There has been an ongoing debate regarding the regulatory framework, or rather the lack of it, in the Indian e-commerce sector. The issue is currently unsettled due to the ongoing proceedings in Delhi High Court filed by two of the retail associations, namely the Retailers Association of India (RAI) who are representing the brick-and-mortar retailers and the All India Footwear Manufacturers and Retailers Association (AIFMRA).
On September 23, 2015, the Court held a preliminary view that the Government cannot treat sales over online marketplaces as retail sales for tax purposes and at the same time not treat them as retail sales for FDI purposes. The Delhi High Court had earlier directed the Government to investigate 21 e-commerce companies for possible FDI violations. Later the Department of Industrial Policy and Promotion (DIPP) submitted an affidavit on December 21, 2015 stating that the current FDI policy doesn’t permit FDI in B2C (e-commerce space)nor recognizes the online marketplace model followed by companies such as Flipkart, Snapdeal and Amazon. This statement has assuaged the fear in e-commerce companies following the online marketplace model with respect to the Government of India’s aversion to any particular model of conducting business.
However, the traditional retailers are of the view that the marketplace model is merely a ploy to get around this stipulation.
Interestingly enough, on October 20, 2015, the Kerala high court has held such online sales not to constitute as retail sales for the purpose of taxation under the State’s value added tax legislation.
Another important development relating to this discussion was in the recent amendment to the FDI policy of 2015 that was issued on November 24, 2015 via press note no.12 of 2015, permitting single brand retail traders to undertake retail trading through e-commerce or e-retailing. Therefore, although currently e-commerce may not be permitted in multi brand retail trading, e-commerce companies can now rest assured while engaging in single brand e-retailing.
Incidentally, the Government had earlier stated that it would define marketplace in the FDI policy, but much to the dismay of e-commerce companies who wanted clarity on the said issue, DIPP decided not to define marketplace as it was of the opinion that it would be unwise to define the same due to rate at which technology changes. In December 2014, The DIPP issued a discussion paper on e-commerce in India, to which several e-commerce companies such as Amazon, Myntra, Yebhi, etc. had given a feedbacks in favour of FDI in B2C e-commerce space.
As on date, there is still an on-going debate on whether the e-commerce space should be permitted for multi brand retail trading and it remains to be seen whether the government decides to dispel the confusion regarding the same.
It is interesting to note that several e-commerce companies have earlier tried to bypass the FDI policy restrictions by using intelligent corporate structures to penetrate the Indian market. A classic example is of Flipkart’s subsidiary known as WS Retail; which is still the top seller on Flipkart’s platform, though it is now independent from Flipkart following the Bansals (Promoters of Flipkart) resigning and selling their stake in WS Retail to a group of Indian investors. At the time of WS Retail’s incorporation, WS Retail was the only seller on Flipkart’s platform and even after entry of other sellers on the platform, it remained the top seller among them. Similarly in the case of Amazon, the e-commerce giant had established fulfillment centres where products from various sellers were received and stored for orders placed by customers on Amazon’s platform.
While on the one hand investigations are led against e-commerce companies, on the other hand it remains to be seen whetherthe Government would really take steps to clear the confusion on ‘market place’ model under the FDI policy for this year, or hold true to its statements made before the Delhi High Court and refrain from relaxing the same.
With billions of dollars already invested in the e-commerce sector in India and promising growth rates being predicted there from, the Government clearly does not want to ban ‘market places’ and branded anti-reform and on the other hand, if it specifically allows B2B ecommerce to include ‘market places’, it will have to allow FDI in multi-brand retail. In such a precarious scenario, the Government would be well advised to take a realistic and economically viable stand on this issue which requires an urgent resolution.