SEZ and FTWZ in India: How the Zones Work

India's Special Economic Zones date, in their present form, from the SEZ Act, 2005 and the SEZ Rules, 2006, which replaced the earlier export processing zones. Free Trade Warehousing Zones were created by the same law as a category of SEZ for trading and logistics. Both rest on a single legal idea: for its authorised operations, the zone is treated as a territory outside the customs territory of India. Everything else, the exemptions, the obligations and the accounting, follows from that.

What an SEZ is

An SEZ is a notified area developed by a developer, with units approved inside it by the Unit Approval Committee chaired by the Development Commissioner. Zones may be multi-product or sector-specific: IT and ITeS, pharmaceuticals, gems and jewellery, engineering and others. A unit's approval specifies its authorised operations, and the exemptions apply only to those.

What the unit gets:

• duty-free import of capital goods, raw materials and consumables for authorised operations;
• zero-rated supplies from domestic vendors, who treat the supply as an export;
• a single-window approval process through the Development Commissioner's office;
• the zone's infrastructure and, in practice, a regulator who deals with the unit's day-to-day questions.

What the unit owes:

• a positive Net Foreign Exchange over each five-year block, computed under Rule 53 and reported annually in the Annual Performance Report;
• duty on any goods cleared into the domestic tariff area, assessed as an import;
• compliance with the conditions of the Letter of Approval, the bond-cum-legal undertaking, and the SEZ Rules on movement of goods.

The income-tax deduction under Section 10AA was available only to units that commenced operations by 31 March 2020. Units set up since then choose an SEZ for its Customs and GST treatment, not for income tax.

What an FTWZ is

A Free Trade Warehousing Zone is an SEZ whose authorised operations are trading, warehousing and related services. A unit in an FTWZ may import goods without duty, hold them without time pressure, and carry out operations that do not amount to manufacture: sorting, re-packing, labelling, kitting, quality checks. The goods may then be re-exported or sold into India, in which case the buyer clears them on payment of duty at that point. The unit serves many clients, including foreign suppliers who want stock positioned in India before a sale is made.

The contrast with a Customs bonded warehouse matters. A bonded warehouse holds an importer's own goods under Customs control with duty deferred. An FTWZ unit is a separate enterprise inside an SEZ, subject to the Development Commissioner, able to add value and to serve third parties.

SEZ and FTWZ side by side

	SEZ (manufacturing or services unit)	FTWZ unit
Core activity	Manufacture or services for export	Trading, warehousing, value-added logistics
Duty on imports	Exempt for authorised operations	Exempt while in the zone
Domestic sale	Treated as import; duty paid by buyer	Treated as import; duty paid by buyer at clearance
Obligation	Positive NFE over five years	Positive NFE over five years
Typical user	Exporter with high imported-input content	Trader, distributor, foreign supplier holding stock in India, re-export hub

Where the zones stand today

Several hundred SEZs have been notified since 2005, with a large share of them operational, concentrated in IT and ITeS, pharmaceuticals, engineering and gems and jewellery. FTWZs are fewer, located near the major gateway ports, and serve as re-export and distribution hubs for West Asia, Africa and South-East Asia as well as for domestic distribution of imported goods. The longstanding criticisms, the withdrawal of income-tax benefits, land acquisition disputes, and under-utilisation in some zones, are real; so is the fact that the Customs and GST framework has been stable for a decade and is administered by a dedicated regulator.

Choosing between an SEZ, an FTWZ and the alternatives

• Export manufacturer with high imported content: SEZ, or an EOU if the preferred location is outside a zone.
• Manufacturer selling mostly in India: MOOWR, which defers duty without an export obligation.
• Trader or foreign supplier positioning stock in India: FTWZ.
• Services exporter: IT SEZ if equipment imports and campus infrastructure matter; STPI or a domestic company if location flexibility matters more.

What to settle before applying

1. The five-year sales mix, export and domestic, and the NFE it produces under Rule 53.
2. The list of authorised operations, drafted widely enough to cover what the unit will actually do.
3. The duty consequence of any later exit or relocation, which is assessed on the goods in the unit at that time.