20 March 2023
Each one of us is aware of how much e-commerce has created buzz in India. E-commerce has brought a paradigm shift in trading not just in India but throughout the world. We all have heard so much about e-commerce, but do we all know what it actually is?
E-commerce is a type of business model, or segment of a larger business model, that enables a firm or individual to conduct business over an electronic network, typically the internet. Electronic commerce operates in all four of the major market segments: Business to Business (“B2B”), Business to Consumer (“B2C”), Consumer to Consumer (“C2C”) and Consumer to Business (“C2B”).
B2B means when various businesses build new relationships with other businesses for efficiently managing several of their business functions such as distribution services, procurement services etc.
B2C means direct dealings between businesses and consumers. With the emergence of e-commerce such transactions have gained the most momentum.
C2C is where one consumer connects and does business with other consumers such as on eBay and quikr.
C2B consumers provide product development ideas or in online platforms where consumers provide product reviews which are then used for advertisement purposes.
A part of the reason for the boom of e-commerce in today’s times is the increased use and access to the internet and that in turn creates varied opportunities for businesses. The rapid popularity and acceptance of e-commerce throughout the world is driven by the greater customer choice and improved convenience in commercial transactions with the help of internet where the vendor or merchant can sell his products or services directly to the customer and the payment can be made electronic fund transfer system. Due to these conveniences and ease in doing business, the e-commerce market and its holding in the whole trade and commercial transactions is increasing in demand as well as expanding very fast replacing non-e-commerce transactions in so many sectors. E-commerce is already appearing in all areas of business and customer services.
SETTING UP E-COMMERCE BUSINESS IN INDIA
Bill Gates once said: “If your business is not on the internet, then your business will be out of business.”
If you are thinking of venturing into the e-commerce market space, it is best to take a deep dive into the waters now.
There are two ways in which you can start an ecommerce business in India:
The government of India has been promoting the upcoming boom in the E-commerce ecosystem with government initiatives such as Startup India, Digital India, allocation of funds for the BharatNet Project, promotion of ‘cashless economy’, the launching of the Unified Payment Interface by the RBI and the National Payment Corporation of India which have collectively contributed to the growth and success of the e-commerce sector in the country.
E-commerce ecosystem is a fairly open space and not many restrictions or entry barriers have been imposed for domestic as well as Foreign Direct Investment (“FDI”) in India. Every business owner who intends to start an e-commerce business shall require to keep a few things in mind and follow the steps to establish its business in India
Creating a business plan is the most basic step to start an e-commerce business. However, it is also the most essential step in setting up your e-commerce business; if done wrong, all the further efforts can go in vain. Your business plan must be designed according to the market research, financial budget, and profit margin. Similar to a traditional store, an online e-commerce store also requires a business model. However, remember that the right business plan is crucial for implementing your business model.
The ultimate goal for an e-commerce entrepreneur is to raise funds, so the most popular business structure for them is a private limited company. Along with that, any online business who wants to accept online payments is required to be set up as a registered company. This is needed so that they can establish a secured payment gateway on the website.
Every business that is receiving any sort of revenue is mandatorily required to register with the taxation authorities for tax compliances such as Income Tax , Goods and Service Tax, etc.
A payment gateway is a must if you have your own website, all major marketplaces have an existing payment gateway infrastructure especially since most purchase and sale transactions are paid for online these days.
Shops and Establishment Act, 1948: This is important if you wish to have a payment gateway for your online store. Also, it is mandatory if you wish to set up a physical shop and employ people.
Micro, Small and Medium Enterprises Act, 2006 (MSME) Registration: MSME registration comes with its own set of benefits and it is required for any e-commerce business falling within the limits of maximum investment for service providers to be INR 100 crore to appropriately register under MSME.
Employees State Insurance Act, 1948: If there are at least 20 workers, registration with the Employee State Insurance Act is necessary.
Mumbai requires special professional tax registration & local body tax and compliance with the labor department. No such taxes or registrations are needed in Delhi and Haryana.
To launch the e-commerce business, registration for domain name, Microsoft and other software licenses shall also be needed.
FDI NORMS FOR E-COMMERCE BUSINESS IN INDIA
The FDI in the e-commerce startup ecosystem can lead to an influx of capital and enhance its growth potential in India. E-commerce businesses utilising the marketplace model have registered significant growth in the recent past.
The Government has understood the potential of the e-commerce industry to contribute to the development of the economy as a whole through job creation, productivity improvement and enhanced customer choices. Keeping this in mind, and the interests of various stakeholders, the Government has formulated an e-commerce policy which is still in draft form ("E-commerce Policy"). The foreign direct investment ("FDI") regulations pertaining to e-commerce is contained in Paragraph 220.127.116.11 of the Consolidated Foreign Direct Investment Policy of the Government of India dated 15 October 2020 ("FDI Policy").
The FDI policy outlines what shall constitute an "Inventory based model of e-commerce" and what shall constitute a "Market Place based model of e-commerce". An "Inventory based model of e-commerce" is defined as an activity where inventory of goods and services is owned by the e-commerce entity, and a "Market Place model of e-commerce" is defined as providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. The FDI policy permits FDI in the market place model of e-commerce to the extent of 100% under the automatic route (i.e. without prior government approval). However, FDI is not permitted in inventory based model of e-commerce.
Even though there are no entry barriers, a few conditions have been specified which need to be fulfilled for the marketplace e-commerce entities which are –
FDI Policy for Manufacturing entities selling on E-Commerce :-
The FDI Policy permits manufacturers to sell their manufactured products in India through retail and/or wholesale, including e-commerce, without government approval, i.e. under automatic route. But For food products produced or manufactured 100% FDI is allowed under only government approval route.
FDI Policy For E-commerce Multi-Brand Retail Trading Entities :-
The FDI Policy prohibits retail trading in any form through e-commerce for the companies with FDI engaging in the activities of multi-brand retail trading.
Consumer protection issues
As per draft E-commerce Policy, emphasis is laid on following issues:
E-commerce entity operating in India needs to have a business entity registered in India, to ensure compliance with laws in India.
Emphasis on Made-In-India:
The government’s new policy will allow foreign MNCs to invest in Indian e-commerce companies which hold inventory. They may be allowed to hold up to 49% stake in such companies. Earlier, the permissible limit was 0%. However, there is a stipulation. 100% of the products being held in the inventory of such companies must be Made In India.
E-commerce has revolutionized the way businesses operate, not just in India but around the world. It is a business model that enables firms to conduct business over an electronic network, typically the internet. E-commerce operates in all four major market segments: B2B, B2C, C2C, and C2B. The ease and convenience of conducting commercial transactions over the internet have led to the rapid popularity and acceptance of e-commerce worldwide.
Here are some frequently asked questions about e-commerce in India:
FDI (Foreign Direct Investment) in e-commerce refers to the investment made by a foreign company in an Indian e-commerce business. The government has formulated certain guidelines and regulations that govern FDI in India's e-commerce industry.
No, FDI is not permitted in the inventory-based model of e-commerce.
E-commerce entities must follow specific conditions, such as not directly or indirectly influencing the sale price of goods or services and not exercising ownership or control over the inventory beyond a particular limit.
The responsibility for post-sales services and customer satisfaction lies with the seller, as mentioned in the FDI guidelines.
No, entities with equity participation or control over inventory cannot sell their products on the platform run by the marketplace entity.
Genuine reviews and ratings, anti-counterfeiting and privacy measures, and e-courts for grievance redressal are some of the consumer protection measures highlighted in the draft e-commerce policy.
The Indian government intends to promote the Made-In-India initiative by allowing foreign MNCs to invest in Indian e-commerce companies that hold inventory, with a condition that 100% of the products in the inventory must be Made In India.
Foreign companies are allowed to operate e-commerce businesses in India, subject to compliance with Indian laws and regulations.
It is clear from the E-commerce Policy that the Government intends to bring in strategies to regulate the FDI Policy. Once the draft policy is enforced and published we will get more clarity on the regulations to which e-commerce businesses will have to adhere to.
From the information available to date it can only be said that if you intend to setup an e-commerce business, it is definitely a good option and this is a best time to deep dive into this ocean of e-commerce ecosystem.
In this series on the e-commerce industry in India, we will be covering the laws and regulations governing the e-commerce businesses and the compliance requirements for the same along with the future developments in our next blog.
The government will look to stabilise its e-commerce firm ONDC and address the data privacy concerns before bringing a proposed e-commerce policy, according to an official source. On the other side, the Department of Promotion of Industry and Internal Trade (DPIIT) under the Commerce and Industry Ministry is also framing a national e-commerce policy.
Stay tuned to read more about this!!
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