INTRODUCTION.
The Special Economic Zones Rules, 2006 ("ExistingRules") were amended through the Special Economic Zones (Amendment) Rules, 2025 (the "Amendment Rules") on June 03, 2025, to strengthen domestic chip production and raise foreign investments to support the semiconductor sector. The Amendment Rules supplement the Government's policy on providing incentives to the semiconductor sector by easing requirements for companies to set up units in Special Economic Zones ("SEZs").
BACKGROUND.
SEZs are geographically delineated duty-free regions for trade operations and tariffs that were introduced with the objectives of creating an integrated infrastructure for export production, attracting foreign investment, and creating employment opportunities. Developers and co-developers build zones within an SEZ, and companies set up units in those zones to conduct their businesses with a favourable tax regime.
KEY AMENDMENTS.
Rule 5 (Minimum Area Requirements): Under the Amendment Rules, the minimum contiguous land area required for setting up an SEZ exclusively dealing with manufacturing semiconductors and/or display module sub-assemblies, camera module sub-assemblies, battery sub-assemblies and various types of other modules, printed circuit boards, li-ion cells for batteries, mobile and information technology, hardware components, hearables and wearables, has been reduced from 50 hectares to 10 hectares. The reduction ensures that developers and co-developers do not get entangled in complex structures of land acquisitions.
Rule 7 (Streamlined Approvals): Under the Existing Rules, a developer had to furnish a certificate issued by the respective State Government (or an authorized agency of the State Government) to (i) the Board of Approval and (ii) the Central Government, stating the following: (a) developer has legal possession of the area they intended to set the SEZ up in; (b) the developer has irrevocable rights to develop the area as an SEZ; and (c) the area is free from all encumbrances. Under the Amendment Rules, the Board of Approval may relax the condition of an area being free from encumbrances if the area is mortgaged or leased to the Central Government or State Government (or its authorised agency).
Rule 18 (Charging Supplies): Under the Existing Rules, overseas entities receiving services or manufacturing services from SEZ units, had to mandatorily supply capital goods and raw materials (including consumables, sub-assemblies, components, semi-finished goods) to such SEZ units free of cost. Post the Amendment Rules, it is no longer mandatory for these goods and materials to be provided by the overseas entities free of cost.
Rule 18 (Sale to Domestic Tariff Area): Under the Existing Rules, SEZ units set up for providing services or manufacturing services to overseas entities had to export the finished goods or transfer the finished goods to the customs bonded warehouse maintained by the respective overseas entity. Under the Amendment Rules, these units can now also supply their finished goods to the domestic tariff area upon payment of applicable duties or transfer them to the free trade and warehousing zone unit maintained by the respective overseas entity within the same SEZ or a different SEZ, as per the instructions of such overseas entity.
Rule 53 (Net Foreign Exchange Earnings): Under the Amendment Rules, the value of goods received, and value of goods supplied on a free of cost basis will be included in the net foreign exchange calculation ("NFE") for units providing manufacturing services in the semiconductor sector. Further, the NFE value is to be determined in accordance with the Customs Valuation Rules.
CONCLUSION.
The Amendment Rules provide the abovementioned relaxations for SEZ units in the semi-conductor space. Since the amendment, the authorities have approved two SEZs which have availed the benefit of the relaxations. Considering SEZ units in the manufacturing sector can now supply finished goods to the Domestic Tariff Area as well, it is likely to strengthen procurement capabilities for Indian companies within the Domestic Tariff Area.
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