Is the draft e-commerce policy a robust legislation – What to expect

The Department of Industrial Policy and Promotion (“DIPP”) unveiled a draft e-commerce policy (“Policy”) to certain stakeholders, to address the challenges that persist in the field of e-commerce. The Policy crystallizes the norms of Press Note 3, issued by DIPP in 2016, which dealt with the guidelines for foreign investment in e-commerce (“Press Note 3”).
Stakeholders have already coined the Policy as controversial and since it is hot on the heels of the Flipkart acquisition by Walmart, it is being termed by analyst as being highly tilted in favour of Indian companies. E-commerce giants have already voiced their displeasure and are proposing to get the Policy scrapped, while smaller market players are welcoming the changes since Policy looks to create a level playing field for foreign and domestic players while addressing non-competitive practices.

Key takeaways of the Policy are as follows:

•    Personal data or community data collected by “internet of things” devices from “public space” will be required to be stored exclusively in India.
•    Separate wing in the Directorate of Enforcement for grievances related to Press Note 3.
•    Creation of a Social Credit Database through a Public-Private Partnership, to facilitate digital lending and creating a fraud intelligence mechanism for digital payment systems.
•    Regulating bulk purchases between related entities.
•    Stimulating the participation of micro, small and medium enterprises in the digital economy.

Reasons for the new Draft e-commerce policy: The commerce department has asserted that the Policy has been formulated due to pressure from developed countries and the World Trade Organisation (“WTO”). It looks to bring in a comprehensive legislation to protect consumers and personal data, regulate the e-commerce industry and to create a facilitative regulatory environment, the objective will also be to bar group companies in e-commerce from directly or indirectly influencing sale prices.

It will seek to balance conflicting interests of dominant global players as against domestic enterprises, while also enabling innovation and access to latest technology.

Protecting the interest of Indian e-commerce founders: For Indian founders with minority stakes, the Policy will endeavour to empower them with differential voting rights, ensuring control with Indian entrepreneurs, where required. Further, in order to legally ensure the proposal, it foresees the requirement to amend the relevant provisions in the Companies Act, 2013.

Implications on pricing strategies: In order to protect smaller market players, a sunset clause for “deep discounting”, will be prescribed. A maximum duration for “differential pricing strategies” is being proposed. Deep discounting is a strategy utilised by large market players wherein the price of certain products is drastically reduced to capture the customer market. Brands will be prohibited from offering two sets of prices for the same product. Competition Commission of India and the DIPP will be prescribing the provisions to regulate this aspect.

However, a major concern with the proposed rule against “deep discounts” is the lack of clarity as to its definition in terms of the Policy and it seems to not take into account that e-commerce sites vary from business to business and have lower cost of operations.

Challenge of inventory management: The sale of domestically produced goods through online platforms would be promoted by allowing limited inventory-based B2C model, however, such a business model will require the products to be 100% made in India products, sold through platforms where founder/ promoter are Indian residents and the entity is controlled by resident Indian management, wherein foreign held equity does not exceed 49%.  There is a possibility that this proposal may be rolled back or incorporated without any limit.

Tax implications: A simplified GST procedures by allowing centralized registration. Further, the concept of ‘significant economic presence’ as the basis for determining ‘Permanent Establishment’ for the purposes of allocating/identifying profits of multi-national enterprises, between ‘resident’ and ‘source’ countries is being proposed. Further, for incentivising data storage within India, tax sops will also be provided.

Conclusion: On the backdrop of having a WTO compliant legislation and the pressure to counter China’s dominance in the sector, the Policy aims provides a framework for product pricing, regulatory overview and protection to Indian businesses against existing behemoth players. Various stakeholders are uniting to review the policy to provide their feedback to the government. With the current draft of the Policy possibly having an impact on sales strategies of e-commerce giants, only the efflux of time will tell whether the Policy will have an adverse impact on subsequent foreign investments in the sector.