Free Trade Warehousing Zones in India

Free Trade Warehousing Zones (FTWZs) are areas deemed as foreign territories, ports, and warehouses for storage and various value-added activities as per Indian Customs Law. FTWZs come under the category of special economic zones (SEZ) in India.

How free trade warehouse zones (FTWZs) function in India

FTWZs are essentially designated areas in SEZs that allow businesses to import, store, and re-export goods without paying customs duties and taxes. These zones facilitate various warehousing services, such as packaging, inspection, sorting, and kitting, and provide numerous advantages to businesses engaged in cross-border trade.

Foreign companies can establish Units in the FTWZ with 100 percent foreign direct investment (FDI) approval via the automatic route.

The legal framework for FTWZs is governed by the Special Economic Zones Act, 2005, and the Special Economic Zones Rules, 2006. Additionally, the Ministry of Commerce & Industry issues instructions periodically to clarify various operational aspects of FTWZ.

Supply of goods from the Domestic Tariff Area (DTA) to the FTWZ is considered an export under the SEZ Act. Therefore, the same export benefits available for goods exported out of India are also applicable to supplies from DTA to FTWZ.

What are the key benefits of FTWZs in India?

FTWZs in India have been recognized globally for their world-class facilities and operational success. They play a critical role in boosting India’s import-export activities, attracting investments, and facilitating smooth cross-border trade.

Duty deferment: Customs duties are deferred when goods are stored in an FTWZ, helping businesses save on upfront costs and improve working capital. Duties are only levied when goods are moved to the Domestic Tariff Area (DTA) for local sales.

Flexible trade practices: The FTWZ model allows businesses to re-export items without paying duties, sell in the domestic with applicable taxes, and conduct transactions in foreign currencies, making it conducive to meet global demands.

Export benefits: Export entitlement is granted for the supply of goods from the DTA to the FTWZ for authorized operations. The Unit or Developer can claim a drawback or Duty Entitlement Pass Book (DEPB) for goods procured from the DTA. Alternatively, the DTA supplier can claim these benefits, provided they obtain a disclaimer from the Unit or Developer.

Long tenure of storage: Goods can be stored in FTWZs for a long time without payment of customs duties, offering flexibility for long-term inventory management—so long as there is a valid Letter of Approval (LOA).

Rapid customs clearance: FTWZs enable faster customs clearance, typically within 24 to 48 hours, enhancing supply chain efficiency.

Reduced licensing requirements: FTWZs do not require certifications such as BIS, FSSAI, or drug licenses for imports, streamlining the process for businesses.

No permanent establishment (PE) needed: Businesses can operate in India through FTWZs without the need for a physical presence or PE, simplifying market entry.

Just-in-time (JIT) delivery: FTWZs support efficient inventory management and JIT strategies, aligning raw material orders with commercial production timelines, optimizing supply chains and reducing the risk of market volatility.

Value-added services: FTWZs offer a range of value-added services like packaging, repackaging, labeling, relabeling, kitting, assembly, lashing, shrink wrapping, strapping, palletization, bottling, cartonization, refurbishment, quality checks, testing, combination, and handling, thereby enhancing the value of goods before export.

Where are FTWZs located in India?

Source: Kerry Indev; OSVFTWZ; and Parliament Q&A, 2019.

Notes:

1. *The FTWZ is part of a larger Multi-Product Special Economic Zone (SEZ) at Mundra Port (Gujarat state).
2. In late December 2023, DP World proposed an investment of INR 20 billion to establish a FTWZ at Kandla in Kutch district (Gujarat state).

Spotlight: Sriperumbudur FTWZ

Sriperumbudur FTWZ or JMFTZ, India’s pioneering FTWZ, is a prominent multi-sector Special Economic Zone. It boasts top-tier Grade-A warehousing facilities and state-of-the-art industrial infrastructure, catering perfectly to the requirements of global operators and manufacturers. This makes it a top destination of choice and the zone’s occupiers include industry leaders DHL, DB Schenker, Kerry Indev, TVS Supply Chain, and Seaways Supply Chain.

Singapore-based Xander Investment Management acquired an additional one million square feet of premium warehousing space within the confines of Sriperumbudur FTWZ in 2021.

Sriperumbudur FTWZ enjoys a strategic location along the Chennai-Bengaluru Industrial Corridor (CBIC), boasting exceptional connectivity to key maritime hubs—Chennai, Ennore, and Kamrajar Ports. Collectively, these ports handle roughly 20 percent of India’s container traffic. Additionally, the FTWZ is conveniently situated in close proximity to significant industrial clusters, including Oragadam, Maraimalai Nagar, Tiruvallur, and Kanchipuram. These areas are renowned for hosting a substantial concentration of electronics, automotive, and auto ancillary companies.

READ: Tamil Nadu’s Industrial Parks and SEZs under SIPCOT: A Brief for Investors

What are the minimum requirements to set up an FTWZ?

To establish an FTWZ, a minimum land area of 50 hectares is necessary, with half of that space reserved for the designated processing area. Exceptions are for India’s hilly states, union territories, and the state of Goa where the minimum land area is 25 hectares.

Doing business in an FTWZ

Any Indian entity, including traders, importers/exporters, 3PLs (third-party logistics providers), CHAs (customs house agents), freight forwarders, shipping lines, manufacturers, and others, can establish a Unit within the FTWZ. These Units must execute a bond-cum-legal undertaking for the import and warehousing of goods within the FTWZ.

FTWZ Units are permitted to maintain inventory on behalf of both foreign suppliers and domestic buyers. Further, FTWZ rules allow multiple ownership transfers—but only within the zone and without movement of goods outside the FTWZ. This strategic approach aims to maintain the trading chain as closely connected as necessary, preventing the accumulation of indirect taxes and compliance burdens while also avoiding an increase in transaction costs.

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Units within the FTWZ have the ability to import goods into the zone without incurring duty charges. They can store these goods in the FTWZ and subsequently re-export them without any duty obligations. Furthermore, they are allowed to procure goods from the Indian market exempt from excise duties. This exemption applies not only to the goods that the unit deals with but also extends to items necessary for the growth, functioning, and upkeep of the zone.

Activities allowed in an FTWZ

An FTWZ is a distinct area designated for activities, such as warehousing and trade. Within FTWZs, the following activities are permitted:

• Storing goods on behalf of foreign suppliers for dispatch according to the owner’s instructions.
• Trading, whether with or without labeling, packing, or repacking, without the need for processing.
• Employing refrigeration for storage purposes.
• Assembling completely knocked-down or semi-knocked-down kits.
• Reselling, re-invoicing, or re-exporting imported goods.
• Repair and maintenance.
• Trade transactions in foreign currencies are permitted.

FTWZ units also reap the benefits of indirect tax advantages when engaged in non-Domestic Tariff Area (DTA) sales.

Utilizing the FTWZ market entry model in international trade

According to analysis from Flanders Investment & Trade, FTWZs provide various advantages for businesses, such as retail chains, manufacturers, and international traders. These zones eliminate regulatory constraints, offering cost-effective solutions for consolidating products from multiple suppliers in Asia. Companies can store and distribute products with lower costs and quicker payment to suppliers.

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For example, for industries such as automobile manufacturing and IT hardware production, FTWZ permits the duty-free storage of spares for seamless, low lead time supply to the Indian market. It also offers the flexibility to test spares before actual supply and duty payment. Surplus or defective spares can be re-exported without financial loss.

Foreign rubber suppliers can take advantage of FTWZ by procuring and storing materials from countries like Indonesia, Thailand, or Malaysia during production seasons, aligning with the requirements of Indian tire manufacturers.

Additionally, utilizing forward trading for foreign exchange hedging and cost equalization enhances the cost-effectiveness of FTWZ operations.

How can companies operate through an FTWZ in India?

Companies interested in operating through FTWZs have two options:

1. Trading Unit: This option allows companies to engage in authorized activities within the FTWZ, which may include trading, warehousing, labeling, consolidation, and more.

2. Service Unit: Alternatively, companies can opt to utilize the services provided by an authorized Trading Unit.

Companies registered as Trading Units must be Indian entities involved in activities such as import-export, trading, shipping, and other related fields. The specific authorized operations are outlined in the Letter of Approval (LOA), which is granted by the Unit Approval Committee. These LOAs have a standard validity of five years, with the possibility of extending them for an additional five years.

This article was originally published October 31, 2023. It was last updated November 26, 2024.

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