SUMMARY

Published on June 16, 2025, the article from The Hindu explains the Indian government’s recent decision to relax key rules governing Special Economic Zones (SEZs) to boost domestic manufacturing of semiconductors and electronics components. This move is part of a broader strategy to reduce India’s reliance on imported high-tech components, strengthen its position in global supply chains, and align with initiatives like the Semicon India programme. The amendments to the SEZ Rules, 2006, aim to address the capital-intensive, import-dependent nature of these industries, which also face long gestation periods before profitability.

Context and Rationale for SEZ Rule Relaxation

1. Strategic Objective: India aims to become a global hub for semiconductor and electronics manufacturing, critical for technologies like AI, machine learning, smartphones, smart TVs, and electric vehicles (EVs). Semiconductors are tiny chips that process vast amounts of data, underpinning modern electronics. In 2021, China accounted for 35% of global semiconductor production, highlighting India’s import dependency (90% of semiconductors are imported).

2. Previous Initiatives: The government launched the Semicon India programme in 2022 with a ₹76,000 crore outlay to incentivize domestic semiconductor production through subsidies and infrastructure support. However, high capital costs, land acquisition challenges, and restrictive SEZ regulations have limited progress.

3. Global Trade Uncertainty: Geopolitical tensions, such as China’s rare earth material (REM) export curbs (affecting EV production, as noted in prior articles), underscore the need for self-reliance in high-tech manufacturing. Relaxed SEZ rules aim to shield India from global supply chain disruptions while meeting domestic demand.web:articleonREMs

Key Amendments to SEZ Rules, 2006

The Ministry of Commerce and Industry notified amendments on June 3, 2025, effective immediately, targeting semiconductor and electronics component manufacturing. The changes address barriers to investment and operational flexibility:

Immediate Outcomes and Investments

1. New SEZ Approvals: Following the amendments, two SEZs were approved with a combined investment of ₹13,100 crore:

2. Micron Semiconductor Technology India: A semiconductor manufacturing facility in Sanand, Gujarat, with an investment of ₹13,000 crore. Micron’s project is expected to create 5,000 direct and 15,000 indirect jobs, boosting India’s semiconductor ecosystem.

3. Hubballi Durable Goods Cluster (Aequs Group): An electronics component manufacturing facility in Dharwad, Karnataka, with an investment of ₹100 crore, focusing on high-precision components for aerospace and electronics.

4. Economic Potential: These projects signal investor confidence in India’s reformed SEZ framework, with potential to attract further foreign direct investment (FDI) and create high-skilled jobs.

Linkages to Taxation in India

Tax Administration Reforms

1. Single-Window Clearance: SEZs operate under a single-window approval system, reducing compliance burdens. The relaxed rules further simplify processes, aligning with reforms like faceless assessments under the Income Tax Act, 1961, to enhance ease of doing business.

2. Curbing Misuse: Recent Budget 2025 measures require SEZ units to be officially licensed to avail tax breaks, preventing companies from exploiting SEZ locations for tax evasion. This ensures fairness and boosts revenue collection.

3. 
   Broader Economic and Strategic Implications

4. Reducing Import Dependence: By fostering domestic semiconductor production, India aims to cut reliance on imports (e.g., 90% of semiconductors from China, Taiwan). This complements efforts to address rare earth material (REM) shortages for EVs, as discussed in prior articles.web:articleonREMs

5. Employment Generation: SEZs have created over 30.7 million incremental jobs since 2006, with new semiconductor SEZs expected to add high-skilled roles in Gujarat and Karnataka. This supports India’s response to rising unemployment (5.6% in May 2025).web:articleonUnemployment

6. Export Growth: SEZ exports reached $163.69 billion in FY24, with a 23% CAGR over 18 years. Allowing domestic sales diversifies revenue streams, reducing exposure to global trade risks.

7. Global Competitiveness: The reforms position India to compete with semiconductor hubs like China and Taiwan, leveraging its skilled workforce and infrastructure (e.g., GIFT City, Kandla SEZ).

8. Environmental and Land Concerns: Relaxed land rules raise concerns about environmental degradation and misuse for real estate, as noted in past critiques of SEZs. The government must enforce sustainability norms to mitigate these risks.

Challenges and Criticisms

1. Long-Term Impact Uncertainty: As the changes are recent, their economic impact is unproven. Success depends on execution, infrastructure quality, and global market conditions.

2. Land Acquisition Issues: Despite relaxed encumbrance rules, India’s fragmented land records and legal disputes could delay SEZ setup, especially in rural areas.

3. Fiscal Strain: Extensive tax exemptions may strain government revenues, particularly if domestic sales do not generate sufficient GST/customs duties. This necessitates careful monitoring, as suggested in prior taxation questions.web:previousTaxationQuestions

4. Sectoral Imbalance: Over 70% of SEZs focus on IT/ITeS, with manufacturing underrepresented. The new rules aim to correct this, but broader industrial diversification is needed.

5. Global Competition: India faces stiff competition from established semiconductor producers like China, which benefits from economies of scale and state subsidies.

Conclusion

The relaxation of SEZ rules, notified on June 3, 2025, marks a strategic push to position India as a semiconductor and electronics manufacturing hub. By reducing land requirements, easing encumbrance rules, and allowing domestic sales, the government addresses key barriers to investment in capital-intensive, import-dependent sectors. The immediate approval of two SEZs worth ₹13,100 crore demonstrates early success, but challenges like fiscal trade-offs, land disputes, and global competition remain. Integrated with India’s taxation framework—through income tax exemptions, GST reforms, and single-window clearances—these changes enhance economic competitiveness while supporting energy security (e.g., EV production) and job creation. However, sustainable implementation and robust oversight are critical to realizing long-term benefits and avoiding past SEZ pitfalls like environmental degradation and tax misuse.