Goods procured from SEZs by single brand retailers to qualify for meeting local sourcing norms

Goods procured from units in special economic zones (SEZs) by single brand retailers, owned by foreign companies, would qualify for meeting the mandatory 30 per cent local sourcing conditions, according to a government clarification.

According to the current foreign direct investment (FDI) policy on single brand retail trading, 100 per cent overseas investments are allowed in the sector. But sourcing of 30 per cent of the value of goods procured is mandatory from India for such companies having FDI beyond 51 per cent.

The government has received representations from various business entities seeking clarification whether sourcing of goods from units located in SEZs would qualify as sourcing from India, as per FDI policy.

"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," according to the clarification.

However, it said that goods which are proposed to be sourced by a single brand retailer from SEZ units will have to be manufactured in India.

It added that compliance with all the conditions enumerated in the FDI policy and as notified under FEMA (Foreign Exchange Management Act) would continue to be the responsibility of manufacturing entity.

SEZs, developed as export hubs, are treated as foreign territory in terms of customs laws. Procurement of goods and services from units in these zones are treated as imports.

In February 2006, the government for the first time opened the sector for foreign players by allowing 51 per cent FDI. In January 2012, the cap was raised to 100 per cent -- up to 49 per cent through automatic route and beyond that with the government approval.

In January 2018, the government allowed 100 per cent FDI in the sector, permitting foreign players in single brand retail trade to set up own shops in India without government approval.

FDI into India grew by 15 per cent to USD 26 billion (about Rs 1,85,000 crore) during April-September 2019-20.