Mr Kishore Biyani of Future Group has alleged discrimination against brick-and-mortar players in FDI (foreign direct investment) policy vis-a-vis e-commerce companies in the retail space.
Meanwhile, seeing threat from near explosion in e-commerce transactions, the Retailers Association of India (RAI) [besides Future Group, it includes Reliance Retail, Bharti Retail etc] had petitioned the government seeking a level playing field. It also approached Delhi High Court (DHC) who directed that let government deal with it first and if problem persists, it will hear their plea after 4 months.
So what is the concern flagged by brick-and-mortar players? How does the discrimination arise? Are mom-and-pop stores also feeling the heat from e-commerce onslaught? What is the stance of government on FDI? What is the way forward?
Team Biyani argues that as per extant policy they cannot easily access FDI [in 2012, then UPA dispensation approved 51% subject to onerous conditions and prior approval of concerned state], whereas companies in e-commerce are getting millions of dollars from this source. The latter use this money to give heavy discounts thereby giving an unfair competition to former.
Giving heavy discount is by itself a bad idea. And, when this is propelled by external/foreign funds – coming at zero cost – the situation turns ugly! It tantamount to predatory pricing aimed at displacing brick-and-mortar players. Even the mom-and-pop stores or street corner shops won’t remain un-affected.
How do e-companies manage to get foreign funds ‘without any fetters’ despite operating in the same territory just as brick-and-mortar players do and ought to have been subjected to same onerous guidelines? The catch lies in former camouflaging their real stuff under a fancy name called “marketplace model” which enables them to circumvent FDI norms.
Their contention is that they provide a platform (a commonly known euphemism for this is ‘virtual world’) 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. This contention itself is highly suspect!
A close scrutiny clearly brings out that these companies have merely taken recourse to complex documentation engineering [Kishor Biyani prefers to call it “smart accounting”] to show that they are different whereas, in reality they are not. This also helps them to dodge on payment of taxes to states. For details, pl read:-
The emergence of e-commerce in the retail space may appear to be an attractive proposition to consumers for now. They are able to get items at throw away prices even while sitting at home free from hassles of physical shopping and even saving on fuel. But, the big question is how long will this honeymoon last?
This is residing on fragile foundation even as the discounts will stop the day foreign investors turn off the tap. The investors – mostly private equity players & hedge funds – are here with the sole objective of making money and will hive-off their investment at a time of their bidding [may be when stock gets listed].
Even so, e-commerce companies are not investing in building efficient supply chain or infrastructure for quality control and after sales services [this is in sync with their ‘declared’ role as facilitators/aggregators/service providers]. Recently, there were also reports of a company hauled up by Food and Drug Administration (FDA), Maharashtra for selling drugs in violation of the Drugs and Cosmetic Act (1940).
The extant arrangements are harming all stakeholders. If allowed to continue, they will destroy the very edifice of existing brick-and-mortar companies. As regards, street corner shops/mom-and-pop stores, already hundreds of them especially in consumer electronics had to down their shutters and many more will be forced to exit sooner than later.
There is also no guarantee that e-commerce companies will be able to provide a stable platform for meeting customer needs on a ‘sustainable’ basis. How can an operator who claims to be only performing the role of a facilitator – in plain words offering a meeting place to sellers and consumers – himself be a bedrock for providing full customer satisfaction.
If on the other hand, he is truly a seller performing all key functions viz., taking orders, raising invoice, keeping stocks, arranging delivery and accepting payments, then he should remove the smokescreen of a facilitator/service provider and subject himself to all the regulations applicable to a retailer.
In view of the RAI having already petitioned the Government and DHC also given a deadline, the latter should immediately get in to action mode. The real problem is not e-commerce per se, it has to do fundamentally with current uncertainty of policy environment for FDI in multi-brand retail (MBR).
For now, Modi – government has not altered the decision of erstwhile UPA dispensation in 2012 to permit 51% FDI in MBR with riders. The riders include sourcing 30% of requirements from small enterprises, a minimum investment of US$ 100 million besides giving full leeway to states on whether to grant permission or not. The policy is as bad as saying ‘No’ to FDI.
The government should put an end to this ambiguity once and for all. [Modiji is not averse to allowing FDI in areas where it can bring value addition and generate employment.] Ideally, it should go for 100% FDI in MBR without any riders. Already, 100% FDI is allowed in whole sale cash-and-carry and there is no reason why this should not be extended to retail.
But, it may go for 51% FDI in retail ‘without conditions’. This will instil confidence among brick-and-mortar players who will then be able to go for a long haul, invest in infrastructure, quality control etc and build an efficient supply chain. They will also have a level playing field vis-a-vis e-commerce players.
With FDI restrictions gone, regulating e-commerce from foreign investment perspective becomes redundant. Nonetheless, clarity about their business model is an absolute must to ensure that these companies pay taxes in full. Each one of them should be required to give clear-cut declaration with full details of their model.
For instance, if an e-company is genuinely a service provider then, it should go for a service tax registration and pay tax accordingly. On the other hand, if it is a retailer [the test of this should be ‘substantive’ operations and government must not get swayed by accounting jugglery] then, it should go for a Taxpayer Identification Number (TIN) and pay VAT.
Modi – dispensation should get cracking on the job promptly before things get even messier.