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INDIA: SEZ Goods Qualify for Local Sourcing Quota of Overseas-Owned Single Brand Retailers

The Department for Promotion of Industry and Internal Trade (DPIIT) has announced that goods procured from within any of the country’s Special Economic Zones (SEZs) will qualify as fulfilling the mandatory domestic sourcing requirements for overseas-owned single brand retail companies. SEZs, which serve as export-processing zones, are normally deemed as overseas territory for the purposes of applying the country’s customs regulations, with goods produced within such facilities usually considered overseas-made and thus liable for customs duty when ‘imported’ to the country.

The DPIIT’s announcement follows recent requests for clarification of the country’s foreign direct investment (FDI) rules, which specify that any single brand retailer with an overseas shareholding in excess of 51% is required to locally-source at least 30% (in value terms) of its goods available for domestic sale or as part of its combined global operations. The DPIIT has, however, now stated that only SEZ goods actually produced in India qualify towards satisfying domestic sourcing requirements, with items containing overseas-manufactured input material specifically excluded.

The DPIIT has also made it clear that all parties undertaking such procurement activity must comply with all other general provisions of the country’s Special Economic Zones Act of 2005 as well as all other regulatory requirements, including existing FDI regulations and the Foreign Exchange Management Act. Under the present system, 100% FDI is permitted in single brand retail through the automatic route (i.e. without prior government approval).

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