E-commerce draft policy plugs gifting loophole for foreign sites

Among other things, taking note of complaints against several Chinese e-commerce players such as Shein, Ali Express etc for sending shipments as 'gifts' to customers in India and avoiding duties, the government has now mandated that all e-commerce sites and apps must have a registered business entity.

This will be the importer on record and subject to customs rules, report Subhayan Chakraborty, Neha Alawadhi and Karan Choudhury.

Illustration: Uttam Ghosh/Rediff.com

Protection of consumer data stands out as the dominant theme of the much-awaited e-commerce draft report released on Saturday, February 23.

Prepared by the department for promotion of industry and internal trade (DPIIT) along with a clutch of other ministries, the draft has granted the industry a three-year window for making a shift to the local data storage requirements.

Aiming to step up onshore digital commerce, the report also hints at regulating Chinese e-commerce apps.

Ruling out the need for a new regulator, the draft, which will be finalised after consultations with stakeholders, has recognised the standing group of secretaries on e-commerce as the primary body for regulating the high growth sector.

Online retail commerce, which was pegged at $38.5 billion end of 2017, is projected to grow to $200 billion by 2026 in the country.

This excludes travel and tourism and business-to-business transactions.

In what is seen as a balancing act after the recent changes in the foreign investment rules linked to e-commerce, the 41-page policy docket may not be hard on foreign majors such as Amazon and Walmart, which controls Flipkart.

"Companies such as Amazon and Walmart have all the data present in India, so they will not have to make any changes.

"Also most of the things being talked about in the draft are being done anyway.

"So I think they are in the clear," said a top executive at an e-commerce firm.

Data protection all the way

With a tagline 'India's data for India's development', the report focuses on various aspects of data including use of artificial intelligence to track consumer behaviour for targeted marketing.

From information on the frequency of visiting a website to search results to the time spent in reading an article simultaneously stored in the cloud, the report deals with all this and more in detail.

"By tracking the search and browsing histories, online retail websites are able to target consumers with tailor-made marketing content," the draft says.

"Among the most prominent features of the draft e-commerce policy is its emphasis on data protection, including data collected by users in India and restrictions on sharing of such data, even if it is stored outside the country, even if a customer consents to such data storage," said Atul Pandey, partner at Khaitan & Co, said.

Pandey said: "It remains to be seen as to how the stringent EU General Data Protection Regulation interplays with such strict conditions on data sharing provided in the draft e-commerce policy."

In an effort to bring in small traders and retailers online, the draft states that advertising charges in e-commerce must be regulated, especially for small enterprises and start-ups.

In view of artificial intelligence (AI), big data and deep learning being used by organisations, the policy has called for regulators and law makers to set up dedicated 'technology wings'.

"This would help them understand and analyze transactions in proper light."

In what is likely to be a controversial move, the policy wants the government to be able to access source code and algorithms of AI-based systems.

"There is a need to strike a balance between commercial interests and consumer protection issues, as well as issues of larger public concern, like preventing racial profiling and maintaining constitutionally mandated rights, such as the right to equality," the policy states.

Reiterating its earlier demand, the draft makes it clear that global online giants in the sector must appoint local representatives in India.

Chinese firms on DPIIT radar

Any foreign e-commerce player planning to sell in India needs to set up local offices and have representatives present onshore, making it tough for many international businesses to survive in the country.

Taking note of complaints against several Chinese e-commerce players such as Shein, Ali Express etc for sending shipments as 'gifts' to customers in India and avoiding duties, the government has now mandated that all e-commerce sites and apps must have a registered business entity.

This will be the importer on record and subject to customs rules.

This alone can be the entity through which all sales in India are transacted.

After customs officials found widespread exploitation of a law permitting Indians living abroad to send 'gifts' worth up to Rs 5,000 to relatives at home without paying any duty, the government has now banned all such parcels, with the exception of life-saving drugs.

Any player in the sector with access to the data of Indians must nominate a local representative to be responsible for the affairs of the company in India.

While warning about the dangers of massive revenue and data loss that will accompany the World Trade Organisation's push towards creating a global set of e-commerce rules, the government hasn't made it clear whether it will enter the talks, if the rules are changed.

"During negotiations, policy space must be retained to seek disclosure of source code for facilitating transfer of technology and development of applications for local needs as well as for security," the policy said.

Policy space to grant preferential treatment of digital products created within India must also be retained, it added.

However, New Delhi has hinted that it is willing to tax electronic transactions in the near future.

In contrast to the leaked first draft that had drawn much flak, the latest e-commerce draft policy has found many takers.

From firms like Snapdeal to even trader bodies including Confederation of All India Traders (CAIT), all have given their stamp of approval.

Gurugram-based Snapdeal said the draft policy's categorical rejection of inventory based e-commerce model must be followed by effective implementation of FDI norms to ensure marketplaces do not own or control inventory, directly or indirectly.

"The recognition of data as a strategic national asset is well-timed and will lead to the development of required regulation in this regard," said the company's spokesperson.

Last year, the unreleased draft was heavily criticised for being one-sided and slanted towards e-commerce players such as Paytm, Ola and Snapdeal. Many stakeholders, including international investors such as SoftBank, had raised concerns.

Finally, the draft was junked and never released for public consultation.

Even organisations such as CAIT had raised concerns on the issue claiming it would have adverse effects on offline businesses.

Walmart-owned Flipkart plans to give its comments as the government at the moment is seeking consultation on the draft policy.

"We are going through the draft, which has been just released for comments and will be sharing our inputs in due course.

"We look forward to working with the government and other stakeholders in developing this nascent sector, making India a competitive economy and driving greater benefits to consumers, farmers, small suppliers, infrastructure development and innovation," said Rajneesh Kumar, Chief Corporate Affairs Officer of the Flipkart Group.

Amazon India said it is studying the draft policy and will provide inputs during the public review period.

"We look forward to an enabling policy to serve over 450,000 sellers and a policy that will allow us to scale up our logistics network, create new jobs and infrastructure, digitise payments and delight our customers," the company said in a statement.

Even trader organisations that have for long demanded a level-playing field for offline businesses, said the draft e-commerce policy "looks to be innovative and good".

However, they do believe that several things have been left out that need to be addressed.

"Some red herrings need to be changed.

"First thing's first, this policy is putting everything on the Standing Group of Secretaries and DPIIT.

"Instead, this should be through a committee headed by representatives of various stakeholders, so that the workings are answerable to the people and Parliament.

"The e-commerce policy should provide substantial platform for business.

"The policy seems to be silent on domestic e-commerce players that is undesirable.

"They should also be brought under the policy," said Praveen Khandelwal, secretary general of CAIT.