E- commerce marketplaces have flourished by optimising fulfilment, enforcing seller discipline and enhancing buyer experience; and in the process have captured tremendous value from traditional retailers. However, Indian e- commerce marketplace models have
mostly evolved as antidote to FDI restrictions in B2C retail and e- commerce. Marketplaces have been positioned as IT platforms connecting storefronts with buyers. Though investigated occasionally, until now these models were neither affirmed, nor censured
conclusively by authorities. The new rules legitimises marketplaces, and re- affirms that inventory models will undoubtedly fall afoul of existing FDI restrictions in B2C e- commerce. While these bring a cheer to marketplaces, it also cramps their style by
placing operational restrictions on them. In the past, some states have sought to levy tax on marketplaces contending that they are dealers, and hence liable to VAT. Whereas marketplaces have resisted this claiming that they are only providing IT platform
for transactions. The new rules define marketplace as trade facilitators and it reinforces the stand taken by them. Further, the rules are expected to improve the tax positions taken by marketplaces on issues like entry tax. The rules clearly state that sellers
shall be responsible for delivery of goods to customers and thereby such taxes ought to be levied on sellers. However, in practice, since sellers may not have well developed logistics capabilities either they will be constrained to outsource delivery or otherwise
compromise consumer experience on marketplace. The rules catch up on seams of ongoing tussle between retailers and ecommerce entities by taming the horse through operational constraints. However, the horse may bolt through the door yet again! FDI policy cannot
apply to marketplaces that are entirely owned by resident Indians. Extending that principle further, could marketplaces set up as a step- down entity by Indian ‘owned and controlled’ companies, which itself may have foreign investment, also fly under the radar?
Considering the creative structures that have evolved around FDI restrictions in retail, this is not entirely inconceivable. - www.business-standard.com