What Investors Should Watch

Investors should closely monitor:

• Final SEZ 2.0 policy announcement.

• Legislative amendments to the SEZ Act.

• New incentive structures.

• Industrial park development.

• Manufacturing investment announcements.

• Export-oriented sectors.

• Global companies expanding production in India.

Companies operating in industrial infrastructure, logistics, export manufacturing and engineering could emerge as key beneficiaries.