Class I and Class II Local Suppliers: Understanding the Classification System

Since 2020, government tenders classify suppliers as Class I, Class II, or Non-Local based on domestic value addition. This classification determines who can bid, who gets preference, and how much of the order each class receives. Getting your classification right is now as important as getting your price right.

The Classification System

• Class I Local Supplier — minimum 50% domestic value addition. Full eligibility for all tenders. Gets purchase preference over Class II and non-local.
• Class II Local Supplier — 20% to 50% domestic value addition. Can bid on most tenders. Gets preference over non-local suppliers only.
• Non-Local Supplier — less than 20% domestic value addition. Can bid only on tenders not restricted to local suppliers. No purchase preference.

How Local Content Is Calculated

• Formula — Local content = (Total value minus imported content) divided by total value, expressed as a percentage
• Imported content — includes CIF value of imported raw materials, components, sub-assemblies, and services
• Labour — Indian labour costs count as local content even if raw materials are imported
• Value addition in India — assembly, manufacturing, testing, and quality inspection performed in India counts as local
• Verification — self-certification by the bidder. Government can verify post-award. False declaration leads to 3-year debarment.

Impact on Bidding

• Many tenders now restrict bidding to Class I and Class II suppliers only (no non-local participation)
• In open tenders, Class I suppliers within 20% of L1 get the option to match L1 price
• Some sectors have higher local content thresholds (e.g., IT hardware under PMA requires specific component-level localisation)
• Defence procurement under DAP 2020 has its own IDDM (Indigenously Designed, Developed, Manufactured) classification

Improving Your Classification

• Source domestically — switch from imported to Indian-made components where quality and cost allow
• Local assembly — assembling imported components in India adds value. May push you from non-local to Class II.
• Manufacturing tie-ups — partner with Indian manufacturers under licence. Their value addition counts.
• Technology transfer — gradually move manufacturing to India. Government incentives (PLI scheme) support this transition.

GeM Declaration

• GeM requires sellers to declare local content percentage at the product level
• Declaration is linked to your seller profile and visible to government buyers
• Incorrect declaration can lead to order cancellation and seller rating downgrade
• Update your declaration if your supply chain changes (new imported component, domestic substitution, etc.)