Friday 1 October 2021

Draft e-comm rules can be taxing

In the last few years, the Indian government has been taking steps to regulate the policy environment. Initially, social media companies came under intense scrutiny from the government, which was quickly followed by a set of rules that sought to regulate such companies. More recently, India has looked to regulate e-commerce companies. However, this move could have far reaching practical and legal challenges.

The primary challenge against the new regulations is that they seem to be based on a weak legal wicket and could create bureaucratic challenges. The way the term e-commerce entity has been defined, it brings a diverse range of businesses under its definition.

More importantly, the definition of e-commerce entity under the Draft Rules does not make a distinction between FDI and non-FDI marketplace, which seemed to have been the main driving agenda behind the new regulations. Hence, the new rules have taken a hammer approach to regulate the industry rather using a fine scalpel to achieve its purpose. However, at this juncture it is pertinent to analyse if these rules will stand the test of judicial scrutiny.

A preliminary perusal of the draft regulations makes it clear as to why most experts feel that the new rules will lead to mass confusion. Many provisions of the draft rules are in contrast with, or replicate provisions of other existing laws that are already in force and under jurisdictional purview of other regulators. Several proposals go beyond the scope of the Ministry’s rule-making powers under the Consumer Protection Act.

The rules pertaining to the ability of a marketplace entity to provide support services to sellers have already been set out in Press Note 2 of the FDI rules which allow e-commerce companies to provide ancillary services such as warehousing, order fulfilment, logistics and payment collection. The Press Note already imposes a restriction on sellers listed on a marketplace to buy a maximum of 25 per cent of its inventory from a related party of the marketplace entity.

Further, a wholesale entity is permitted to sell goods to any B2B entity in India, subject to restrictions, and general KYC requirements applicable to its business. Traditionally, the provision of services simplicitor, whether on B2C or B2B basis, is expressly and historically permitted under FDI under 100 per cent automatic route.

In terms of compliance officers assisting law-enforcement agencies, the IT Act already mandates the appointment of officers to help with responses to the Government, for responses to cyber security incidents. While, the data-sharing mandate under the Draft Rules has already been proposed to be regulated under the upcoming Personal Data Protection Bill, 2019.

Another layer of procedures

India already has a robust and comprehensive set of laws/regulations to deal with most facets of business envisaged by the draft consumer protection e-commerce rules. Which begs the question as to why such a targeted set of rules have been drafted to model e-commerce in India. The rules in their existing form also add a layer of compliances and mandatory procedures which will ultimately have a telling effect on Ease of Doing Business in India.

The mandatory requirement of registration with DPIIT combined with the overly broad definition of e-commerce entity creates ambiguity in whether a registration is required for all the entities or not. Further, there is no guidance on what the registration is used for, how it impacts customers and what are the applicable conditions for maintenance of the registration.

The draft rules also have a trickle-down effect on start-ups and small businesses. Companies that work with e-commerce entities to provide B2B services will be impacted as the draft rules impose a heavy burden on these players.

Further, these rules will hamper day to day business activities as the rules are extremely prescriptive on minute aspects of doing business such as font size in the invoice, how many persons to appoint for grievance redressal and compliance, promotions and ads, use of brand name of the entity, user interface in displaying products over and above existing legal requirements, ultimately providing no value add to customers or businesses.

For decades after its Independence, India was burdened by sluggish growth and an alarmingly weak economy due to the excessive bureaucratic red tape under the Licence Raj. However, we have witnessed the power of enabling regulations as India has emerged into a global superpower after a flurry of legislation unshackled India’s economy from bureaucratic and procedural chains.

The draft rules, if implemented, will take us back decades. In the last 30 years, India has also developed a robust legal and judicial framework. By focussing on these draft e-commerce rules, the government has completely missed the brief. A review of India’s existing laws and rules make it clear that the country does not need any more rules or laws.

India needs to implement the existing laws to uphold competitive business while also protecting the consumer and small businesses.

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