The Commerce Department is preparing a Cabinet note to amend the Special Economic Zones (SEZ) Act, allowing SEZ units to receive payments in Indian rupees (INR) instead of foreign exchange for services provided to customers in the Domestic Tariff Area (DTA). The proposed reform is expected to remove a long-standing regulatory hurdle and significantly expand business opportunities for sectors such as maintenance, repair and overhaul (MRO), defence manufacturing, engineering, and information technology.
The proposed amendment seeks to modify Section 2(z) of the SEZ Act by removing the requirement that services supplied by SEZ units to domestic customers must earn foreign exchange. While this condition currently applies to services, it does not apply to goods, creating what industry has described as an anomaly.
According to the Export Promotion Council for EOUs and SEZs (EPCES), the foreign exchange payment requirement has increased transaction costs and discouraged domestic companies from sourcing services from SEZ units. Under the existing framework, domestic buyers must first purchase foreign currency to make payments, after which SEZ units convert the proceeds back into Indian rupees, resulting in additional banking charges and operational complexities.
The amendment is expected to particularly benefit SEZ-based MRO facilities, engineering companies, defence manufacturers and IT service providers. For example, MRO units in MIHAN Nagpur SEZ and GMR Aero SEZ, Hyderabad, are currently unable to provide maintenance services to domestic airlines due to the foreign currency payment requirement. Similarly, L&T MBDA Missile Systems’ SEZ unit in Coimbatore cannot offer maintenance and overhaul services to the Indian Air Force, while SEZ-based IT companies face restrictions in providing software development services to public sector undertakings and government departments.
L&T MBDA Missile Systems has informed the Commerce Department that it is impractical for the Ministry of Defence to make payments in foreign currency for maintenance services sourced from domestic companies. The company noted that the existing provision limits the ability of SEZ-based defence manufacturers to support the operational requirements of the Indian Armed Forces, contrary to the objectives of the Government’s Make in India initiative.
The proposal has been discussed extensively between the Commerce Department, the Reserve Bank of India (RBI), the Finance Ministry and stakeholders from the SEZ sector. Following Cabinet approval, the amendment will require parliamentary approval before becoming law.
The proposed reform is expected to improve the competitiveness of SEZ units, reduce transaction costs, encourage greater domestic sourcing of specialised services and strengthen India’s manufacturing and defence ecosystem.
