As many as 76 members of the World Trade Organization [WTO] who constitute nearly half the WTO’s membership have begun a process of framing rules governing cross-border e-commerce. The initiative is being spearheaded by the United States, China, the European Union and Japan – the four largest trading nations – and has the tacit support of leading multinational companies [MNCs] viz Amazon,Walmart/Flipkart, Alibaba etc in the e-commerce market place.
India has strongly objected to the above move ostensibly on the ground that the WTO being a multilateral body wherein all decisions regarding international trade and investment are taken by consensus involving all members, the agenda cannot be driven only by a section of the membership. This may be sheer posturing.
The real objection stems primarily from an apprehension that in the event of India being a part of the negotiations, it will have to commit itself to harmonized WTO rules on e-commerce which will take away the ‘policy space’ currently available to the government in crafting its policies to suit its national objectives.
So, what are the apprehensions? How does the government seek to address these concerns by not being a part of the consultative process? Will it not be better placed by joining the negotiations? What is the way forward?
First, it fears that initiating negotiations on substantive obligations relating to e-commerce will oblige India to permanently accept current moratorium on imposing customs duties on electronic transmissions such as books, films, music, video games etc. Second, it fears that it will lose the much needed flexibility in formulating policies on foreign direct investment in multi-brand retail. Third, it fears that it won’t be able to control cross-border movement of data heightening concerns on privacy and national security. All the fears are either completely unfounded or exaggerated.
The government must not do anything which comes in the way of free flow of creative/innovative content [read: films, books, video games etc. Since, levy of customs duty on transmission of such stuff is a major speed-breaker, it should be shunned. In this backdrop, even if the current moratorium on imposing duties continues – post-agreement on e-commerce, that should be welcome.
As regards revenue, this can be taken care by imposition of a tax [also referred to as ‘digital tax’] on revenue derived from the activities of Indian users on the search engines, social media platforms and online marketplace of these companies. The Central Board of Direct Taxes [CBDT] has already mooted a proposal using the significant economic presence or digital permanent establishment [DPE] concept. This is also mentioned in the draft policy on e-commerce.
As regards, FDI in multi-brand retail [MBR], under a policy notified in 2016-17, 100% FDI in the market-place model of e-commerce is allowed. The market-place is an electronic platform on which vendors sell their products to consumers. The platform owner can only provide support services viz. warehousing, logistics, order fulfillment etc to the vendor but not undertake direct selling.
The guidelines were vague and lacked transparency which enabled global majors such as Amazon and Flipkart enter into direct selling without appearing to be in violation of the policy. To put it straight, 100% FDI in MBR was already permitted albeit through the backdoor. Vide a circular dt December 26, 2018, the government clarified that the owner of market place can neither hold equity nor control inventory of the vendor.
The Dec 26, 2018 circular had put fetters on global majors though it stopped short of barring them from getting in to direct selling. The government would like to retain this dispensation but apprehends that in case it joins the negotiations on e-commerce, it will have to make way for ‘unconditional’ entry of foreign companies in MBR. This again is a very myopic approach.
The way forward is to allow 100% FDI in retail in ‘online’ MBR and concurrently open up offline retail to 100% FDI [at present, 51% FDI is permitted in this segment subject to riders]. This will result in ‘clarity’ and ‘certainty’ of the policy environment and be beneficial to all stakeholders including MNCs and small traders. It will also give our policy makers confidence to join WTO negotiations.
On cross-border movement of data, India has taken a rigid position as articulated in the draft policy which requires foreign companies to set up local data storage facilities; mandatorily register business, have a local representative and give to the government access to source code and algorithms of AI [artificial intelligence] systems.
Such a restrictive data protection and regulatory regime would be out of sync with the requirements under a WTO – sponsored architecture. The latter is expected to reflect the concerns of global majors who won’t be comfortable with the hassles of setting up data storage locally and even handover the ‘data key’ [read: source code and algorithms of AI systems] to the local government.
India should consider ‘pragmatic’ and ‘flexible’ arrangements to address the concerns on protection of ‘sensitive’ data. Its approach should be one of risk assessment, identification of misuse and timely preemptive action taken in collaboration with the MNCs who are bound to extend full support willingly. Such a dispensation is also likely to pass muster under the WTO scheme of things.
This approach guided by the philosophy of mutual trust and accommodation will also help in capturing all the digital transactions needed for garnering tax revenue – indirect and direct – from the vendors as well as the market-place owner.
To sum up, India needs to shift gears from current ‘protectionist’ stance to being more ‘open’ and proactively engage with the USA/EU/Japan/China to frame rules of the game on e-commerce. Considering that the negotiations will move on – irrespective of whether India and its supporters join or not – this is the only way forward. For India, not to join will be suicidal as then, it will be presented with a fait accompli.