Indirect Tax Laws and Practice · Special Economic Zone Scheme

Fiscal Incentives and Exemptions for SEZs

Updated 11 October 2026 · Fact-checked

Under the SEZ Act, 2005, developers and entrepreneurs get exemption from customs duty on imports and exports, excise duty on goods from the DTA, service tax, securities transaction tax (IFSC) and central sales tax. Section 7 gives exemption from taxes under the First Schedule enactments. Goods sent into the DTA are charged customs duty as on import.

Understand Fiscal Incentives and Exemptions for SEZs

A Special Economic Zone is treated as foreign territory for trade, duties and tariffs. The idea is simple: goods and services that flow into, within and out of the zone for authorised operations should not carry tax cost. That makes exports from India cheaper to produce.

The Act does this in two layers. Section 7 gives a general exemption from taxes, duties or cess under all enactments in the First Schedule. It covers goods or services exported out of, imported into, or procured from the Domestic Tariff Area (DTA) by a Unit or a Developer. It applies subject to prescribed terms, conditions and limitations. Section 26 then lists the specific exemptions, drawbacks and concessions for every Developer and entrepreneur.

The definitions matter. Export includes supplying goods or services from the DTA to a Unit or Developer, and from one Unit to another. Import includes receiving goods or services from another Unit or Developer. So a DTA supplier selling to an SEZ unit is making an export in the Act's sense. This is the base for the zero-rated treatment of supplies to SEZs under GST.

The benefits are not unconditional. Section 26(2) says the Central Government prescribes the manner, terms and conditions. Section 28 lets it prescribe how long goods or services may stay in a Unit or SEZ without payment of tax. Benefits apply for authorised operations only.

The exit is where the benefit ends. Under Section 30, goods removed from an SEZ to the DTA are chargeable to customs duties, including anti-dumping, countervailing and safeguard duties where applicable, as if imported. The rate and tariff valuation are those in force on the date of removal, or on the date of payment of duty if the removal date cannot be ascertained.

Key rules to remember

Section 7 general exemption: Goods or services exported out of, imported into, or procured from the DTA by a Unit or Developer = exempt from taxes, duties or cess under First Schedule enactments; Subject to prescribed terms, conditions and limitations.
Section 26(1)(a) customs on imports: Exemption from customs duty on goods imported into, or services provided in, an SEZ or Unit for authorised operations; Covers the Customs Act, 1962, the Customs Tariff Act, 1975 and any other law.
Section 26(1)(b) customs on exports: Exemption from customs duty on goods exported from, or services provided from, an SEZ or Unit to any place outside India; Export duty is also exempt.
Section 26(1)(c) excise on DTA goods: Exemption from excise duty on goods brought from the DTA to an SEZ or Unit for authorised operations; Under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985.
Section 26(1)(d) drawback: Drawback or other admissible benefits on goods or services brought from the DTA into an SEZ or Unit, and on services provided by service providers outside India; Linked to authorised operations.
Section 26(1)(e), (f), (g) other taxes: Exempt: service tax on services to a Developer or Unit; STT on non-resident transactions through an IFSC; CST on goods (other than newspapers) for authorised operations; These are the legacy taxes named in the Act's text.
Section 30 DTA clearance: Goods removed from SEZ to DTA = customs duties as on import, at rate and valuation on the date of removal (or date of payment if removal date is not ascertainable); Includes anti-dumping, countervailing and safeguard duties where applicable.
Section 26(2) and Section 28: Benefits follow prescribed manner and conditions; Central Government may prescribe the period goods or services may remain in a Unit or SEZ without tax; Do not say exemption is unconditional.

How to solve Fiscal Incentives and Exemptions for SEZs questions

Most questions give a transaction and ask whether tax or duty applies. Work through the flow of goods or services and the purpose.

1Identify the parties: Developer, entrepreneur or Unit, DTA supplier, foreign supplier, or a buyer in the DTA.
2Classify the movement using the Act's definitions: import into the SEZ, procurement from the DTA, export out of India, or removal to the DTA.
3Check the purpose. Exemption applies for authorised operations only.
4Match the movement to the Section 26(1) clause: (a) imports, (b) exports, (c) DTA goods, (d) drawback, (e) service tax, (f) STT, (g) CST.
5Note Section 7 as the general exemption and Section 26(2) and 28 as the limits: conditions and time period.
6For removal to the DTA, apply Section 30: customs duty as if imported, rate and valuation on the date of removal.
7State the conclusion clearly: exempt, taxable, or taxable with conditions, and give the section.

Quickest way: Direction and purpose check

When to use it: For MCQs and short case questions asking whether a duty or tax applies to an SEZ transaction.

Ask: is the goods or service moving into the SEZ, out of India, or out to the DTA?
Into the SEZ or out of India for authorised operations: exempt under Section 26 and Section 7, subject to conditions.
Out to the DTA: duty as on import under Section 30, at the rate on the removal date.
If the question says 'unconditional', suspect a trap: Section 26(2) makes benefits conditional.

Common mistakes in Fiscal Incentives and Exemptions for SEZs

Saying SEZ goods cleared to the DTA are exempt or taxed at the SEZ-entry rate.
Students remember the exemption and forget the exit.
Fix: Apply Section 30: customs duty as on import, at the rate and valuation in force on the date of removal.
Treating a DTA supply to an SEZ unit as a domestic sale.
The goods never leave India physically.
Fix: The Act defines export to include supplying goods or services from the DTA to a Unit or Developer.
Claiming exemption for any use of goods in the SEZ.
Students ignore the phrase 'authorised operations'.
Fix: Section 26 benefits are tied to authorised operations. Always check the purpose.
Calling the exemptions unconditional.
Section 26(1) reads like an absolute entitlement.
Fix: Section 26(1) is 'subject to' sub-section (2), and Section 7 is subject to prescribed terms and conditions.
Forgetting anti-dumping, countervailing and safeguard duties on DTA clearance.
Students think only basic customs duty applies.
Fix: Section 30(a) includes these duties where applicable under the Customs Tariff Act, 1975.
Missing that STT exemption covers only non-residents through an IFSC.
Students generalise to all securities transactions.
Fix: Section 26(1)(f) is limited to taxable securities transactions entered into by a non-resident through the International Financial Services Centre.

Worked examples

Example 1

Bharat Components SEZ Unit, a unit in an SEZ, imports machinery from Germany and uses it for its authorised manufacturing operations. It also exports finished parts to the USA. Is customs duty payable on the import and export?

Show the solution

Bharat Components is a Unit set up by an entrepreneur in an SEZ.
The machinery is imported into the SEZ for authorised operations. Section 26(1)(a) exempts customs duty on such goods.
The export of finished parts out of India falls under Section 26(1)(b), which exempts customs duty on goods exported from a Unit to any place outside India.
Section 7 also exempts goods imported into or exported out of the SEZ by a Unit, subject to prescribed terms, conditions and limitations.
Section 26(2) means the exemption is granted in the prescribed manner and subject to conditions.

Answer: No customs duty is payable on the import for authorised operations or on the export, provided the prescribed conditions are satisfied.

Example 2

Sunrise Textiles, an SEZ Unit, clears finished fabric to a buyer in the DTA on 10 March. Duty was paid on 18 March. The rate of customs duty on the removal date was 10% and on 18 March it was 12%. The date of removal is clearly known. Which rate applies and what is the nature of the duty?

Show the solution

Removal of goods from an SEZ to the DTA is covered by Section 30.
Section 30(a): the goods are chargeable to customs duties as leviable on such goods when imported, including anti-dumping, countervailing and safeguard duties where applicable.
Section 30(b): the rate and tariff valuation are those in force on the date of removal.
The date is ascertainable (10 March), so the date of payment is not used.
Applicable rate: 10%.

Answer: Customs duty at 10% applies, as in force on 10 March, with any applicable anti-dumping, countervailing or safeguard duty, subject to the prescribed conditions.

Exam tips

Quote Section 26(1) clause letters for specific exemptions and Section 30 for DTA clearance. Examiners reward the right section.
Use the words 'authorised operations' and 'subject to prescribed conditions' in every answer.
In case-based MCQs, first decide the direction of movement. Most options differ only on that point.
Remember the Act's definition of export and import, especially DTA to Unit as export. It links to zero-rated supply questions under GST.
Do not cite service tax, excise or CST as current taxes. Mention them only as the Act's text does.

Practice questions from Special Economic Zone Scheme

Fiscal Incentives and Exemptions for SEZs in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fiscal Incentives and Exemptions for SEZs: frequently asked questions

What exemptions does Section 26 of the SEZ Act give?

It gives developers and entrepreneurs exemption from customs duty on imports and exports, excise duty on goods from the DTA, drawback, service tax, STT for non-residents through an IFSC and CST. They apply to authorised operations and are subject to prescribed conditions.

Is a supply from the DTA to an SEZ unit an export?

Yes, under the SEZ Act's definition, supplying goods or services from the DTA to a Unit or Developer is an export. This is why such supplies get exemption treatment and are linked to zero-rated supply under GST.

What happens when SEZ goods are sold in India?

Under Section 30, goods removed to the DTA are chargeable to customs duties as if imported, including anti-dumping, countervailing and safeguard duties where applicable. The rate and valuation are those on the date of removal.

What is the difference between Section 7 and Section 26?

Section 7 is the general exemption from taxes, duties or cess under First Schedule enactments for Units and Developers. Section 26 lists the specific exemptions, drawbacks and concessions. Both depend on prescribed terms and conditions.