Special Economic Zones in India

The concept of Special Economic Zones (SEZs) has undergone major shifts in India. What started out as an attempt to promote exports and reduce trade barriers, has evolved into an advanced economic tool over time. 

SEZs are now an essential component of India's initiatives to increase its visibility internationally, drawing in both capital and technology. SEZs are still essential to the nation's economic growth strategy, even though their main objective has changed with time. This development hasn't been without difficulties, though, as India keeps improving and modifying its strategy to maximise these areas.

History and Evolution of SEZs in India

India’s first steps into the SEZ model began earlier than many realise. In fact, back in 1965, the country established Asia’s first Export Processing Zone (EPZ) in Kandla, Gujarat. Over the following decades, other zones came up such as the SEEPZ in Mumbai in 1973 and the Noida EPZ in 1984. These early zones were mostly focused on encouraging manufacturing and supporting the growth of exports.

Still, the legal and structural framework remained loose until much later. It was in April 2000 that a clear SEZ policy was introduced, offering long-term visibility for investors. Hence, SEZ Act was passed in 2005, which came into effect the next year. One of the major improvements under this law was a simplified approval process. Investors gained more clarity, and companies were given a legal structure that was more predictable.

By March 2021, approximately 425 SEZs had received approval. Of these, only around 265 were active and running. As of 2023, the number of operational zones had grown to nearly 272.

Key Features of Indian SEZs

1. Inside India’s legal framework, a SEZ is treated somewhat like a separate economic entity. This special treatment means that goods and services brought into SEZs are not subject to the same customs duties as the rest of the country. This exemption alone makes them appealing for businesses with an export focus.
2. Companies within these zones are allowed to carry out manufacturing, trading, warehousing, and consulting activities. However, there’s one key rule that within five years, they must generate a net positive in foreign exchange earnings.
3. Tax exemptions form another important feature. Under Section 10AA of the Income Tax Act, SEZ units are granted income tax holidays. Developers, too, benefit through Section 80-IAB. On top of this, there are exemptions from central excise, customs duties, and other indirect taxes. 
4. Fast-track approvals through a single-window mechanism also save companies considerable time and hassle.
5. A Development Commissioner is responsible for each SEZ. This official ensures that all regulations, especially those from the SEZ Act, are followed. While these zones are special, they aren’t exempt from all Indian laws unless specified.

Types of SEZs in India

In India, SEZs come in different formats, depending on their size and focus:

• Multi-sector SEZs: These are usually large, frequently covering over 1,000 hectares, and are made to support a variety of industries in one location.
• Sector-specific SEZs: These kinds of SEZs, on the other hand, are typically smaller, with a starting area of 100 hectares, and focus on a single industry, such as textiles or electronics.
• Free Trade and Warehousing Zones (FTWZs): At least 40 hectares of space are needed as they are primarily concerned with logistics.
• On the smaller side, SEZs designed for sectors like IT services or biotech can be established on just 10 hectares, which makes them more specialised and condensed.

Major SEZs in India

Some states have emerged as central players in the SEZ story:

• Maharashtra has Navi Mumbai SEZ and the SEEPZ in Mumbai. 
• Gujarat has some zones in Kandla, Mundra, and Surat. 
• Tamil Nadu has the Madras Export Processing Zone and Mahindra World City. 
• Andhra Pradesh has the Tirupati Bio SEZ and the Visakhapatnam SEZ. 
• Karnataka’s Bangalore SEZ plays a huge role in software exports.
• Telangana and Kerala host important hubs like HITEC City and Infopark. 
• The Noida SEZ in Uttar Pradesh and the Falta and Salt Lake zones in West Bengal round out a nationwide footprint.

Kandla SEZ alone has reached exports worth nearly $38 billion, which shows just how large these contributions can get.

Benefits of SEZs

SEZs offer a combination of policy support and infrastructure advantages. For one, companies are allowed to import raw materials and capital goods duty-free, cutting down major upfront costs.

Then there are the income tax benefits. Units enjoy tax holidays on export profits, and developers receive similar advantages. The GST system also treats SEZ supplies as zero-rated, allowing businesses to claim input tax credits without the usual burden of double taxation.

Infrastructurally, SEZs are well-planned. They come equipped with reliable electricity, roads, telecom lines, and waste systems. This readiness plays a big role in attracting investment, both local and foreign.

The impact is visible in numbers. Between 2006 and the end of 2023, investment in India’s SEZs surged from approximately ₹4,035 crore to more than ₹6.92 lakh crore, exports climbed to US $163.69 billion in FY 2023-24, and employment within these zones grew to around 3.07 million workers.

Challenges Faced by SEZs in India

Still, not everything has gone smoothly. A major concern has been the underutilisation of space. Estimates suggest nearly 10 crore square feet of built-up area across India’s SEZs remain vacant.

Land acquisition delays and overlaps between SEZ and other policies, like those concerning food processing parks, have also created confusion. Moreover, since SEZs are not officially treated as infrastructure, developers find it hard to secure long-term, low-cost funding.

A further issue is the domestic market barrier. Goods produced in SEZs, when sold inside India, face full customs duties as if they were imports. That erodes any price advantage.

Changes in tax rules have added to the uncertainty. The introduction of MAT and the phasing out of tax holidays have made some investors cautious. Additionally, about 70% of SEZs still focus on IT and related services, leaving only a small share for manufacturing. This imbalance could undermine broader industrial goals.

Future Outlook of SEZs in India

Recognising these concerns, the government is now rethinking the SEZ model. In the 2022-23 budget, plans were announced to replace the current SEZ Act. The new proposal envisions more flexible industrial enclaves, with stronger roles for state governments and a “plug-and-play” model.

These suggestions mostly follow the recommendations of the Baba Kalyani Committee, which was set up in 2018. Among other things, the committee proposed renaming SEZs as Economic and Employment Enclaves and granting them infrastructure status to improve funding options. There were also suggestions to allow more domestic sales and to focus more on sectors with high employment potential.

Another goal is to bring SEZs to smaller cities. Moving into Tier-2 and Tier-3 regions could help spread the economic gains more evenly across the country. With these new ideas, the hope is to give SEZs the adaptability they need to remain relevant in a fast-changing global market.

Special Economic Zones have played a clear part in shaping India’s economic rise, especially in boosting exports, attracting investment, and creating jobs. Still, challenges remain, and without reforms, their full potential might stay out of reach. The proposed changes, if implemented thoughtfully, could bring fresh momentum to the SEZ story. In the coming years, their continued success may well depend on how effectively India balances growth, regulation, and flexibility.