Overview: The Government is considering a change that could make it easier for Special Economic Zone (SEZ) units to provide services to customers in India. A draft Cabinet Note circulated by the Commerce and Industry Ministry proposes removing the requirement for such services supplied to the Domestic Tariff Area (DTA) to earn foreign exchange, potentially allowing SEZ units to receive payment in Indian rupees.
The proposal, if approved, could particularly benefit sectors such as aerospace, defence, maintenance, repair and overhaul (MRO), and advanced engineering, where domestic organisations may need specialised services from SEZ-based units.
A regulatory requirement that has made some domestic transactions unnecessarily complicated for Special Economic Zone units could be heading for a rethink. The Commerce and Industry Ministry has circulated a draft Cabinet Note proposing a change in the SEZ Act, 2005. This would allow SEZ units to receive rupee payments for services supplied to customers in the Domestic Tariff Area.
The issue arises because the present definition of “services” under Section 2(z) of the SEZ Act is linked to earning foreign exchange. While SEZ units can supply goods to domestic entities without the same foreign-exchange requirement, the position for services has created an additional hurdle for certain domestic transactions.
What is the Government proposing?
Under the proposed change, the foreign-exchange requirement for services supplied by an SEZ unit to a DTA customer would be removed.
In practical terms, this could mean that an Indian customer purchasing eligible services from an SEZ unit would be able to make the payment in Indian rupees, rather than having to arrange payment in foreign currency.
The proposal would require an amendment to the SEZ Act, 2005. It is important to note that the amendment has not yet come into force.
The draft Cabinet Note is currently under inter-ministerial consultation.
Why is this change being considered?
The existing requirement can create an unusual payment cycle for transactions that are essentially domestic.
An Indian company or public sector undertaking may need to purchase services from an SEZ unit but, because of the existing SEZ framework, it will have to arrange payment in foreign currency. The customer may therefore have to purchase foreign currency through an authorised dealer bank, while the SEZ unit may subsequently convert the foreign currency back into Indian rupees.
This can add banking charges, conversion costs and administrative work to a transaction between two entities operating within India.
An Economic Times report states, Industry has sought rupee-denominated payments particularly for services connected with aerospace, defence, MRO and advanced engineering. The report also noted that some public sector undertakings in the defence and space sectors face difficulties in procuring such services because of the foreign-currency payment requirement.
SEZ Services and the Domestic Tariff Area
An SEZ is treated as a special zone under the SEZ framework, and transactions between an SEZ unit and a domestic entity outside the zone can therefore be subject to specific rules.
The present framework distinguishes between goods and services in an important respect. Section 2(z) of the SEZ Act links services with foreign-exchange earnings. Proceeds from SEZ-to-DTA supplies of services must currently be realised in foreign exchange, whereas there is no equivalent foreign-exchange requirement for the supply of goods to DTA entities.
The proposed amendment seeks to address this distinction and make the treatment of services more practical for domestic business transactions.
Potential Impact on Businesses
If the proposal is approved and notified, SEZ units providing specialised services to Indian customers could have a simpler payment mechanism.
The possible benefits include:
- Rupee-based domestic transactions for eligible SEZ services.
- Lower foreign-exchange conversion and banking costs.
- Easier procurement of specialised services by Indian companies and PSUs.
- Greater scope for SEZ-based businesses to serve the domestic market.
- Reduced transaction friction for sectors such as aerospace, defence, MRO and engineering.
The change could also make the SEZ framework more practical for businesses where both the service provider and customer are based in India.
What Happens Next?
The proposal is currently at the draft Cabinet Note stage. The Ministry has circulated it for inter-ministerial consultation, following which it would need to proceed through the applicable Government approval process.
Therefore, businesses should not treat rupee payment for SEZ-to-DTA services as a newly available facility yet.
Until the proposed amendment is formally approved and brought into effect, SEZ units should continue to follow the existing legal and regulatory requirements applicable to their transactions.
FAQs
Can SEZ units currently receive rupee payments for services supplied to DTA customers?
The proposed change has not yet been notified. The current Section 2(z) framework links SEZ services with foreign-exchange earnings, so businesses should follow the existing requirements until any amendment comes into force.
What is the proposed change in the SEZ Act?
The Government is considering removing the foreign-exchange requirement for services supplied by SEZ units to customers in the Domestic Tariff Area, potentially creating a route for payment in Indian rupees.
Which businesses could benefit from the proposal?
The proposal could be particularly relevant to SEZ units providing aerospace, defence, MRO and advanced engineering services to Indian customers.
Has the Government already approved the change?
No. The proposal is presently in the form of a draft Cabinet Note under inter-ministerial consultation. It is not yet an operative amendment.
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Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.
