Allowing 100% FDI in e-tail will make it easier for tax authorities to bring e-com firms under the tax net.
In 2012, the UPA had permitted 51% FDI in multi-brand retail (MBR) with riders. The riders included sourcing 30% of requirements from small enterprises, a minimum investment of $100 million, besides giving full leeway to states on whether to grant permission or not. The policy was as bad as saying ‘no’ to FDI in MBR. The Modi government has continued with that policy decision.
Finding that the direct route of entering MBR was choked, foreign investors have been looking for opportunities to make inroads. They found one in e-commerce where business was growing leaps and bounds. How did they manage to grab the opportunity?
Under the extant policy, 100% FDI is allowed in B2B transactions in e-commerce whereas it is prohibited in B2C. What exactly constitutes B2B and B2C in the context of e-commerce? This has not been spelt out by the policy-makers. In fact, the government is yet to lay down the framework and clear-cut rules to regulate e-commerce companies.
The e-commerce companies have taken advantage of this haziness in policy environment to have unfettered access to foreign funding and yet claim that they are in full compliance with extant regulations. They are using this money to give heavy discounts, which will have a serious debilitating effect on brick-and-mortar players in retail space. Even the mom-and-pop stores or the so-called street corner shops won’t remain unaffected.
Feeling the heat, the Retailers Association of India (RAI) had approached the Delhi High Court in May 2015, which directed that the government must deal with the issue first and, if the problem persists, the Court will hear the plea after four months. Getting no relief from the authorities, the association has now gone back to the Court.
Prima facie, the Delhi High Court has accepted their plea and issued a show-cause notice to the government of India/DIPP, ministry of corporate affairs, finance, RBI and the Enforcement Directorate. The matter is posted for hearing on October 4.
The e-commerce companies have presented their business as ‘marketplace model’. They contend that they are merely providing a platform to sellers and buyers for conducting transactions; that they are mere facilitators or service providers and are far removed from being a party to these transactions. In other words, they are apportioning themselves to B2B classification where 100% FDI is permitted.
A close scrutiny of their manner of operations is needed to get to the bottom of the truth. The customer registers her request for an article on the web portal of e-commerce company, which raises the invoice and arranges for its delivery at the customer’s address. The company also receives consideration either through internet payment or cash paid by customer to its delivery person. It accepts rejections and arranges for refund.
In short, it performs all sales-related functions—stocking products, booking orders, raising invoices, making deliveries (by providing logistics and transportation support), receiving payments, accepting rejections, making refunds and, for that purpose, maintains direct interface with the customer all through. In essence, e-commerce companies are retailers yet ‘camouflage’ this behind what they euphemistically term as facilitators.
To buttress this, they employ all sorts of documentation techniques; call it ‘smart accounting’. Under one model, the e-company goads manufacturer/supplier to raise invoice even as it continues to handle the entire sale transaction. This way, it leaves an impression that it does not own the goods and, therefore, can’t be deemed a retailer (people are more likely to view it as a facilitator).
Alternatively, even as the e-company raises invoice on customer, simultaneously the manufacturer/supplier raises an invoice on the e-company. The two operations are ‘synchronised’ to ensure that the e-commerce company does not own stock even for a moment. Even as all this documentation engineering happens, it merrily collects the money, keeps its profits and passes on purchase price to the manufacturer/supplier.
To be a successful venture, all big companies—Flipkart, Snapdeal, Amazon, etc—ensure that they have all the ‘logistics’ wherewithal for timely delivery of goods and handle after-sale services, etc. For this, they not only keep an eye on the availability of all sought-after goods, their sources/points of supply and contractual agreements, but also keep sufficient stocks in their own store houses. They are very well-positioned and adequately equipped to initiate and successfully consummate a sales transaction.
It is abundantly clear that e-commerce companies are retailers and engaged primarily in B2C where, as per extant policy, FDI is prohibited. They are acting in clear violation of FDI guidelines. The Delhi High Court, by admitting a petition in this regard, has done the right thing. It should hear the case expeditiously and pronounce its verdict to enable course-correction.
Post-correction, the discriminatory treatment of retailers vis-a-vis e-tailors under the FDI policy will automatically end. But this would be far from representing a healthy state of affairs as none would have access to foreign funds. This apart, the consequences of foreign investors having to take back the money already invested in e-commerce companies will be dastardly. This will set the clock back at a time when India needs FDI.
To keep up the momentum of reforms and make India an attractive investment destination, the government should shed its negative mindset in regard to FDI in MBR and allow 51% FDI (100% would give greater flexibility) without any riders. Already, 100% FDI is allowed in wholesale cash-and-carry and there is no reason why this should not be extended to retail. Alongside, it should permit 100% FDI in e-commerce retail too.
With this, both retailers and e-tailors will be on a level-playing field and can engage in an open and transparent manner with foreign investors (no back-door entry). They can invest in infrastructure, quality control, technology upgrade and build an efficient supply chain to deliver the best to consumers. This will boost growth and create jobs without posing any threat to street corner shops.
Having made the policy crystal clear and permitted FDI in e-tail through the front door, it will be much easier for tax authorities in various states to bring the companies under the tax net, which hitherto they have managed to escape under the garb of the marketplace model.
Hopefully, the government will make a bold move forward to end the policy mess on FDI in retail and leverage this for accelerating inclusive growth.
The author is a policy analyst