Free trade zones (FTZs) in the SAARC region are designated areas where goods can be imported, stored, processed, and re-exported under reduced or zero customs duties. They exist in every major South Asian economy — from India's SEZs to Bangladesh's EPZs and Sri Lanka's BOI zones. Understanding how they differ across countries helps exporters, manufacturers, and logistics planners make better sourcing and routing decisions.
What Is a Free Trade Zone in the SAARC Context
A free trade zone is a geographically defined area where standard customs procedures are suspended or simplified. Within a SAARC country, FTZs operate under national legislation but often align with regional frameworks such as SAFTA (South Asian Free Trade Area). They are not uniform — each country uses different terminology and administrative models.
Common zone types across South Asia:
- SEZ (Special Economic Zone) — India, Pakistan, Bangladesh, Sri Lanka
- EPZ (Export Processing Zone) — Bangladesh, Sri Lanka, Pakistan, Nepal
- Free Port / Free Zone — Sri Lanka (Colombo Port City), Maldives
- Bonded Warehouse Zone — all SAARC countries
- Technology Park / IT SEZ — India (Bangalore, Hyderabad, Pune)
The key distinction: EPZs are primarily export-oriented manufacturing zones, while SEZs in India cover broader activities including services and domestic sales under specific quotas.
Major Free Trade Zones by Country
India
India operates over 260 SEZs as of 2026, governed by the SEZ Act 2005. The largest by export volume:
| Zone | Location | Primary Sector | Annual Export Volume |
|---|---|---|---|
| SEEPZ SEZ | Mumbai, Maharashtra | Gems, electronics | USD 7.2 billion |
| Falta SEZ | West Bengal | Light manufacturing | USD 1.1 billion |
| Kandla SEZ | Gujarat | Chemicals, engineering | USD 3.8 billion |
| Cochin SEZ | Kerala | Seafood, spices, IT | USD 2.6 billion |
| MEPZ | Chennai, Tamil Nadu | Electronics, garments | USD 4.1 billion |
India's SEZ units get a 100% income tax exemption for the first 5 years of production, 50% for the next 5 years, and a further 50% on reinvested profits for years 11–15.
Bangladesh
Bangladesh's Export Processing Zones are managed by BEPZA (Bangladesh Export Processing Zone Authority). There are 8 operational EPZs as of 2026, with two more under development in Jashore and Sylhet.
| EPZ | Location | Focus Industry |
|---|---|---|
| Chittagong EPZ | Chittagong | Garments, knitwear |
| Dhaka EPZ | Savar, Dhaka | Garments, electronics |
| Comilla EPZ | Comilla | Textiles, footwear |
| Mongla EPZ | Khulna Division | Shrimp, jute products |
| Ishwardi EPZ | Rajshahi | Leather, agro-processing |
Foreign investors in Bangladesh EPZs pay zero customs duty on capital machinery and raw materials, and corporate tax is exempt for 10 years from commercial production.
Sri Lanka
Sri Lanka's investment zones are administered by the Board of Investment (BOI). The Colombo Port City Special Economic Zone, established under the Colombo Port City Economic Commission Act of 2021, became fully operational in 2023 and is now the most significant FTZ development in South Asia's maritime sector.
Key zones:
- Biyagama FTZ — electronics, rubber products
- Katunayake FTZ — garments, light manufacturing, near Colombo Airport
- Koggala FTZ — southern Sri Lanka, gems, apparel
- Colombo Port City SEZ — financial services, IT, logistics, offshore trading
The Colombo Port City SEZ allows 100% foreign ownership, no restrictions on capital repatriation, and zero income tax for qualifying businesses for up to 25 years.
Pakistan
Pakistan's SEZ framework is governed by the SEZ Act 2012, with major expansion under CPEC (China-Pakistan Economic Corridor) since 2016. Nine SEZs were designated under CPEC as of 2026.
| SEZ | Location | Status |
|---|---|---|
| Rashakai SEZ | Khyber Pakhtunkhwa | Operational |
| M-3 Industrial City SEZ | Faisalabad | Operational |
| Dhabeji SEZ | Sindh | Under development |
| Mohmand Marble City SEZ | KPK | Partial operations |
| Allama Iqbal Industrial City | Lahore | Operational |
SEZ developers in Pakistan receive a 10-year tax holiday. Zone enterprises get a 5-year income tax exemption on profits and exemption from customs duties on plant and machinery.
Nepal and Bhutan
Nepal established its SEZ framework under the Special Economic Zone Act 2016. Two SEZs are currently operational — Bhairahawa (Rupandehi) and Simara (Bara). Both target export-oriented manufacturing in textiles, agro-processing, and footwear.
Bhutan does not operate classic FTZs but has established designated industrial estates in Pasakha and Motithang with partial customs facilitation for export-oriented units.
Maldives
The Maldives operates a free trade zone in Thilafushi Industrial Zone, primarily for logistics, warehousing, and re-export purposes. Given the island geography, the zone is critical for marine equipment, fishing industry supplies, and transshipment.
Customs Rules and Duty Structures Inside FTZs
FTZs in SAARC countries follow a broadly similar customs logic, but the procedural details vary significantly.
| Procedure | India SEZ | Bangladesh EPZ | Sri Lanka BOI Zone |
|---|---|---|---|
| Import duties on raw materials | Zero for zone units | Zero | Zero |
| Export duties | Sector-specific | Generally zero | Zero |
| VAT/GST inside zone | Exempt or deferred | Exempt | Exempt |
| DTA (Domestic Tariff Area) sales | Up to 50% of production, with duties | Limited, with approval | Permitted with duties |
| Customs bond requirement | Yes | Yes | Yes |
| Entry/exit documentation | Bill of Entry (SEZ) | BEPZA customs gate pass | BOI clearance certificate |
Movement of goods from an FTZ to the domestic market (outside the zone) is treated as an import and subject to full applicable duties and taxes.
How SAFTA Interacts With Free Trade Zones
SAFTA (South Asian Free Trade Area Agreement, in force since 2006) reduces tariffs on intra-regional trade, but FTZs operate under a separate national legal framework. This creates a practical overlap:
- Goods manufactured in an FTZ and exported to another SAARC country can claim SAFTA preferential rates if they meet Rules of Origin requirements.
- Certificate of Origin under SAFTA must still be issued even for FTZ-manufactured goods.
- Sensitive Lists under SAFTA (items excluded from duty reduction) apply regardless of FTZ status — this is a common compliance error among new exporters.
Pakistan and India, despite both being SAFTA signatories, have suspended direct trade since 2019. This affects routing decisions for exporters in FTZs near the India-Pakistan border.
Practical Benefits for B2B Exporters
Why manufacturers and traders set up inside FTZs rather than operating from standard industrial areas:
- Duty deferral on inputs — raw materials brought in for processing are not taxed until final goods leave the zone toward a domestic or export destination.
- Faster customs clearance — FTZ units typically have dedicated customs officers on-site or expedited processing windows.
- Lower compliance burden for re-exports — goods transiting through a zone without processing face minimal documentation requirements.
- Access to bonded warehousing — allows inventory staging without triggering import duty.
- Currency and repatriation flexibility — most SAARC FTZs allow foreign currency accounts and free profit repatriation for foreign investors.
One practical example: a garment manufacturer in Chittagong EPZ sources fabric from China (zero duty as a zone import), produces finished goods, and exports to the EU under GSP+ preferences. The same manufacturer selling to Dhaka's domestic market pays the applicable customs duty on the imported content.
Logistics and Connectivity Factors
Location within or near a zone matters as much as the tax structure. Key logistics considerations:
- Port proximity: Chittagong EPZ is 16 km from Chittagong Port; Katunayake FTZ is 6 km from Colombo Airport.
- Road and rail links: India's Falta SEZ suffers from poor road connectivity despite strong tax incentives — actual utilization remains below capacity.
- Power reliability: Consistent power supply is a known constraint in several Pakistani SEZs under CPEC; backup infrastructure investments vary by zone developer.
- Inland Container Depots (ICDs): Nepal's Birgunj ICD connects to Kolkata Port, which is essential for Simara SEZ exports.
Common Compliance Mistakes in SAARC FTZs
- Selling to the domestic market without proper duty assessment and BOE filing
- Using FTZ Certificate of Origin for goods that don't meet value-addition thresholds
- Misclassifying zone warehousing as re-export when goods are repackaged (which triggers processing rules)
- Failing to renew annual zone operating licenses — a recurring issue in Nepal and Pakistan zones
- Ignoring Sensitive List restrictions when claiming SAFTA rates on FTZ-manufactured goods