In a major boost to electronic giants, SEZs clear local sourcing test

In a major boost to consumer electronic giants like Apple and Xiaomi, the government has relaxed the local sourcing norms. Issuing a clarification, the Department for Promotion of Industry and Internal Trade (DPIIT) on Wednesday said, foreign retailers can now meet their local sourcing requirements by buying goods produced in units based in Special Economic Zones (SEZs).

While 100 per cent foreign direct investment (FDI) is allowed in single-brand retail, if the foreign investment exceeds 51 per cent, the 30 per cent mandatory local sourcing norm kicks in.

“As regards, sourcing of goods from units located in SEZs in India, it may be clarified that sourcing of goods from such units would qualify as sourcing from India for the purpose of 30 per cent mandatory sourcing from India for proposals involving FDI beyond 51 per cent, subject to SEZ Act, 2005,” DPIIT said in the clarification.

This is seen as a move to further entice original equipment manufacturers (OEMs), especially for the mobile phone industry. Taiwanese OEMs such as Wistron and Foxconn, who supply to tech giant Apple are expected to benefit.

Electronics major Apple that is willing to set up its flagship Apple Stores here, has long been struggling to meet the local sourcing norms. With its key manufacturing partners – Foxconn & Wistron – having their India facilities located in SEZs, the relaxation will boost its fortunes. Currently, it procures iPhone XR from Foxconn’s Tamil Nadu plant, while Wistron assembles iPhone 7 from Bengaluru.

Others like Xiaomi & Oppo — both are working to expand their branded offline store networks — source from Foxconn.

The SEZ sourcing issue was not clearly defined earlier and the industry had argued that the government was considering SEZ procurement made by retailers on a case-by-case basis, a senior functionary of the Federation of Indian Export Organisations, said. The DPIIT clarification has laid the matter to rest.

In August last year, the government had agreed to a long-standing industry demand to make things easier for foreign retailers. With the change, purchases made by foreign retailers for export purposes were allowed to be factored in to meet the 30 per cent domestic sourcing norm. Companies in the single-brand space were also allowed to start online retailing without opening brick-and-mortar stores first, something that was not allowed earlier.

After continuing to push for an exemption from the minimum alternate tax, SEZ developers have continued to clamour for more reforms, arguing that the provisions make SEZs unfavorable in terms of investment. This has resulted in only 234 of the 370 notified SEZs being operational, according to official statistics. The commerce department has also said that many SEZs are operating at sub-par levels with the number of current units being much lower than the original expectation.

The commerce department has again floated the idea that duties be reduced when goods are cleared by SEZs to domestic areas, considering that these goods could be imported through the free trade agreement (FTA) route at nil rate, sources said.