Special Economic Zones were conceived as engines of export-led growth. Analyse the tensions between SEZ fiscal incentives and the customs duty framework when SEZ units supply to the Domestic Tariff Area.

Q. Special Economic Zones were conceived as engines of export-led growth. Analyse the tensions between SEZ fiscal incentives and the customs duty framework when SEZ units supply to the Domestic Tariff Area. (15 marks, 250-350 words)

The SEZ Act, 2005 creates a legal fiction — under Section 53, an SEZ is a territory outside the customs territory of India [1]. This export-promotion design turns inward-facing sales into a fiscal problem: goods cleared from SEZ to the Domestic Tariff Area (DTA) are treated as imports and taxed under Section 30 [1], pulling the incentive framework and the customs framework in opposite directions.

The design tension: enclave logic vs. domestic market access - Duty exemptions on inputs are justified only by export obligation; DTA sales would otherwise let units undercut domestic manufacturers who paid full duty. - Yet global trade disruption has left SEZ capacity idle. The Centre's 2026 one-time relief permits DTA clearance at concessional duty, capped at 30% of the highest annual FOB export value of the preceding three years, with a minimum 20% value addition — an admission that a pure enclave model strands capacity [2].

The legal tension: fiction cannot substitute for a charging provision - In Adani Power Ltd. v. Union of India (2026 INSC 1), the Supreme Court held that customs duty cannot be levied on electricity supplied from the Mundra SEZ to the DTA, as no valid charging event exists under the Customs Act, 1962 [3]. - The Court set aside the 2019 Gujarat High Court view and directed refunds, holding the executive cannot retain money collected without authority of law — reaffirming Article 265 [3].

The investment tension: predictability - The levy, notified in 2010 but applied retrospectively from June 2009, illustrates how retrospective taxation erodes legitimate expectation and deters long-gestation SEZ infrastructure [3]. - SEZs already contribute substantially to India's exports, making regulatory certainty a growth question, not merely a legal one [4].

The tension is ultimately reconcilable: fiscal fiction must operate strictly within statutory limits, while DTA access is calibrated to value addition rather than barred outright. A rationalised framework — as the DESH Bill approach envisaged — that converts SEZs into broader development hubs, with duty payable only on imported inputs, would preserve export incentive while ending litigation-prone ambiguity.

(~330 words)

Sources: 1. The Special Economic Zones Act, 2005 (Sections 30 and 53) — SEZ deemed outside customs territory; SEZ-to-DTA clearance treated as import 2. PIB — Government notifies Conditional Concessional Customs Duty for SEZ to DTA sales (2026) — 30% FOB cap, 20% value-addition condition, response to global trade disruption 3. Adani Power Ltd. v. Union of India, 2026 INSC 1 (Supreme Court, 05.01.2026) — no valid charging event for electricity; refund ordered; retrospective levy without legislative authority impermissible 4. PIB Backgrounder — Special Economic Zones — SEZ contribution to exports and policy evolution