All you need to know about setting up an E-Commerce business in India

In the previous article we had learnt about what the e-commerce ecosystem is and how it functions in India, the Government of India initiatives taken to promote the same and the Foreign Direct Investment (“FDI”) norms for investment in the e-commerce ecosystem in India.

In this article we shall be learning about the laws and regulations applicable, compliances required for an e-commerce startup and the related impact on the economy.

Laws and regulations applicable

i. Information Technology Act, 2000 (“IT Act”) –

The e-commerce is similar to the traditional marketplaces with the only difference of non-availability of flesh and blood to sell things. Through e-commerce also, the sellers have to generate bills, pay taxes, file returns, prepare ledgers, and maintain records which are done online. The IT Act is the primary legislation that governs and regulates the services provided by e-commerce platforms in India. The IT Act governs online conduct and related aspects of e-commerce and recognizes electronically concluded contracts and digital signatures which are essential for facilitating paper less trading. The Act aims at regulating the use of the Internet by providing punishments for publication of obscene information or hacking or destroying or altering the data from devices.

• Indian Contracts Act, 1872 –

Governs the conditions for validity of contracts formed through electronic means; communication and acceptance of proposals; additionally, revocation, and contract formation between consumers, sellers, and intermediaries. Further, the terms of service, privacy policy, and return policies of any online platform must be legally binding agreements. The seller and buyer on an e-commerce platform enter into an electronic contract while the seller provides the good or services to the buyer. For this purpose, it is important to read the Indian Contract Act with the Information Technology Act, 2000.

• Transaction security is one of the most important aspects of e-commerce. It is absolutely essential for any e-commerce business to ensure reliability and security of transactions being conducted over the internet. The most reliable means is through cryptography.  The most popular and useful method of encryption is public-key cryptography; that is, encryption and decryption techniques involve the use of two kinds of keys, public keys and private keys both of which are mathematically linked. One key is used for encryption and the other corresponding key is used for decryption. The IT Act regulates encryption in India.
• Digital Signatures – These are electronically attached signatures that can be annexed to e-contracts by the parties and shall be treated equivalent to physical signatures. Section 3 of the IT Act establishes that a signature could be sent using public-key cryptography. In order to link the identity of the sender with the signature, it is necessary to attach a digital certificate which is issued by a certifying authority that confirms the identity of the sender.

ii. Payment and Settlements Systems Act, 2007

A ‘payment system’ indicates a system that enables payment to be effected between a buyer and a seller. An e-commerce business has to qualify as a payment system and comply with the relevant rules of RBI relating to online payments. Further, it is mandatory for every intermediary that is receiving payments through electronic modes to have a Nodal Account in operation for settling the payments of the merchants on its online e-commerce platform.

iii. Sale of Goods Act, 1930

The Sale of Goods Act, 1930 covers what the sales and shipping policy of the e-commerce business must contain. Additionally, such as the warranties, conditions, and the refund and return conditions.

iv. Consumer Protection Act, 2019 read along with Consumer Protection (E-Commerce) Rules, 2020

In order to protect the interest of the consumers, the central government has enacted the Consumer Protection Act, 2019. Section 94 of the Consumer Protection Act, 2019 provides that for the purposes of preventing unfair trade practices in e-commerce, direct selling and also to protect the interest and rights of consumers, the Central Government may take such measures as required. For the same purpose the Consumer Protection (E-Commerce) Rules, 2020 have been enacted to provide the details of the compliances required by every e-commerce business.

Compliance requirements for E-commerce business in India

i. Indian Contracts Act, 1872 read with Information Technology Act, 2000 – Terms of Service, Privacy Policy and return policies of any e-commerce platform are to be laid out such that they are legally binding agreements.

ii. Information Technology Act, 2000 and rules thereunder – Compliances under Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data Or Information) Rules, 2011 for the policy of privacy and the disclosure of information. Under section 79 of the IT Act certain safe-harbors are available to e-commerce entities functioning as ‘Intermediaries’. Regulations are also applicable to ‘Intermediaries’ relating to the content displayed on the platform, especially pertaining to defamation and obscenity. The Information Technology (Intermediary Guidelines) Rules 2011 lays down stringent liability for e-commerce businesses in India. A digital due diligence is advisable before commencing any e-commerce business. If the end consumers happen to be a European Union resident, General Data Protection Regulations (GDPR) compliance becomes mandatory.

iii. Intellectual Property Issues – the e-commerce business must secure all trademarks in accordance with the Trademarks Act and copyrights intended to be used by it, one must also be mindful to not infringe the trademarks and copyrights of other businesses as well. In the age of such wide use of the internet, e-commerce entities should be aware of various intellectual property infringements that may happen online such as cybersquatting, identity theft, copyright infringement, caching, derivative works, domain name protection, etc.

iv. As per the Reserve Bank of India (“RBI”) notification DPSS.CO.PD.No.1102 /02.14.08/ 2009-10 dated 24 November 2009, it is mandatory for an intermediary which is receiving payments through electronic modes to have a Nodal Account in operation for settling the payments of the merchants on its online e-commerce platform. Further depending on the arrangements for payments for the transactions on the platform, the entity must comply with the relevant rules relating to online payments made by the RBI.

v. Legal Metrology Act, 2009 read with Legal Metrology (Packaged Commodity) Rules, 2011 – The e-commerce platform must display requisite information about the goods displayed on sale, such as, units, dimensions, weight, etc. on the display page of the products itself.

vi. Fixation of prices by arrangements between sellers listed on the platform, exclusive sales agreements, and other practices under the scope of Sections 3 and 4 of the Competition Act, 2002 can be brought under the scrutiny of the Competition Commission of India. The e-commerce business must be mindful of these factors while entering into any arrangements.

vii. Goods and Service Tax Registration – it is mandatory for all e-commerce platforms and sellers/distributors/suppliers who sell through e-commerce to get GST registration in all States where they purport to sell their goods/services.

Impact of E-commerce success in India

The E-commerce industry has been directly impacting micro, small & medium enterprises (MSME) in India by providing means of financing, technology and training and has had a favorable cascading effect on other industries as well. The Indian e-commerce ecosystem has been on an upward growth trajectory and is expected to surpass the US to become the second largest e-commerce market in the world by 2034. Technology-enabled innovations like digital payments, hyper-local logistics, analytics driven customer engagement, and digital advertisements will likely support the growth in the sector. The growth in e-commerce will also boost employment, increase revenues from export, increase tax collection, and provide better products and services to customers in the long-term. With a turnover of $50 billion in 2020, India became the eighth-largest market for e-commerce, trailing France and a position ahead of Canada.

The Indian online grocery market is estimated to reach US$ 26.93 billion in 2027 from US$ 3.95 billion in FY21, expanding at a CAGR of 33%. India’s consumer digital economy is expected to become a US$ 1 trillion market by 2030, growing from US$ 537.5 billion in 2020, driven by the strong adoption of online services such as e-commerce and edtech in the country.

According to Grant Thornton, e-commerce in India is expected to be worth US$ 188 billion by 2025.

References: Media Reports, Press releases, IBEF Blog

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