Sitharaman on 15 July chaired a meeting of states on issues related to FDI, the definition and taxation in the e-commerce sector. Photo: Pradeep Gaur/Mint
New Delhi: The government is set to fast-track efforts to come out with definitions of what will be considered retail, wholesale and marketplace selling on e-commerce platforms after the commerce and industry ministry recently received responses it had sought from state governments on the matter.
The definitions will have a bearing on the future of e-commerce in India. The business is expected to touch $60 billion (by sales) in 2020, from under $6 billion last year, according to an April UBS report.
They could also address issues related to the taxation of e-commerce transactions that have caused friction between e-commerce companies and several state governments.
“We are in the process of putting it together. We have to come up with a definition of e-commerce. At the moment, I am not talking about the FDI (foreign direct investment) part,” commerce and industry minister Nirmala Sitharaman said.
There is no definition of an online marketplace under current FDI laws. Marketplaces are websites that connect buyers to sellers, offering services such as warehousing, logistics and payments.
Two retail associations representing brick-and-mortar retailers, the Retailers Association of India (RAI) and the All India Footwear Manufacturers and Retailers Association (AIFMRA), have approached the Delhi high court arguing that online retail companies have been given undue advantage by allowing them access to FDI through which they are able to provide deep discounts that traditional retailers cannot match.
They also argue that the present retail policy of the government does not allow such e-commerce companies to directly sell to customers, but that, in the garb of the marketplace model, such online companies are directly selling to customers, thus violating rules.
In response to the petition filed by AIFMRA, justice Rajiv Sahai Endlaw on 24 September said there was a “prima facie case” of violation of FDI rules and issued a notice to the government and directed it to file an affidavit within two weeks.
Rishi Agarwala, a partner with Agarwal Law Associates who is representing the traditional retailers in the Delhi high court, said the government has not filed the affidavit yet. “The case is listed for 19 November. It is likely that the government will file its affidavit on the same day, after which the court may hear the arguments of both sides,” he said.
Agarwal said there is a clear case of discrimination against the brick-and-mortar shops as FDI is allowed in e-commerce companies while it is not allowed for other retailers.
The industry department under Sitharaman held wide-ranging consultations with online and offline retailers, banks and state industry ministers in July. During the consultations, many state industry ministers, including some from states ruled by the Bharatiya Janata Party (BJP) such as Rajasthan and Madhya Pradesh, said they favoured a level playing field for both e-commerce and multi-brand retailers, and suggested that FDI be allowed in both. While the state governments were asked to submit their response in writing within 15 days, most states sent their replies only recently.
A Maharashtra government official, speaking under condition of anonymity, said the state is not against e-commercem, but added that the interests of small retailers should be taken care of and there should be no revenue loss to the state government.
Online retailers such as Amazon.com Inc.’s local arm have faced tax troubles in states such as Karnataka where the company has been served notices to pay value added tax (VAT). E-commerce does not find a specific mention in the tax laws of Karnataka or other states because these laws predate online retail. VAT or sales tax is a state subject, and laws differ from state to state.
Asked about the local tax troubles for e-commerce companies, Sitharaman said her department is discussing the matter with the finance ministry to find a way out.
In 2012, the then Congress-led United Progressive Alliance government allowed 51% FDI investment in multi-brand retail in some cities, subject to the approval of the state governments and some conditions regarding sourcing.
The current BJP-led National Democratic Alliance government is opposed to this, although it has not changed the policy itself. Perhaps because of its opposition, there have been no investment proposals in multi-brand retail. In July, the cabinet allowed all companies, including Indian supermarkets, to tap the equity market to raise foreign portfolio investment up to 49% without seeking the finance ministry’s approval.
Last week, a day before Diwali, the government took a slew of foreign investment liberalization measures that included relaxing sourcing norms for foreign single-brand retailers and allowing foreign cash-and-carry companies to get into single-brand retailing. It also allowed Indian manufacturers that make at least 70% of the products they sell to carry out online retailing to counter their claim of lack of a level playing field with e-commerce companies.
In 2014-15, investors pumped in over $4 billion into Internet businesses.
The share of e-commerce is expected to jump from 2% in 2014 to 11% in 2019, while the share of physical, organized or modern retail is expected to fall from 17% to 13%, according to Think India. Think Retail, a report by property consultant Knight Frank India Pvt. Ltd and RAI.