Ecommerce24’s Pros and Cons on FDI in ecommerce

FDI in e-Commerce – Pros and Cons by Business Head at Ecommerce24 Manish Patil:

Views on FDI

Indian e-commerce industry is poised to cross USD 50 billion mark by 2020 and has the potential to become one of the largest markets. Heavy investments to the tune of tens of billions are required to fast track growth of the industry. We believe FDI in B2C ecommerce would create healthy competition, will boost infrastructure development and spur manufacturing facility besides bringing in the much needed investments for several local online businesses and SMEs that often perish because of cash flow drying up. It will also play an important role in growth of supporting agencies and service providers like logistics, payments and data analytics firms. Global players like Amazon will benefit the most of it as they can than hold their own inventory and sell directly to consumers rather than the current model where they provide platform to third party sellers who sell their products to customers. At present, foreign companies can engage in business-to-business e-commerce, where 100% FDI is permitted. On the other side allowing FDI in the sector will “cannibalise” brick and mortar retail stores. It is therefore of critical importance to create the right policy environment for the liberalisation of B2C e-Commerce.

Pros:

1. Boost to the infrastructural development: Increased capital will help to establish supply chain, distribution system and warehousing.

2. Impetus to manufacturing sector: Growth in retail sector will have cascading effect in the manufacturing sector which will positively contribute to overall growth of economy and job creation.

3. More efficient supply chain management: Will reduce the need for middlemen leading to lower transaction costs, reduced overhead and reduced inventory and labor costs.

4. Adopting best global business practices: Will lead to better work culture and customer service.

5. Increased outreach: Will provide increased access to buyers/sellers; allow MSMEs and artisans to reach out to customers far beyond their immediate location, both locally within India and abroad.

6. Traceability and transparency: Will not only empower consumers with information and data but also help in better compliance of regulatory framework.

7. Reduced costs: On marketing and distribution, travel, materials and supplies will benefit businesses

8. Improved customer service: Providing more responsive order taking and after-sales service to customers and competitive pricing

9. Positive spillover effect: It also said the growing e-commerce industry can have a positive spillover effect on associated industries such as logistics, online advertising, media and IT/ITES. Currently e-commerce accounts for 15-20 percent of the total revenues for some of the big logistics companies.

10. Benefit Local players and boost economy: Other than foreign players like Amazon and eBay, opening up of FDI in this sector is likely to benefit existing local companies who need more capital to expand their business in a rapidly growing market. It could also lead to a better work culture, information data and improved customer service by providing more responsive order-taking and after-sales service to customers, along with competitive pricing

Cons:

1. Extinction factor: One of the primary fears of allowing FDI in e-commerce would seriously impair small time trading of bricks and mortar stores. Small shopkeepers are not highly qualified and will not be able to compete with sound e-retail business. Displacement of small stores is big challenge.

2. Local Sourcing: At present, e-retailers including Amazon works on inventory based model which can adversely impact the SMEs, and therefore the question of local sourcing arises as in the case of FDI in multi brand.

3. Unemployment: Another serious issue of small time businesses and kirana stores being the largest source of employment in the country, opening the business to consumer (B2C) ecommerce on inventory based model is likely to seriously impact these shopkeepers, leading to large scale unemployment.

4. Taxation: Along with FDI, taxation is a key consideration impacting e-retailers’ business model ,operational strategy and future growth. Lack of physical boundaries and the intangible nature of operations create several income-tax and indirect tax issues at each stage of the value chain.

5. Advertisement and promotion: E-commerce companies provide customers various incentives such as credit points, cash back, cash rollover, re-purchase discounts, buy one–get one free, combo-pack discounts and so on. The valuation of products and services for indirect taxes are, in general, based on the stream of considerations received, and an incorrect valuation could expose the e-commerce companies to higher taxes, interest and penalties.

6. Stock procurement and management: E-commerce companies engage in activities such as branding, repacking, labeling, re-affixation of MRP, gift wrapping and so on for shipping products to customers. Based on the activity and the value addition to the final product, it may qualify as ‘deemed manufacture’, under the Central Excise Legislation, chargeable to excise duty.

7. Dispatch and delivery: The supply chain of e-commerce companies is usually thin and hence they use drop shipment, wherein the vendor of the e-commerce company directly delivers the product to customers. The vendor, the e-commerce company and the customer could be in different States and the place of taxation could vary based on the transaction. Further, registration and compliance management in the respective States would pose significant challenges to the e-commerce company.