E-commerce companies with foreign direct investment must create separate legal entities if they wish to participate in the new E-commerce Export Framework that allows them to hold inventory in India for overseas sales directly to consumers.
The framework operationalised on Wednesday by the Directorate General of Foreign Trade (DGFT) brings into effect a change in FDI policy announced on July 23, allowing e-commerce companies with foreign equity holding to hold inventory for export.
Major beneficiaries of the move are seen to be global giants like Amazon and Walmart-owned Flipkart. Local manufacturers including a cross section of micro, small, and medium enterprises (MSMEs) are expected to witness an increase in orders and business stability because of the move, including those located in tier-2 and tier-3 cities, thanks to the supply chain integration the move might facilitate.
Prior to the policy change, e-commerce entities with FDI were not allowed to own inventory of goods and services. The restriction regarding the inventory-based model for domestic sales still stands. Some experts fear that the move could create pressure to extend the inventory-based model to domestic sales, which they feel could harm local traders.
For inventory-based cross-border e-commerce the company would have to register as Exporter-on-Record (EoR) and procure goods produced in India from the Seller-on-Record (SoR). At the time of registration, the entity will have to disclose the shareholding pattern and the nature of its ownership or control relationship with the e-commerce entity.
Goods would have to be procured by the exporter from the seller against a confirmed export order. Speculative inventory build-up for export purposes is not permitted.
According to the framework the export inventory must be distinctly identified, segregated and maintained through a digital repository to ensure complete traceability. Further, export inventory cannot be diverted for sale in the domestic market even if the exported goods are returned by the buyers outside India.
To further strengthen transparency and enforcement, the framework mandates annual compliance certification and maintenance of digital records. Exporters will be required to submit a compliance certificate to DGFT within 90 days of the end of a financial year.
The exporter should, to the extent practicable, utilise notified E-commerce Export Hubs (ECEH) for operations under this framework. Currently, five ECEHs are operating as pilots in Delhi, Bengaluru and Mumbai. These hubs also have dedicated customs stations to oversee the compliance with the rules.
Exports through these inventory-based e-commerce will also be eligible for export rebates and refunds through schemes like Duty Drawback, Remission of Duties and Taxes on Exported Products (RoDTEP) and Rebate of State and Central Taxes and Levies (RoSCTL).
These benefits must be shared with the sellers and the exporter is allowed to deduct the administrative charge.
The exporters would, however, not be eligible for schemes like Advance Authorisation and Export Promotion Capital Goods Scheme that allow duty-free imports of inputs for export manufacturing.
The framework also states that the exporter must pay the Indian seller within seven days of accepting the goods. Payment cannot be delayed because the foreign buyer has not paid or has returned the product.
“The new policy is broadly similar to DGFT’s existing export house model under which small firms supply goods to export houses for overseas sales. E-commerce companies were already free to use this arrangement so a change in FDI policy may not have been needed,” said Ajay Srivastava, founder of Global Research Initiative (GTRI).
He said the new FDI relaxation raises a larger concern. “Although currently limited to exports, it establishes the principle that foreign-funded e-commerce companies may own inventory. Soon, this could create pressure to extend the same model to domestic sales, opening the door to inventory-based e-commerce across all transactions.”