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February 25, 2016
Athira A. Nair and Vishal Krishna, Your Story
Bengaluru, 25 February 2016
Online
retail constitutes just one percent of India’s total retail.
Yet, out of the country’s nine startup Unicorns, three are
major online commerce players: Flipkart (valued at $15.5 billion),
Snapdeal ($6.5 billion), and ShopClues ($1.1 billion). Estimated
to touch $38 billion in 2016, Indian e-commerce industry has grown
impressively. However, hurdles for its potential growth are many
– most of which related to government norms.
The tug-of-war between the physical retailers and online marketplaces
mainly surrounds foreign direct investment (FDI). While the Centre
in November 2015 permitted singe-brand retailers with FDI to sell
online, the e-commerce sector can witness no major transformation
unless FDI is allowed in multi-brand retail. It was immediately
after that 21 e-commerce websites were listed by the Delhi High
Court for investigation on violation of FDI laws. Although the
order led to no serious investigation or shut-downs, and even
had listed companies with no FDI, the lack of clarity regarding
the sector continues.
While ‘Stand up, India Startup India’ campaign brought relief to startups, the e-commerce sector is hoping for the same from the Union Budget 2016, to be announced on February 29. E-commerce Coalition recently expressed hope that the Budget will allow 100 percent FDI for online (multi-brand) retail, as it does in single-brand retail. At the Budget, the government may define the nature of an e-commerce marketplace business and possibly put an end to the confusion about what constitutes retailing.
What should e-commerce be?
In simple words, e-commerce is any commercial transaction done
over the Internet. But in a simpler world, e-commerce would not
need to be defined at all. According to Arvind of Technopak, the
definition of commerce should be based on whether it is a physical
channel or a distribution channel. “In the latter, it is
just a channel for distribution of goods and services from a producer
to a customer. To that extent, there should be no differentiation
between e-commerce and physical retail,” he says. But as
far as investments are concerned, every industry has investors
from all over the world, Arvind says. “E-commerce is not
an area to be bothered about. It is not national security, why
worry about where the money comes from?”
E-commerce currently falls in services category as marketplaces claim that they are just mediators so are not liable to pay VAT or CST (Central Sales Tax). Sellers end up paying not only VAT but service taxes as well, along with 2 percent to 50 to 55-percent commissions. In traditional business, commission was a fixed percentage. Even if it varies, there was no such drastic change.
Also, the commission agent was charged taxes based on goods and
not services.
What led to the confusion?
The hullabaloo over e-commerce is far from minimal. The Department
of Industrial Policy and Promotion (DIPP) stated in January 2016
that it does not recognise marketplaces under FDI laws; within
six weeks, it declared that it is considering allowing 100 percent
FDI in marketplaces.
The ambiguity goes back to the law itself. The DIPP does not
define what a marketplace is other than that FDI is allowed in
wholesale retailing. It allowed all small merchants to sell on
e-commerce websites like Flipkart, Snapdeal and Amazon. But these
marketplaces had their preferred sellers like Prione, Cloudtail
and WS Retail. These constitute 60 percent (according to sources)
of the sales of the platform by value and so small retailers who
use the marketplaces have taken their objections to the Delhi
High Court saying that these marketplaces are direct sellers and
not commission agents.
“By law, these marketplaces are not flouting any rules.
They are at an arms-length with their distribution companies.
But yes, there is confusion over the nature of transactions on
a market place,” says Ganesh Prasad, partner at Khaitan and
Company. However if the Central government chooses to ignore the
definition then it is clear that the platforms’ major sales
come from its preferred distribution companies and it is not a
platform for small retailers like it was intended to be in the
first place.
The lack of definition has hurt the sellers in more than one way.
The All India Online Vendors Association (AIOVA) hopes that by
defining online marketplaces, e-commerce sellers can be recognised
as a legal industry that can open up avenues to them. For instance,
up until a few years ago, mutual funds were not recognised. Once
it got defined, many regulations came up and helped reducing fraud
and one-sided policies by fund managers. The AIOVA spokesperson
told YourStory that e-commerce marketplace definition should specify
that they should not indulge in buying or selling, or create entities
like Cloudtail and WS Retail that they own, and must keep same
policies for all stakeholders.
State & FDI: A complicated relationship
Karnataka was the first State to clamp down on marketplaces by
sending them notices. The State, in its notice, said that marketplaces
were generating invoices and were storing products in their warehouses
and therefore needed to pay VAT. The marketplaces said that they
could not pay tax because it was in violation of FDI rules if
it collected and paid tax on behalf of sellers.
“The States are yet to understand the DIPP rules and the
nature of a marketplace. In principle, there is no violation of
the law, but since the Delhi High Court has asked for a probe
into these marketplaces it allows States to send notices to the
marketplaces,” says Prashant Kathore, partner and Head of
Corporate Taxes, Ernst & Young.
The ideal future
Divisions more often than not bring about more confusion.
Bringing all retail activity under one umbrella will make the
business easier for all stakeholders, and policies can be made
more consistent. Devangshu Dutta, Chief Executive at Third Eyesight,
a consulting firm, says, “Today there are various artificial
segregations, some driven by policy hangovers and some due to
the evolution of the business itself. Having multiple brands versus
having one single brand should be a decision that is driven by
business strategy, rather than by government policy.”
There is a general consensus among experts that the government should not differentiate between categories of business in a sector that is growing increasingly integrated.
Any change in rules in the retail sector should come from the
ruling party. But in the last 15 years it has become a political
issue more than an economic issue. Arvind of Technopak says, “Former
Prime Minister Manmohan Singh brought the question of FDI in retail
to the Parliament unnecessarily while it should have been a mere
executive decision. It is now time to call a final shot in the
issue. Finance Minister Arun Jaitley or PM Modi or Amit Shah as
head of the ruling party should make a decision on whether FDI
is needed or not; then DIPP can come up with a simple policy statement.”
While disruptions in business models are always welcome, whether or not the money is sourced internationally, it is essential to have clearly defined policies regarding the sector. E-commerce is the buzzword, but it has the potential to go light years. Defining the term is only the first step in that direction.
(Published in Your Story)
