Clarification on FDI Policy on Single Brand Retail Trading

In India in Single brand retail trading (SBRT) sector one hundred per cent (100%) foreign direct investment (FDI) is permitted through the automatic route. Those products that are branded during manufacturing and also sold under the same brand in other countries are to be covered under this. However, where the FDI crosses fifty one per cent (51%), at least thirty per cent (30%) of the value of goods should be sourced from India. This mandate was inserted to promote domestic sectors in India i.e. micro, small and medium enterprises, village and cottage industries, artisans and craftsmen

The Special Economic Zone (SEZ) policy in India first had its inception on April 1, 2000. The idea behind SEZ was to demarcate an area in which the business and trade laws were different from the rest of the country. The prime objective was to enhance foreign investment and provide an internationally competitive and hassle free environment for exports. SEZs were set up to promote exports from the country and to provide a level playing field to the domestic enterprises and manufacturers to be competitive globally

The Ministry of Commerce and Industry, Department for Promotion of Industry and Internal Trade (DPIIT) recently clarified by issuing a circular on February 25, 2020 as to ‘whether sourcing of goods from units located in SEZ would qualify as sourcing from India, as per FDI Policy’. They said that as per the extant FDI Policy, in proposals involving FDI beyond fifty one per cent (51%), sourcing of thirty per cent (30%) of value of goods procured should be from India. There was however ambiguity regarding sourcing of goods from units located in SEZs in India, and it was clarified that sourcing of goods from SEZs would qualify as sourcing from India, subject to Special Economic Zones Act, 2005 and other relevant laws. It was further clarified that goods which are proposed to be sourced by a SBRT entity from a unit in SEZ, were to be manufactured in India.

This clarification paves the wave for various entities in the SBRT sector to invest heavily in the Indian market. It does appear that the said approach is primarily a mechanism to boost FDI in India which in turn may lead to an economic revival. The clarification also appears to allay fears that owing to their tax and duty free nature (in certain cases) SEZs are primarily not domestic in nature. Hence, now after the clarification, more work may flow to SEZs.