After ICA, Now Reliance Retail, Future Group Alleges Ecommerce Giants For FDI Violation

Indian ecommerce, touted by IBEF to be a $38.5 Bn market as of 2017 and expected to reach $200 Bn by 2026, is presently going through a phase of turmoil. As indicated by a few recent developments, the certain segments of the ecosystem consider this growth as a result of the ‘unfair play’ and now demand a government intervention to plough a level playing field.

As per an ET report, a group of brick and mortar retailers including Future group and Reliance Retail have alleged that ecommerce companies like Flipkart, Amazon India are violating FDI rules by “influencing prices on their platforms and illegally funding “abnormal discounts.”

A letter in this regard has been submitted to Minister of Commerce and Industry Suresh Prabhu by the Retailers Association of India (RAI) asking for government intervention and taking an action against the ecommerce marketplaces.

Most recently, Handset maker’s lobby Indian Cellular Association (ICA) had alleged that Flipkart and Amazon India are violating FDI (foreign direct investment) rules by offering discounts — directly or indirectly — on mobile phones and other products through intermediaries or partner companies. The association represents handset makers such as Apple, Micromax, Nokia, Vivo, Lava and Lenovo/Motorola.

The Press Note 3 states that 100% FDI investment in ecommerce companies is allowed under the automatic route if the companies are engaged in B2B  sales, not B2C transactions. The norms highlight that they can’t have an inventory-based model that involves goods being sold to consumers directly. Such ecommerce companies can only function as marketplaces to connect vendors with buyers and they can’t influence prices.

To be noted, Amazon India operates in India through its subsidiaries such as Amazon Seller Services, Amazon Wholesale India Pvt., Amazon Pay and sellers on Amazon platform such as Green Mobiles, Rocket Commerce, Darshita Electronics and others.

On the other hand, Flipkart operates through Flipkart Internet, Flipkart India, Ekart Logistics, PhonePe and sellers on the platform such as Retailnet, SupreComnet, Omnitech Retail, Trunet Commerce and India FlashMart.

Both Flipkart and Amazon India has given media statements indicating that on their part, they have been fair and are have not been flouting the FDI rules in any manner.

Apart from the issues related to FDI, the Indian ecommerce companies are also facing the ire of Income tax authorities.

The Indian ecommerce unicorn, Flipkart recently lost its appeal to the Income Tax (IT) department over the reclassification of marketing expenditure and discounts as capital expenditure (capex), which involves substantial tax liabilities.

As per the latest ruling, the IT department wants ecommerce companies to reclassify discounts not as a cost but a capital expenditure, meaning that it should not be deducted from revenue and should, therefore, be taxable.

While the government has set up an ecommerce think tank to evaluate a policy for the sector, the claims of FDI violation by ecommerce majors is a huge setback for the sector. However, what happens after such allegations could either be a huge turnaround for the sector or a lesson for the companies.