As many as 248 units operating in Special Economic Zones (SEZs) and Export Oriented Units (EOUs) shut down in 2025-26, highlighting the growing stress in India's export-focused industrial ecosystem. Data shared by the Export Promotion Council for EOUs and SEZs (SEZEPC) with TNIE also showed that 50 manufacturing units in SEZs and 27 manufacturing EOUs debonded or exited during the year.
Industry representatives attribute the closures to a combination of logistical hurdles, rising compliance costs, tax-related policy issues and intense competition from cheaper imports. Industry players said the growing operational challenges have prompted many more units to consider exiting the SEZ framework.
"SEZ units are required to pay export duty even though the raw material is not actually exported. It is used to manufacture finished goods on which there is no export duty. The Supreme Court has already ruled that export duty cannot be levied on DTA-to-SEZ transactions because the goods do not physically leave the country. However, the government has neither amended the rules nor issued a clarification," said Alok Chaturvedi, Director General, Export Promotion Council for EOUs and SEZs.
A case in point is TUF Metallurgical Pvt. Ltd., which has urged the government to allow SEZ units to procure chrome concentrate and chrome ore from the Domestic Tariff Area (DTA) without paying the 30% export duty. The company said the levy has forced its Vizag plant to remain shut since November 2024.
Industry executives also flagged distortions in domestic raw material pricing.
"For every product there are commodity traders in between. Steel prices in India are much higher than in China because of the gap between the manufacturer's selling price and the price at which it reaches us. At the same time, SEZ units cannot freely import cheaper steel," said Atul Mukhi, Managing Director of Cosmos India, an industrial machinery and tools company.
But exiting an SEZ has become increasingly difficult, particularly for manufacturing companies, because of both regulatory and logistical constraints.
"It is very difficult for a manufacturing unit to exit an SEZ if it is located in the middle of the zone and surrounded by other units. Such a unit cannot simply convert into a Domestic Tariff Area unit because an SEZ has to remain a contiguous area and all units within it must operate as SEZ units," Chaturvedi explained.
Debonding also requires companies to pay customs duty on the depreciated value of capital goods as well as on duty-exempt inventories. For manufacturers, the bigger challenge is physically relocating heavy plant and machinery outside the SEZ, a process that can be as expensive as setting up a new factory.
"Many SEZ units consider debonding when export orders decline and the export-oriented model is no longer commercially viable. Since the SEZ framework is designed to promote foreign exchange earnings, businesses with limited export opportunities often prefer to shift their focus to the domestic market," said Kapil Mahani, co-founder of Cretum Advisory and an SEZ tax expert.
According to Mahani, while IT and services units with limited physical assets can complete the debonding process relatively quickly, manufacturing units usually take much longer because of extensive inventory verification, customs assessments and the complexities involved in relocating capital-intensive facilities.
