Why it’s time to scrap dollar billing for local SEZ deals

Source: The post “Why it’s time to scrap dollar billing for local SEZ deals” has been created based on “Why it’s time to scrap dollar billing for local SEZ deals” published in “Business Line” on 23rd September 2026.

UPSC Syllabus: GS-3- Economy

Context: Special Economic Zones (SEZs) were created primarily to promote exports and earn foreign exchange. At present, SEZ units providing services to Domestic Tariff Area (DTA) customers are generally required to receive payment in foreign currency. The proposed amendment to Section 2(z) of the SEZ Act, 2005 seeks to permit rupee payments for such services.

Key features of the proposed change

1. The Commerce Department has circulated a draft Cabinet note proposing amendment of Section 2(z) of the SEZ Act.
2. SEZ units would be allowed to receive rupee payments from DTA customers for services.
3. This would bring services broadly in line with the treatment already available to goods.
4. The Government is also working to harmonise the definition of services under the SEZ Act with the GST law.
5. The proposal is under inter-ministerial consultation involving Commerce, Finance and the RBI before being placed before the Cabinet.

Reason for the need for the change

1. Reduction in transaction costs

1. Currently, an Indian DTA customer has to purchase foreign currency through an authorised dealer bank.
2. The SEZ unit subsequently converts the foreign currency back into rupees. This results in banking charges and unnecessary currency-conversion costs for a transaction that takes place entirely within India.

2. Benefit to specialised sectors

1. Sectors such as IT, IT-enabled services, defence, aerospace, engineering, maintenance and repair and overhaul (MRO) are likely to benefit.
2. Indian SEZ-based firms can sometimes provide specialised services much faster than foreign vendors.

3. Benefit to public sector organisations

1. Defence, space and aerospace PSUs often require specialised maintenance and engineering services.
2. Rupee billing could reduce the additional costs and administrative burden associated with foreign-currency transactions.

4. Improve attractiveness of SEZs

1. Several IT firms have reconsidered their SEZ presence after the withdrawal of earlier Income Tax incentives.
2. Rupee billing could provide an additional incentive for firms to retain operations in SEZs.

5. Ease of doing business: Government departments and other domestic customers would face less paperwork and lower transaction costs while procuring services from SEZ-based firms.

Challenges and concerns

1. SEZs have a special legal status

1. SEZs are treated as territory outside India for several legal, customs and tax purposes.
2. This legal framework supports their customs and tax privileges. Therefore, relaxing foreign-exchange requirements needs careful regulation.

2. Risk of regulatory ambiguity: If the definition of a domestic transaction is not clearly specified, the distinction between domestic and export transactions could become blurred.
3. Possibility of revenue leakage: The Finance Ministry would need to ensure that the proposed relaxation does not create opportunities for tax or revenue leakage.
4. Need for clear banking rules

1. The RBI and authorised dealer banks would require a clear framework for rupee settlement.
2. Ambiguous rules could lead individual banks to interpret the provisions differently.

5. Sectoral differences

1. A defence contractor providing specialised services to a PSU and an IT company providing services to a private Indian client may have different regulatory and operational requirements.
2. Hence, sector-specific guidance may be necessary.

Way Forward

1. The Government should harmonise the definition of services under the SEZ Act with that under the GST law to ensure regulatory clarity.
2. The Government should clearly define what constitutes a domestic or DTA transaction to prevent ambiguity and misuse of the provision.
3. The RBI should establish a transparent framework for rupee-based settlement so that authorised dealer banks can process such transactions uniformly.
4. The Government should issue sector-specific guidelines for defence, aerospace, IT, engineering and MRO services according to their different operational requirements.
5. The regulatory framework should include adequate safeguards to prevent tax evasion and revenue leakage.
6. The Government should periodically review the impact of rupee billing on SEZ exports, domestic business and government revenue and make necessary adjustments.

Conclusion: Allowing rupee billing for services provided by SEZ units to domestic customers can remove an unnecessary currency-conversion and compliance burden. At the same time, the reform must preserve the regulatory distinction that supports the customs and tax framework of SEZs. Thus, the proposal can form part of a broader effort to reorient SEZs from a purely export-led model towards an economy where domestic demand is also an important opportunity.

Question: The proposed shift from dollar billing to rupee billing for services provided by SEZ units to domestic customers can improve ease of doing business, but may also create regulatory challenges. Discuss.

Source: Business Line