Every few months, another multinational asks the same question: does it still make sense to set up an SEZ unit in India, now that the old income-tax holiday has quietly expired for new entrants? The honest answer is “it depends” on what you’re exporting, how you’re structured, and whether the customs and GST advantages justify the compliance overhead. This guide walks through the real commercial trade-offs behind a foreign company SEZ setup.
What an SEZ Unit Actually Offers Today
The biggest misconception foreign investors carry into this decision is that an SEZ unit still comes with a 15-year income tax holiday. It doesn’t, not for anyone setting up fresh. Under Section 10AA, the first five years were exempt from tax on exports, followed by fifty percent relief for the next five, and a further fifty percent on reinvestments for five years after that sunset under the Finance Act, 2016, with only units that began operations by March 2020 able to avail it. Anyone starting a new SEZ unit today gets zero income-tax deduction under this section.
What survives is the indirect tax and customs package duty-free import of capital goods, raw materials and consumables GST exemption on procurement, since supplies to an SEZ are zero-rated exemption from various cess levies and single-window clearance through the Development Commissioner’s office. There’s also a useful mechanism where DTA clearances from an SEZ, though treated as imports and dutiable, can qualify for conditional concessional rates up to a capped percentage of prior export turnover under recent CBIC notifications. For a business with significant capital equipment imports or heavy raw-material procurement, the customs and GST relief alone can justify the route.
The Questions a Real Feasibility Assessment Has to Answer
A proper SEZ feasibility assessment starts before anyone talks to a developer or files a Board of Approval application. The first question is whether the business is genuinely export-oriented, because SEZ units carry a Net Foreign Exchange obligation cumulative foreign exchange earnings must exceed cumulative outflow, measured over rolling five-year blocks. Miss this and the risks include penalties, clawback of duty benefits and de-notification. If the India operation is meant to primarily serve the domestic market, an SEZ structure works against it.
The second question is scale. SEZ compliance bonded premises, periodic filings, softex and export documentation, customs bonding carries a fixed cost that doesn’t shrink for small operations larger operations with meaningful import volumes get a better return on that same effort. Third, location and sector fit matter some SEZs are sector-specific (IT/ITES, pharma, gems and jewellery, multi-product) and proximity to ports or talent pools should weigh as heavily as the tax mechanics.
Finally, weigh SEZ against the alternatives. An EOU or an ordinary DTA company registered for GST refunds on exports can sometimes deliver comparable outcomes with a lighter compliance load, now that the income-tax edge of an SEZ is gone for new entrants. A serious feasibility assessment has to include this comparison rather than assume SEZ is automatically superior.
Setting Up an SEZ Unit: A Practical Walkthrough
For a foreign company that has done the feasibility work, the process follows a standard sequence that varies by state and sector select a developer and zone, negotiate a long-term lease (often twenty years or more for land-based units under SEZ Rules) and prepare a project report showing the projected NFE position over the initial five-year block. That report goes to the Unit Approval Committee, chaired by the zone’s Development Commissioner, covering proposed activity, investment, employment and export plans. Once approved, the company receives a Letter of Permission the operating licence, typically renewed or converted to a permanent LOP once operations commence plus an Importer-Exporter Code, SEZ-specific GST registration and customs bonding of the premises before duty-free imports can begin.
One layer worth flagging early the entity operating the unit is usually a locally incorporated Indian subsidiary rather than a branch office, since SEZ activities and FDI-linked approvals are cleaner through a wholly owned subsidiary. FDI up to 100 percent is permitted for most manufacturing activities under the automatic route, though sector-specific caps still apply and should be checked before incorporation.
Service Exporters and India’s Other Export Structures
Not every foreign company is manufacturing anything physical and an SEZ unit for service exporters IT, BPO/ITES, engineering design, financial back-office works somewhat differently, even under the same legal framework. Service SEZ units still need positive NFE but their compliance leans more on softex filings and remittance documentation than customs bonding, since there’s little to import duty-free beyond IT equipment and office infrastructure.
It’s worth comparing India’s export unit structures as a whole rather than defaulting to SEZ because it’s the most talked-about scheme. STPI registration, which once offered a comparable tax holiday, lost that benefit in 2011 and now functions mainly as a softex-filing mechanism. EOUs sit in between, with their income-tax benefit expired since 2012, leaving customs and limited GST relief similar to SEZs minus the campus-style infrastructure. For a services business, the practical difference increasingly comes down to infrastructure, ease of hiring and whether clients actually require SEZ-grade compliance since on tax, all three routes now sit roughly level for new entrants.
Why a Specialist Advisor Is Worth the Cost
Given how much of this hinges on details that shift by state, sector and notification cycle DTA sales caps, FDI conditions, zone-specific infrastructure, the fine print of NFE calculation a genuinely experienced SEZ advisor earns their fee quickly. Domestic consultancies vary widely in how current their guidance is the sunset clause alone has tripped up advisors still quoting the old 15-year tax holiday well after it stopped applying. A good advisor runs the feasibility numbers honestly, including the scenario where an SEZ doesn’t make sense.
Conclusion
An SEZ unit in India is no longer the automatic choice it was a decade ago. The income-tax holiday that once made the decision easy is gone for new entrants but the customs exemptions, GST treatment, and single-window support remain valuable for businesses with real import volumes and a credible export orientation. Treat this as a commercial decision, not a tax play run the NFE numbers, weigh the fixed compliance cost against actual scale, compare SEZ honestly against EOU or plain DTA alternatives, and get advice from someone current on the latest notifications. For an export-heavy manufacturer or a large services operation with substantial capital investment, an SEZ unit can still be the right call. For a smaller or domestically-tilted operation, it often isn’t and knowing that before signing a twenty-year lease is worth more than any incentive on offer.
FREQUENTLY ASKED QUESTIONS
No. The Section 10AA tax holiday was sunset under the Finance Act, 2016 and only applied to units that began operations by March 2020. Any SEZ unit set up today gets no income-tax deduction under that provision.
Duty-free import of capital goods, raw materials and consumables for authorised operations; GST exemption on procurement since supplies to an SEZ are zero-rated exemption from various cess levies and single-window clearance through the Development Commissioner’s office.
Cumulative foreign exchange earnings from exports must exceed cumulative foreign exchange outflow, measured over rolling five-year blocks. Failing to meet this can trigger penalties, clawback of duty benefits and de-notification of the unit.
Almost always a locally incorporated Indian subsidiary rather than a branch office, since most SEZ activities and FDI-linked approvals are cleaner through a wholly owned subsidiary structure. FDI up to 100 percent is permitted for most manufacturing activities under the automatic route, subject to sector-specific caps.
Not automatically Now that the income-tax edge of an SEZ is gone for new entrants, an EOU or an ordinary DTA exporter claiming GST refunds can deliver comparable outcomes with a lighter compliance load, depending on scale and import volume.
Not always. Service SEZ units still need positive NFE, but their compliance leans more on softex filings and remittance documentation than customs bonding. Whether SEZ-grade compliance is worth it depends on physical infrastructure needs, hiring plans and client requirements rather than any remaining tax arbitrage.