SEZ Compliance in India: Rules, Process & Best Practices

Special Economic Zones (SEZs) in India offer some of the most attractive benefits available to any exporter in the country:

• Duty-free imports
• Zero-rated GST
• Significant income tax relief

The idea behind these special zones is to bring in foreign investment, grow exports, and create jobs by keeping regulations business-friendly.

But there's a catch.

The same framework that makes SEZs so appealing also comes with a compliance structure that can be one of the most demanding of any export scheme in India.

In this guide, we'll understand these compliance requirements in detail.

• SEZ units must follow compliance rules across customs, GST, FEMA, and income tax regulations. Failure to comply can lead to penalties or even cancellation of the Letter of Approval.
• Units must obtain two approvals before beginning operations, one for the SEZ itself and another for the business unit inside it. The Bond-cum-Legal Undertaking must also be executed before any duty exemptions can be claimed.
• Every SEZ unit must maintain positive Net Foreign Exchange earnings over a five-year period and file an Annual Performance Report within 90 days of the financial year-end.
• Section 10AA of the Income Tax Act offers up to 15 years of phased tax deductions on export profits.
• For software-exporting SEZ units, FEMA compliance involves monthly SOFTEX filings, timely repatriation of export proceeds, and generating an eBRC for every realized payment.

SEZ compliance is the set of regulatory obligations that SEZ units must follow to retain their status and associated benefits. Non-compliance can result in penalties and even cancellation of those benefits. This includes:

• Filing returns
• Maintaining proper records
• Tracking bonded inventory
• Managing Letter of Approval (LoA) renewals
• Being prepared for inspections

SEZ compliance is mainly governed by the:

• SEZ Act, 2005 and SEZ Rules, 2006
• Development Commissioner (DC)
• CBIC
• RBI/FEMA
• Income Tax Act, Section 10AA
• State and local bodies

Any business operating inside an SEZ needs to follow the compliance requirements. This includes companies, LLPs, partnerships, and proprietorships across sectors like manufacturing, IT/ITES, biotech, and pharma.

To get in, your business must:

• Be export-focused
• Maintain positive NFE over five years
• Have a clean compliance history

There are two approval processes involved: one to set up the SEZ and another to establish a unit inside it.

To establish an SEZ, a developer, state government, or the central government must submit Form A to the Development Commissioner. The DC then forwards it to the Board of Approval (BOA).

Once the BOA approves the proposal, the central government issues a Letter of Approval (LOA) to the developer.

Setting up a unit in an SEZ requires submitting a Form F proposal to the Development Commissioner. The application is forwarded to the Approval Committee, which gets 15 days to make a decision.

To get approved, the unit must meet certain conditions under Rule 18 of the SEZ Rules:

• Positive net foreign exchange earnings
• Adequate space and infrastructure
• Commitment to environmental and pollution norms
• Proof of residence submitted to the DC
• Income tax returns (for partnerships) or audited balance sheets for the last three years (for companies)

The Letter of Approval must be issued by the central government within 30 days of the BOA’s approval. For units, the LOA is valid for one year, within which production or service activity must begin.

The DC can grant extensions of up to 2 years, and a further 1 year if at least two-thirds of setup activities are complete. Once production begins, the LOA stays valid for 5 years and is extendable by another 5.

Before availing any duty exemptions, a unit must also execute a Bond-cum-Legal Undertaking in Form H. This is a legal commitment to use duty-free goods properly and achieve positive net foreign exchange earnings. Its value equals the effective duties on imports or DTA procurement, and compliance is monitored through quarterly or annual progress reports.

A positive Net Foreign Exchange (NFE) position over five years is compulsory for all SEZ units under Rule 53 of the SEZ Rules, 2006.

The calculation is simple: NFE = A - B

Where, A is the FOB value of exports in free foreign exchange.

B is the total cost of imported inputs, domestic raw materials, consumables, and the amortized value of capital goods (calculated at 10% per year over 10 years).

Failing to maintain positive NFE exposes the unit to penalties under the Foreign Trade Act, and can even result in cancellation of the Letter of Approval.

After starting commercial production, an SEZ unit is required to submit its Annual Performance Report in Form I to the Development Commissioner each year within 90 days of the financial year ending.

Each unit prepares its APR independently, and it must be certified by an independent Chartered Accountant. The DC then places it before the Approval Committee, which uses it to review how the unit has performed and whether it has met its approval conditions.

The purpose of the APR is to track net foreign exchange earnings over the year. It is essentially how the government keeps tabs on whether an SEZ unit is delivering on what it was approved to do.

Businesses operating in an SEZ must follow several compliance rules covering customs, foreign exchange, tax filings, and related areas. Here are some of the key compliance requirements for SEZ units:

1. Customs compliance

Customs compliance in an SEZ works differently depending on which direction goods are moving.

Imports into the SEZ for authorized operations are exempt from customs duty under Section 26 of the SEZ Act. The Development Commissioner and the Specified Officer handle regulatory oversight for this.

But when goods are moving out, compliance becomes stricter:

• Full customs duty applies.
• A bill of entry must be filed under Rule 48 of the SEZ Rules.
• Transaction records must be maintained for customs verification.

Under Notification No. 11/2026-Customs, eligible SEZ manufacturing units can sell into the DTA at concessional duty rates between April 1, 2026 and March 31, 2027. But this is subject to conditions, including a 20% value addition requirement and a DTA sales cap of 30% of the highest annual FOB export value in any of the three immediately preceding financial years.

2. GST and e-way bill compliance

Under GST, supplies made to an SEZ are zero-rated. This means the supplier doesn't pay GST on those supplies and can claim a refund on input tax credit for taxes paid on inputs.

The opposite applies when an SEZ sells into the DTA. Those transactions are treated as imports into India, so IGST applies, and customs clearance is required.

Supplies to an SEZ require a:

• GST invoice
• Bill of supply
• Shipping bill or bill of export
• Packing list
• SEZ endorsement

For e-way bills, SEZ units follow the same rules as everyone else. Any goods movement above INR 50,000 requires one, and the responsibility for generating it falls on whoever is facilitating the movement.

SEZ units must also maintain a separate GST registration from their DTA operations, file monthly and annual returns, and keep accurate records of all transactions.

3. FEMA, SOFTEX, and export realization compliance 

Under FEMA, SEZ units must bring export proceeds back into India within a set period. The RBI recently extended this from 9 months to 15 months under the Foreign Exchange Management (Export of Goods and Services) (Second Amendment) Regulations, 2025.

Until recently, FEMA compliance was quite fragmented. Goods exports, software exports, and service exports each had separate declaration requirements, EDF, SOFTEX, etc.

The FEMA 2026 Export-Import Regulations, effective October 2026, address this by consolidating reporting, standardizing declarations, and formally bringing service exports into the framework.

For software-exporting SEZ units specifically, the SOFTEX form remains a monthly obligation. It must be filed within 30 days of the invoice date through the SEZ Online portal and approved by the DC before submission to the RBI. Every realized payment must also generate an eBRC, which serves as documentary proof of realization and is required for SOFTEX EDPMS closure, GST refund claims, and Status Holder Certificate applications.

4. Income tax compliance

Section 10AA of the Income Tax Act is the primary tax benefit available to SEZ units. It offers a phased deduction on export profits over 15 years:

• 100% deduction for the first 5 years
• 50% deduction for years 6 to 10
• 50% deduction for years 11 to 15, or the amount credited to the SEZ Reinvestment Reserve Account, whichever is lower

To claim the third phase, you need to create a SEZ Reinvestment Reserve Account and use it only to purchase new plant or machinery within 3 years. If the amount is unused or used incorrectly, it becomes taxable again.

However, the unit must have started operations between April 1, 2006 and April 1, 2021. It must also file returns on time under Section 139(1), and bring export proceeds back to India within 6 months from the end of the financial year.

5. Labor, environmental, and state compliance

SEZ units must comply with India’s central labor laws, including the Industrial Disputes Act, the Factories Act, and the Minimum Wages Act. But enforcement inside SEZs works differently. The Development Commissioner often takes on the role of Labor Commissioner too, which means regular labor departments have less involvement. Inspections are infrequent, and units largely self-certify their compliance.

A few specific rules apply:

• Strikes and lockouts are banned for the first three years after a unit starts operations. After that, workers must give six weeks' notice before going on strike.
• Trade unions are allowed, following a 2010 amendment to the Trade Union Act, 1926.

For the environment, units must follow the Environment Protection Act, 1986, along with air and water pollution control laws. Industrial and hazardous waste must be handled and disposed of as per prescribed norms.

SEZ units must also meet state and local compliance requirements covering land use, infrastructure, waste management, and municipal taxes.

Non-compliance with SEZ rules can have serious financial and operational consequences.

If an SEZ unit misuses duty exemptions or violates import and export procedures, Customs authorities can investigate and impose penalties under Sections 111, 112, and 114 of the Customs Act, 1962. The SEZ Act does not protect units from the Customs Act in cases involving revenue evasion or fraud.

If a unit chooses to de-bond and exit the SEZ, it must pay applicable customs and excise duties on all imported goods, capital goods, raw materials, and stock at the time of de-bonding.

On top of that, if the unit hasn't maintained positive NFE, additional penalties apply under the Foreign Trade (Development and Regulation) Act, 1992.

Follow these best practices to make compliance easier:

• Properly record every transaction, filing, and document.
• Use digital tools to track deadlines and automate documentation to reduce the risk of error.
• Run internal reviews regularly, so you don't have to wait for an inspection to find out something is off.

For SEZ units that export services, getting paid internationally and staying compliant with FEMA can be a lot to manage. Xflow takes care of both.

With Xflow, you get a receiving account that supports 25+ currencies, letting customers pay via local bank transfers in their country. Funds settle to your Indian bank account within one business day. Every withdrawal comes with a free FIRA, issued automatically by an RBI-authorized bank.

Plus, rates are linked to mid-market rates with no hidden fees, so you know exactly what lands in your account.

Xflow is also ISO 27001 and SOC 2 certified.

SEZ units in India enjoy a host of benefits - duty-free imports, zero-rated GST, income tax relief, etc. However, these depend on compliance. Miss an APR deadline or fall short on NFE, and those benefits are at risk.

In serious cases, the Letter of Approval may even lapse.

And compliance doesn't stop here. Export payments must be received within the required timeline, properly documented, and reported under FEMA. Any delay or mismatch in records can create compliance issues that may take significant time and money to fix.