Last month, reports suggested that the Narendra Modi government planned to drop the Draft National E-Commerce Policy, 2019 released by the Department for Promotion of Industry and Internal Trade. An inter-ministerial committee of relevant line ministries questioned the rationale behind the proposed policy, and cited a lack of coherence on multiple issues. At the same time, there are also reports that the government seeks to tighten the screws on e-retailers like Amazon and Walmart through changes in the Foreign Direct Investment policy for e-commerce. These may look like distinct developments, but can reflect a larger shift in India’s approach to e-commerce. Specifically, these policies contain no consistent definition for e-commerce, and how we define it will determine the future of the digital economy.
The Foreign Direct Investment (FDI) policy for e-commerce predates the Draft E-Commerce Policy, 2019, but both have been mired in controversy. On the one hand, foreign entities have batted for liberalisation of the sector, while on the other, local trade bodies have sought protections.
From 2014 to 2018, the term e-commerce was used synonymously with e-retail. It was also a time when giants like Amazon, Flipkart, and Snapdeal spread their tentacles into India’s tier-2 and tier-3 markets. However, a World Trade Organization (WTO) Ministerial Conference in December 2017 was an inflection point. Developed countries like the United States and the United Kingdom mounted pressure on India to negotiate binding trade rules on e-commerce through a new initiative with over 70 other countries. India was caught off-guard at the conference, and this hastened a revisit of the domestic policy framework to account for online actors other than e-retailers to better prepare for international negotiations in the future.
India opposes international negotiations on e-commerce on the principle that this could impact the ‘policy space’ available to develop its domestic digital economy. However, the country might need to revisit this stance, because the WTO initiative that started in 2017 has gained momentum. The Draft National E-Commerce Policy was an attempt by the Modi government at drawing the boundaries for domestic rulemaking. A key critique of the proposed policy by analysts is that it is maximalist and attempts not just to broaden the scope of the definition of ‘e-commerce’, but also to regulate many aspects of India’s digital economy. For instance, the 2019 draft covered rules concerning the governance of personal data, even when a Personal Data Protection legislation was under construction.
If India scraps the e-commerce policy and revisits FDI Policy as reported, it may simultaneously find it prudent to take a harmonised definitional approach. India currently has no unifying definition of e-commerce. The FDI Policy has a transaction-based definition for e-commerce, limiting it to buying and selling of goods and services. In contrast, rules linked to the Goods and Services Tax (GST), as well as the recently notified equalisation levy on e-commerce operators, adopt a broad definitional approach that covers all methods of supply of goods and services online.
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Broad vs narrow definition
E-commerce means the “buying and selling of goods and services including digital products over electronic or digital networks”, according to the extant FDI Policy. While this encompasses the trade of goods and services, it excludes those services, which are provided free of cost. It also leaves out the distribution of digital products such as online audio-visual content. Instead, it puts additional obligations on foreign-owned e-retail operators and disallows the ownership of goods sold on a marketplace. This stems from the hesitance shown by successive governments to open up retail to foreign competition completely.
Conversely, the 2019 Draft National E-Commerce Policy’s definition — “e-commerce to include buying, selling, marketing, or distribution of goods, including digital products and services through electronic network” – is similar to the WTO’s all-encompassing definition. Consequently, the Draft Policy deals with facets that are beyond the scope of e-retail alone. A domestic definition, better aligned with multilateral, future plurilateral, or bilateral trade negotiations may allow the government to delineate the boundaries of this ‘policy space’.
However, if it chooses to widen the definition of e-commerce in the FDI Policy, the Modi government would do well to create a rules-based framework that accommodates specific characteristics of the digital services economy.
The existing framework for e-retail cannot be force-fitted into an overhaul for two reasons. First, it prohibits most forms of vertical integration. Specifically, it restricts e-commerce players with foreign investment from owning equity shares in any of the vendors who sell on their marketplace platforms.
Second, the FDI Policy also prohibits e-commerce entities from ‘directly’ or ‘indirectly’ influencing the prices of goods or services sold on their platforms. This creates intractable difficulties in implementation if services are explicitly covered under this rule. Take for example, ride-hailing platforms like Ola and Uber. The prices for their services are calculated based on several factors, including the expected time and distance of rides, which are shown to users before their journey. This price discovery process is integral to such services.
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Balancing India’s international commitments
Any change in foreign investment conditions in the country should also be in consonance with India’s obligations under international investment agreements or bilateral investment treaties (BITs). The Delhi High Court endorsed this position in a recent judgment when it held that the country should not invoke its domestic laws as a justification for its failure to fulfill its international obligations.
Indian BITs follow the post-establishment or post-entry model, which provides no general rights of admission and establishment. To put it differently, India’s obligations come into effect only after a foreign player has invested in India. Most such BITs also contain ‘national treatment’ and ‘fair and equitable treatment’ clauses, which obligate India to maintain a predictable and stable legal environment, while prohibiting discrimination between domestic and foreign investments.
In 2017, India terminated 58 BITs, including those with countries such as Germany, France, and the United Kingdom, as the country faced multiple arbitration claims. However, investments made before the termination of the 58 treaties are protected for several years (10 -20 years depending on the treaty) under the ‘sunset’ clauses in those BITs. These essentially stipulate that a treaty will continue to be effective for a further period, from the date of the termination in respect of investments made before that date.
The term e-commerce is not yet defined consistently across legal instruments, but to remedy this inconsistency Indian decision-makers may look to harmonise the definition with international trade discussions on the subject. Expansion of the scope of the term e-commerce through the FDI Policy is a low hanging fruit. But, it should not be picked without a nuanced overhaul of related investment rules that may impact the burgeoning digital services ecosystem.
The authors works at Koan Advisory Group, a technology policy consulting firm. Views are personal.
This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector. Read all the articles here.