Local producers, MSMEs vulnerable as relaxed SEZ rules threaten influx of low-cost goods: Report

New Delhi: A temporary relaxation of restrictions on Special Economic Zones (SEZs) to access the domestic market may lead to an influx of lower-cost goods, potentially creating policy vulnerabilities for local producers, particularly MSMEs, according to a report.

"SEZ units already benefit from duty-free inputs, simplified compliance and other fiscal advantages.

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"If such units are allowed concessional access to domestic markets on an automatic or blanket basis, they could introduce lower-cost goods into sectors where Indian manufacturers, particularly MSMEs, operate with higher input duties, GST working-capital costs, borrowing costs and compliance burdens," according to the report released by Think Change Forum.

Under the temporary framework applicable from April 1, 2026, to March 31, 2027, eligible SEZ units can sell into the domestic market up to 30 percent of their highest annual free on board export value from the preceding three financial years, subject to various conditions, including minimum value addition.

The report titled 'SEZs at the Crossroads: Rethinking India’s Special Economic Zone Framework' also flagged a major enforcement concern.

"With customs policing and audit systems already stretched, allowing India's 276 operational SEZs to divert up to 30 per cent of output into the domestic market could create dry-port-like clearance gateways without adequate oversight. This is especially risky for categories already vulnerable to smuggling, tax arbitrage, misclassification and diversion," it said.

The government should identify vulnerable product categories and issue an absolute negative list covering sin goods, liquor, beer, spirits, tobacco products, high-value luxury items and other high-risk goods, it said, adding that such a negative list would prevent any misinterpretation and misuse of the policy framework.

Every Rs 1,000 crore worth of concessional SEZ goods entering concentrated domestic industrial clusters could potentially displace approximately Rs 420 crore of MSME market share, the report said.

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Besides, there is a structural risk: if the DTA window becomes a regular market-access route, SEZs could gradually shift from export-oriented enclaves into duty-advantaged domestic supply platforms, weakening local manufacturers and distorting the level playing field, it added.

The relaxation should remain strictly limited to its one-year window and be discontinued thereafter unless a transparent review establishes that it has not harmed domestic production or weakened export discipline.

The report proposed seven policy guardrails before further expansion of the SEZ framework: technology-led cargo surveillance and customs-GST data integration; performance bonds linked to duty savings; keeping concessional DTA access strictly time-bound; and full duty parity in sensitive sectors.

It also suggested mandatory domestic industry linkages for new manufacturing SEZs; an independent SEZ audit mechanism; and a Value Chain Depth Score linking incentives to domestic content, R&D, technology, employment and export performance as guardrails.

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