Experts seek safeguards as new SEZ-DTA rule raises concerns over MSME impact

A policy think tank has cautioned that the Centre's new rule allowing Special Economic Zone (SEZ) units to sell more goods in the domestic market at concessional customs duty could hurt micro, small and medium enterprises (MSMEs) unless adequate safeguards are put in place.

Releasing a white paper on Wednesday, New Delhi-based Think Change Forum (TCF) urged the government to introduce a negative list of products that should be excluded from the concessional Domestic Tariff Area (DTA) sales framework. It argued that unrestricted domestic access for SEZ units could create an uneven playing field for local manufacturers that do not enjoy similar tax and compliance benefits.

The recommendation comes after the government, through a temporary framework effective from April 1, 2026 to March 31, 2027, allowed eligible SEZ manufacturing units to sell goods worth up to 30% of their highest annual FOB export value from the previous three financial years in the domestic market, subject to conditions including minimum value addition.

According to TCF, concessional SEZ sales could significantly affect domestic industry. Its analysis estimates that every ₹1,000 crore worth of concessional SEZ goods entering concentrated industrial clusters could displace nearly ₹420 crore of MSME market share.

The think tank said sectors such as liquor, tobacco, luxury goods and other high-risk products should be placed on a negative list to minimise risks of tax arbitrage, smuggling, undervaluation and customs leakage.

"SEZs were established to promote exports and foreign exchange earnings, not to become duty-advantaged suppliers in the domestic market," the report said, adding that the one-year relaxation should remain temporary and should not evolve into a permanent domestic market access route.

Former Central Board of Indirect Taxes and Customs (CBIC) chairman Najib Shah said the government's decision was understandable given global export uncertainties but acknowledged that it could affect domestic industry. He said any long-term policy should be carefully calibrated while preserving the SEZ ecosystem.

Experts participating in the discussion also recommended product-level disclosure of DTA clearances, real-time customs-GST invoice matching, scrutiny of related-party transactions and stronger post-clearance audits to prevent misuse of the scheme.

Rajat Mohan, Managing Partner at AMRG Global, described the relaxation as a "double-edged sword", saying it could support stressed SEZ units but also create enforcement challenges in sectors with high duty differentials. He backed a clearly defined negative list to prevent misuse.

Economist Charan Singh argued that SEZs, which have received substantial fiscal incentives over the years, should continue focusing on exports rather than competing with MSMEs operating under higher cost structures. He said supporting inefficient units at the expense of domestic manufacturers could weaken India's industrial base.

The white paper also recommended linking SEZ incentives more closely with measurable outcomes such as net foreign exchange earnings, domestic value addition, technology development, research and development, employment generation and verified export performance, while strengthening customs surveillance and data integration.