E-commerce in India is set to grow exponentially from $10 billion in 2015 to $250 billion in 2025.
E-commerce in India is set to grow exponentially from $10 billion in 2015 to $250 billion in 2025, according to media reports, and this growth is expected to be disruptive, with many old forms and practices of doing business struggling to survive with the advent of new technology and changing consumer demographics, preferences and habits. E-commerce is one of the most appropriate business models for a country like India, where infrastructure development including roads, power and quality of real estate has not been able to keep pace with the aspirations of its citizens.
The country’s e-commerce growth story has been fuelled by substantial foreign direct investment (FDI) made in the overall ecosystem. Recent clarifications issued by the government on e-commerce pave the way for further investments to take place. However, one must keep in mind that the journey is long and will go through its own experimentation, challenges and iterations, before it evolves into a model that is suitable for India.
According to guidelines recently issued by the government, 100% FDI under the automatic route is permitted in the marketplace model of e-commerce, while the same is not permitted in the inventory-based model. The marketplace model refers to providing of an information technology platform by an e-commerce entity on a digital and electronic network, to serve as a facilitator between buyers and sellers. Stringent conditions have been imposed on such models; one vendor or its group entities are not permitted to carry out more than 25% of the sales, an e-commerce entity will not exercise ownership over inventory, and that such an entity will not directly or indirectly influence sales price of goods or services.
Now, it is evident from these guidelines that the government has performed a balancing act, given the demands of offline retailers and the existing e-commerce businesses, including investors.
Besides encouraging further investments, e-commerce could help support the government’s agenda to filter out the parallel economy from the country. More than 95% of retail sales in India are made through 11-12 million mom-and-pop stores, according to media reports. A significant portion of these sales are not yielding proportionate tax revenue, as a large part of the supply chain, especially at the retail end, is outside the tax net. It is one of the biggest sources of a cash economy where millions of transactions of purchase and sale of goods and services are done in cash.
In contrast, e-commerce invariably creates a transaction trail, right from the seller to the buyer, including where the mode of payment is Cash on Delivery (CoD). Sellers are bound to register and provide full information to the marketplace, intermediary logistics companies track the package from the pick-up point to the final delivery destination, and the ultimate consumer irrespective of whether she pays online through a credit card or CoD is identifiable. Thus, sellers and buyers are now identifiable and could be potential taxpayers for the government. The increasing use of wallets and credit cards is creating trails and also bringing in idle cash within the economy.
It is pertinent to note that, once the goods and services tax (GST) is introduced, vendors in the supply chain shall be required to register with tax authorities, else the credit chain would break. E-commerce, in turn, shall support GST with complete information about each value addition/vendor available in the system.
The digital trail created by e-commerce transactions through the use of smartphones and other devices and the use of credit cards, wallets, etc, over the internet, combined with data analytics and risk-assessment tools, might provide a powerful medium to the government to curb the menace of black economy.
Written by: Amarjeet Singh & Vikas Vasal. Authors are partner, Tax, KPMG in India. Views are personal