India Considers Relaxing Forex Rules for SEZ Services in Critical Sectors

The government in India is exploring easing forex payment rules for domestic companies availing SEZ services, particularly in critical sectors like defense and space.

India’s Ministry of Commerce is reportedly considering introducing exceptions to allow payments in Indian rupees instead of foreign currency. The move is under consideration amid delays in the SEZ Amendment Bill.

At present, domestic companies in the Domestic Tariff Area (DTA) must pay in foreign exchange for services sourced from Special Economic Zones (SEZs). Since most do not possess foreign exchange, they need to purchase it, which raises costs due to conversion charges and regulatory complexities. According to expert insight, domestic companies pay a 3 percent conversion cost for currency conversion, which further creates additional challenges for businesses.

ALSO READ: India Funding and Repatriation Options

Identifying critical sectors

Find Business Support

De-Risk Your Business with Company Health Checks and Partner Reviews

According to media reports, the Commerce Department under the Ministry of Commerce and Industry is assessing whether sectors vital to India’s economy could benefit from relaxed rules. The report states that India’s defense industry and space sector are actively seeking forex flexibility. This flexibility could be provided to these sectors through the implementation of an executive order or other administrative measures, offering temporary relief until legislative changes in the SEZ Amendment Bill are enacted.

By introducing measures like rupee-denominated payments, India aims to reduce operational burdens on domestic companies, particularly in critical sectors, such as defense, space, and high-tech industries. This reform is expected to not only enhance the appeal of SEZs as hubs for investment but also align the framework with India’s evolving economic and industrial priorities.

SEZ amendment bill faces delays amid efforts to revamp regulatory framework

The much-anticipated SEZ Amendment Bill, which seeks to introduce significant changes to how special economic zones are regulated is currently stalled at the highest levels of the central government. The bill awaits approval from the Union Cabinet, followed by legal scrutiny by the Union Law Ministry, before it can be introduced in the parliament.

The bill is part of a larger initiative to relaunch India’s SEZ framework and attract both domestic and foreign investors. The proposed changes aim to address long-standing demands of the industry, such as easing payment norms and providing operational flexibility. These reforms are crucial following the lapse of direct tax benefits that previously incentivized SEZ units and developers.

What is the SEZ Amendment Bill 2024?

The Special Economic Zone (SEZ) Amendment Bill 2024 aims to modernize India’s SEZ framework by addressing past shortcomings and evolving economic demands. This bill seeks to amend the existing SEZ Act of 2005. 

India’s Ministry of Commerce has reportedly held consultations to explore various reforms under the proposed amendment. Key aspects include:

• Domestic market integration: Allowing SEZs to sell products in domestic markets under a flexible framework.
• Retention of Net Foreign Exchange (NFE) requirement: The new proposal is expected to mandate a positive NFE.
• Streamlined approvals: Simplifying regulatory processes to reduce bureaucratic delays.
• Enhanced tax regime: Introducing reforms to attract both domestic and foreign businesses.
• Improved dispute resolution: Strengthening the single-window clearance system and addressing inter-ministerial conflicts.

The amendments also aim to make SEZs in India more attractive to foreign investors and align them with World Trade Organization (WTO) norms.

(US$1 = INR 84.94)

• Previous Article India’s SEBI Tightens Rules, Reporting Norms for Foreign Portfolio Investors
• Next Article