SEZ Rules relaxed: A shot in the arm for India’s semiconductor ambitions?

India’s Special Economic Zones (SEZs) have been a cornerstone of export-driven growth since the SEZ Act of 2005, offering a duty-free enclave for businesses to thrive. In June 2025, the Ministry of Commerce and Industry unveiled an important trio of amendments to the SEZ Rules, 2006, aimed at supercharging the semiconductor and electronics sector.

These changes easing land requirements, streamlining approvals and allowing domestic sales come as India seeks to reduce its reliance on semiconductor imports amid global trade uncertainties. How do these reforms fit into the SEZ legal framework and what do they mean for India’s tech future?

SEZs are specifically delineated areas, legally considered foreign land for purposes of trade, customs duties, and tariffs. Unlike the rest of India, which comes under the Domestic Tariff Area (DTA), SEZs offer a slew of incentives such as duty-free imports, zero-rated supplies under the IGST Act, 2017 and exemptions from Central Sales Tax, Service Tax and certain state taxes. They’re recognised as ports or airports under the Customs Act, with in-house customs clearance and no routine cargo inspections, making trade a breeze.

The SEZ scheme aims to boost exports, attract investment, create jobs and develop infrastructure while safeguarding India’s sovereignty. Developers and co-developers build the zones, often including Free Trade and Warehousing Zones (FTWZs) for trading and third-party warehousing, while SEZ units - spanning manufacturing, services and offshore banking - drive economic activity. Prior to the rules, setting up an SEZ required contiguous, vacant land (typically 50 hectares and 25 in states like Assam) and at least 50% must be a processing area.

Semiconductors are the microscopic powerhouses fueling almost every modern gadget - from smartphones and laptops to cars, medical devices and AI systems. They form the critical foundation of the digital economy, propelling advancements in fields like artificial intelligence, 5G and the Internet of Things (IoT). For India, semiconductors hold a dual significance: they’re key to breaking free from import reliance while establishing the nation as a formidable player in global tech manufacturing.

India’s reliance on semiconductor imports - only 35% of its manufacturing is DTA-based (outside SEZ) - has spurred action. The problem with this is that DTA units face higher costs and inefficiencies due to taxes, duties and procedural delays, unlike SEZs, which offer duty-free imports, zero-rated GST, streamlined approvals and better infrastructure. This makes DTA production less competitive, limits export potential and slows India’s goal of reducing its 65% reliance on semiconductor imports.

The Semiconductor India programme of 2022 set the stage and the latest amendments to the SEZ Rules build on that momentum, targeting the semiconductor and electronics sector with precision.

Rule 5 Amendment: The minimum land requirement for semiconductor SEZs has been slashed from 50 hectares to 10 hectares. This makes it easier for companies to set up specialised units without the daunting task of securing vast land parcels, a frequent bottleneck in India’s complex land acquisition landscape.

Rule 7 Amendment: The “encumbrance-free” land condition has been relaxed. Land can now be approved if clear ownership is established, even with minor legal or financial claims, speeding up the approval process historically slowed by land disputes.

Rule 18 Amendment: A groundbreaking shift, this allows semiconductor and electronics component manufacturing units in SEZs to supply the domestic market after paying applicable duties. Traditionally, SEZs are export-only enclaves, with DTA sales treated as imports, attracting customs duties under the Customs Tariff Act, 1975. This change shields SEZs from global trade uncertainties like supply chain disruptions seen during the COVID-19 pandemic, while ensuring a steady supply to India’s domestic market.

Further, semiconductor units also benefit from duty-free imports of building materials - a perk not extended to Export Oriented Units (EOUs) - and can bypass the repetitive Directorate General of Foreign Trade (DGFT) approvals required for Advance Authorisations or EPCG licenses, unlike their EOU counterparts.

The Rule 18 amendment allowing domestic sales is a departure from this export focus but doesn’t upend it. DTA sales still attract duties, ensuring units prioritise global markets, while the domestic supply option offers a safety net amid trade volatility, if global demand drops, they can sell domestically. It is significant to note that compared to EOUs, SEZs retain certain advantages: DTA supplies to SEZs are exports (zero-rated under GST), while those to EOUs are deemed exports (GST refund-based), and EOUs face a ₹1 crore investment threshold, unlike SEZs.

The Rule 18 amendment is a lifeline for India’s tech ecosystem, ensuring a steady domestic supply of semiconductors and electronics components crucial for AI and machine learning applications, while shielding SEZs from global trade headwinds. The relaxed land norms (Rule 5) and approval process (Rule 7) make SEZs more accessible, but they raise concerns. Smaller SEZs could strain infrastructure, and the leniency on land encumbrances might lead to future disputes. In 2023, a rule change allowed IT/ITES SEZs to repurpose vacant areas within the Non-Processing Area (NPA) i.e spaces not directly involved in exports, such as offices or common facilities, while ensuring that at least 50% of the zone remains dedicated to core export operations. While this adds flexibility for developers - enabling alternate uses like co-working or domestic leasing - it also raises concerns: could SEZs gradually drift from their export mandate and begin to resemble regular business parks focused more on domestic activity than global trade?

Monitoring remains stringent. Certified annual performance reviews ensure compliance, and the NFE requirement keeps units accountable. State governments can support SEZs with exemptions from local taxes, electricity duties and streamlined utilities, adding variability across regions.

Moving forward, this “flexibility” may invite judicial intervention if it conflicts with the SEZ Act’s focus on exports, ensuring that SEZ trade operations remain distinct from those in the DTA.

These amendments position India to capitalise on global supply chain shifts, especially in semiconductors, while strengthening domestic tech capabilities. They signal to investors, global giants like Micron and local players alike that India is a serious contender in the tech arena. It remains important for the government to preserve the export-oriented character of SEZs, even as domestic integration deepens. These reforms, meanwhile, mark a decisive step forward positioning India to emerge as a semiconductor hub while staying true to the core strengths that make SEZs a strategic asset.

Ankita Sarangi is an Advocate-on-Record.