How to Set Up a Unit in a Special Economic Zone in India: Approvals and Tax Benefits

Special Economic Zones (SEZs) are designated duty-free enclaves that are treated as foreign territory for the purposes of customs and trade. Governed by the Special Economic Zones Act, 2005 and the SEZ Rules, 2006, these zones offer significant tax benefits, simplified customs procedures, and a single-window clearance mechanism for businesses engaged in manufacturing, services, or trading for export. This guide explains the end-to-end process for setting up a unit in an SEZ, the approvals required, the tax incentives available, and the compliance obligations that follow.

What Is a Special Economic Zone?

An SEZ is a geographically demarcated area notified under the SEZ Act, 2005 where businesses enjoy a distinct regulatory and fiscal regime. Units in SEZs must primarily produce goods or provide services for export, though a portion of output (as permitted by the Development Commissioner) may be sold in the Domestic Tariff Area (DTA). India has over 270 operational SEZs covering sectors ranging from IT/ITES and pharmaceuticals to electronics and multi-product manufacturing. Each SEZ is supervised by a Development Commissioner (DC) appointed by the Central Government. Businesses that also hold an Import Export Code will find that the IEC is a prerequisite for setting up an SEZ unit.

Who Can Set Up a Unit in an SEZ?

Any person, whether an individual, partnership firm, LLP, or company registered under the Companies Act, can apply to set up a unit in an SEZ. The applicant must demonstrate that the proposed activity is primarily export-oriented. Both domestic companies and foreign-invested entities (subject to FDI policy and FEMA regulations) are eligible. The unit can engage in manufacturing, services, trading, or warehousing activities as specified in the Letter of Approval.

Step-by-Step Process for Setting Up an SEZ Unit

Step 1: Identify the SEZ and Activity. Select the SEZ in which the unit will be established, based on the sector (IT, pharma, multi-product, etc.), location, and available infrastructure. Identify the specific activity: manufacturing, IT/ITES services, trading, or Free Trade and Warehousing Zone (FTWZ) operations.

Step 2: Submit Form F to the Development Commissioner. The application for setting up a unit is submitted in Form F to the Development Commissioner of the chosen SEZ. Form F requires details of the proposed activity, projected exports and imports, investment plan, employment generation, and space requirements. The application must be accompanied by a project report, a copy of the Memorandum and Articles of Association (for companies), and proof of the applicant's financial standing.

Step 3: Approval by the Unit Approval Committee. The application is placed before the Unit Approval Committee (UAC), which is chaired by the Development Commissioner and includes representatives from the Central Government, State Government, and the SEZ developer. The UAC may approve the proposal outright, approve it with conditions, or reject it after giving the applicant a hearing. The UAC evaluates the export potential, Net Foreign Exchange (NFE) earning capacity, and the feasibility of the project.

Step 4: Receive the Letter of Approval (LOA). Upon approval, the Development Commissioner issues a Letter of Approval (LOA) specifying the activities the unit is authorized to undertake, the approved investment, the area allotted, and any conditions imposed. The LOA is valid for one year, within which the unit must commence production or operations. The unit must intimate the Development Commissioner of the date of commencement. After the initial one-year period, the LOA is extended for a further five years from the first export date.

Step 5: Execute a Lease Agreement with the SEZ Developer. The unit enters into a lease or sub-lease agreement with the SEZ developer for the allotted space. The lease terms, including rent and common area maintenance charges, are negotiated with the developer. Companies that have dealt with property registration procedures will find that SEZ leases follow a similar registration process.

Step 6: Obtain Additional Approvals. Depending on the nature of the activity, the unit may need to obtain additional sector-specific approvals, such as: drug manufacturing licence from CDSCO (for pharma); FSSAI registration (for food products); environmental clearance from SEIAA (for manufacturing projects above the notification threshold); and GST registration (SEZ units require a separate GST registration for the SEZ address).

Tax Benefits for SEZ Units

Income Tax Deduction under Section 10AA: Units that commenced operations on or before 31 March 2020 are eligible for a profit-linked deduction: 100% of export profits for the first five years, 50% for the next five years, and 50% (subject to creation of a Special Economic Zone Reinvestment Reserve) for the following five years. This benefit has a sunset clause; units that commenced after 31 March 2020 are not eligible. However, units already within their 15-year window continue to claim the deduction for the remaining period.

IFSC Units under Income Tax Act, 2025: For units in International Financial Services Centres (IFSCs), Section 147 read with Section 400(1) of the Income Tax Act, 2025 provides a 100% tax exemption on specified income for any 20 consecutive years out of 25 years beginning from the year of obtaining the relevant permission. The TDS exemption for specified payments to IFSC units has been notified with effect from 1 April 2026 (Tax Year 2026-27). Businesses that also need to file income tax returns should note the separate return filing requirements for SEZ and IFSC units.

Customs Duty Exemptions: All imports into the SEZ for authorized operations are exempt from customs duty, including Basic Customs Duty, Integrated GST (IGST), and Compensation Cess. Goods procured from the Domestic Tariff Area (DTA) by SEZ units are treated as exports and are eligible for zero-rated GST treatment. Capital goods imported by SEZ units are also duty-free.

Compliance Obligations

SEZ units must maintain a positive Net Foreign Exchange (NFE) earning over every five-year block. The NFE is calculated as: FOB value of exports minus CIF value of imports. If the unit fails to achieve positive NFE, the Development Commissioner may issue a show-cause notice and, after inquiry, may recommend cancellation of the LOA. Units must also file annual performance reports with the Development Commissioner, maintain proper records of all imports and exports, and comply with customs bonding and warehousing procedures. Employers operating SEZ units must also comply with general company registration obligations and startup registration requirements, if applicable.

Key Takeaways

Setting up a unit in an SEZ requires submitting Form F to the Development Commissioner, approval by the Unit Approval Committee, and receipt of a Letter of Approval (LOA). The LOA must be utilized within one year by commencing operations. Income tax deductions under Section 10AA are available only to units that commenced before 1 April 2020, with a 15-year benefit window. IFSC units enjoy a 100% tax exemption for 20 out of 25 years under the Income Tax Act, 2025. All imports for authorized operations are customs-duty exempt. Units must maintain positive Net Foreign Exchange earnings over five-year blocks. Additional sector-specific approvals (GST, FSSAI, environmental clearance) may be required depending on the activity. Businesses considering LLP registration as their structure for an SEZ unit should note that LLPs are eligible to set up SEZ units on the same footing as companies.