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What the e-commerce industry in India expects from budget 2016


The e-commerce market in India is at a nascent stage, yet to explore its potential. However, it is undisputedly the fastest-growing digital commerce market at least when it comes to the Asia Pacific region.  According to Gartner, India represents a $7 billion market, growing at more than 40% every year. Currently, the B2C commerce market leads the market in India, while the B2B market is limited to organizations that drive online sales while trying to cut costs in dealing with their partners and distributors. Presently, there are many roadblocks in India that can prevent making e-commerce a roaring success in India. We spoke to a few e-commerce companies to gauge their expectations from the upcoming budget and the key changes they expect to see for ensuring that  the e-commerce industry in India achieves its full potential.
Mr Vikas Malpani Co-Founder and Head of CommonFloor Groups
Vikas Malpani
Co-founder, Commonfloor.com

The e-commerce industry has disrupted the market thoroughly and brought so many innovations to the fore. However, it is not without its share of challenges. As an online merchant, safety and security of online monetary transactions is one of the most critical issues the industry faces and one that needs urgent attention. The other drawbacks include:
-Limited availability of credit cards and a nationwide credit card system
-Underdeveloped transportation infrastructure.
-Lack of skilled human resources and key technologies. Even within this segment, there is a surprising lack of awareness or lack of trust when it comes to online businesses and their inherent functionalities that can simplify life.
Fear factor: The mindset that online transactions are unsafe is hugely prevalent in Indian consumers. Once this mental block clears, it creates that many customers and the industry grows even further.

With ambitious plans like Digital India, the Union Budget 2016-17 is expected to deliver on providing  investments in India’s technology infrastructure. A substantial amount would be required to develop  a robust network infrastructure across the country to build the foundation for India’s digital economy. Programs such as Digital India, Smart cities and Skill India require the creation of technological infrastructure that will need budgetary support. With Smart Cities bringing in lots of opportunities for private developers, the real estate sector expects government to further liberalize norms and allow FDI in construction and affordable housing apart from re-introducing tax benefits under section 80 IB (10) of the Income Tax Act.

The development of e-commerce has revolutionised the way business operates. It has also challenged the adequacy and validity of principles of international taxation such as physical presence, place of establishment etc. that has formed the basis of asserting tax liability. In India especially in the e-commerce industry as of 2015, the taxation laws are advent of multiple e-commerce ventures in India. The Government is finding it difficult to adapt its existing rules to meet the requirement of newer kind of businesses. The allocation of taxing rights must be based on mutually agreed principles and a common man understanding of how these principles should be applied.

While the Economic Survey appreciated the services sector for being the primary trigger in growth in FY15, importance towards a promising FY16 in the form of reduced vulnerabilities, coupled with a heightened sense of expectation for increase in growth, better infrastructure and steps  taken  towards increasing manufacturing should lead to a better market.

Saurabh Rai CEO Surpluss.in & Bizpluss
Saurabh Rai

CEO, Surpluss.in & Bizpluss.in

e- commerce industry in India  faces a challenge of profitability . The absence of path to profit makes institutional investors like banks vary of dealing with start ups. The second is access to cheap funds and FDI norms limiting the fund flow. The last being absence of alternate markets . These need to be tacked institutionally by government.

I am expecting that there are no surprise service tax impacts.  There is an easing of FDI norms and government led institutions are encouraged to invest more in e commerce start ups. Lastly, easing of multiplicity of taxes and associated red tape will go a long way in encouraging e-commerce . It is a fact of life that most start ups fail hence bankruptcy laws should be eased to encourage entrepreneurs.

GST would have been a shot in the arm and we hope that it is passed in the next parliament session. In absence of the same, the current VAT norms should be made more transparent by consensus building among center and states. Indian e-commerce companies selling goods outside India should get support from government.

The Government should provide commercial , legislative and judicial guidance to start up e-commerce companies for them to sustain and be compliant. Such transparent information would be greatly welcomed by numerous young companies in this space.

Ankita Tandon_COO_CouponDunia
Ankita Tandon

Chief Operating Officer, CouponDunia

COD option allows customer to reject the product or there are products returned back due to other discrepancies. Such facilities are given to consumer for convenience but it creates a huge financial turmoil for the company and bottlenecks. Lastly, most start ups are partially funded or get sporadic funding due to which companies try to adopt marketplace models which lead to financial complexity. So, in a nutshell, most financial challenges are resultant of ad-hoc policies and lack of structured strategic planning.

It is a known fact that the Indian e-commerce market is gaining momentum at a high speed. Since India has an aspiring and vibrant customer base, it is a place that every brand should be present in. The upcoming budget should look aim at simplifying the tax structure for the e-commerce sector. The government should also look at zeroing in some ground rules in order to boost the e-commerce sector. The budget should also look to roll out the implementation of GST by 2016. E-commerce companies expect ample Foreign Direct Investments, which will ensure huge growth, faster building of logistics and better funding option. As promised in the Union Budget of 2015, implementation of GST from April 2016 will help e-commerce companies rationalise supply chains by addressing taxation issues.

Due to the virtual nature of e-commerce transactions relating to goods and services, taxation of such activities raises several issues. While tax authorities may track those e-transactions where-goods are delivered physically, tax evasion becomes a distinct possibility in direct e-commerce. The technical feature of online transactions creates various problems for the taxing authorities, such as establishing audit trails, verifying parties involved in transactions, obtaining documents, and fixing convenient taxing points. Internet operations lend anonymity to the parties in various ways despite the availability of email addresses and domain particulars. The implementation of GST will be a boon to the e-commerce industry as indicated by a recent study that GST could well boost India’s GDP growth by anywhere  between 0.9% to 1.7%.

India is yet to have precise tax laws to regulate the e-commerce industry. This leads to a fair amount of confusion, as tax is imposed according to the interpretation of local taxation authorities in different states, as was seen in the case of Amazon in Karnataka. However, with the GST, which makes no distinction between goods and services, e-commerce companies will not have to deal with complicated regulatory structures of each individual states. With the introduction of GST, logistics decision making will become much simpler. Instead of maintaining several warehouses in different states, companies can now have fewer, larger ones, strategically located warehouses to serve several states together.  Additionally, GST will enable goods to be priced without taking into account the destination of the product, therefore profit margins will be easier to calculate.

Vineet Singh

Co-Founder & CEO, Buildzar.com

The e-commerce industry has seen unprecedented growth in the last two years and is expanding at a rapid pace. While the growth in this sector excites entrepreneurs and financial investors alike, it is also facing some serious challenges, which is access to capital: Too much money too early in the game is instigating excessive burning of cash. Online marketplaces operating in niche segments generally have five to six well-funded players battling it out for business. This is leading to tight competition in prices and pushing the margins to almost nothing.

The greatest dilemma of the current e-commerce industry is aggressive customer acquisition, which is shadowing the urge to offer better product or service. Today, marketplaces are focusing mainly on offering deals and discounts. Rationalising the customer acquisition costs and building the customer loyalty without burning cash is one of the major problems to solve. Another big challenge faced by the e-commerce sector is the poor supply chain infrastructure and the prohibitive logistics costs. The e-commerce market is slowly penetrating into all tier-2 and tier-3 cities, which calls for an organised supply chain. Despite the presence of multinational courier agencies like DHL and FedEx in India, many e-commerce companies are shipping through smaller and cheaper third party couriers.

The Indian Government should also provide clarity on how it is planning to use the Rs.10,000 crore fund it had earmarked for the program “Startup India, Standup India” in 2014. It must also come up with a concrete plan grounded on the announcement made by it in 2014 regarding reactivation of incubation centres for start ups by premier engineering schools. The Government should also focus on coming up with tax policies which encourage start ups. The Australian Government recently announced relief in taxation norms for investors investing in start ups in their 2016 Budget. In the UK, investors receive tax credits for investing in start ups.

The Indian Government can plan similar incentives.It should work on encouraging tech-enabled start ups to participate in government tenders. This will  boost many start ups such as Buildzar in procuring materials and services for government housing schemes such as affordable housing. The Government of India should also allow 100% FDI for e-commerce to move ahead of competition. Foreign investors can make strategic investments in smaller online retailers.

The indirect taxation laws in India have become a hindrance in the e-commerce operations, as they have not been able to identify the continuously evolving hybrid business models.When talking about the challenges, the entire e-commerce segment is facing issues in categorising their offerings as ‘Goods’ or ‘Services’ for charging the Value Added Tax (VAT)/Central Sales Tax (CST) or Service Tax. Presently, both VAT and Service Tax are levied on all digital transactions, leading to frequent disputes. The e-commerce industry is looking forward to tax incentives that will help promote investments in logistics and technological innovation. There should be a better clarity in the tax guidelines for all types of online transactions such as e-wallet, drop shipment or gift voucher. It is expected that Goods & Service Tax (GST), which is likely to be implemented from the next fiscal, may be the answer to most of these problems.

The government should incentivise the SMEs to sell on e-commerce marketplaces by providing them easy access to loans. These sellers are the backbone of e-commerce and growth in their sales on marketplaces will bring rapid growth to this industry in India.

Sanjeev Mohanty
CEO & MD of Jabong

India has seen unprecedented growth in e-commerce for the better half of the past decade. Venture capitalists and investors see huge potential in the sector and are thus pouring in huge funds into start ups that show potential in attracting huge audiences. This success can be attributed to the various upsides that e-commerce in India has, such as huge availability of funds, open market for entrepreneurs and so on. However, despite this boom, there are key challenges for the sector that will test the tenacity of this growth.

As e-commerce in India continues to grow and the Tier 1  market saturates, players will look at Tier 2 and Tier 3 cities to reach out to the next set of audiences. This will require better and improved logistics such as increase in the number of warehouses, reliable transportation and postal infrastructures.

For most Indian players, product differentiation does not come into play as much as the discount factor does. Though highly competitive, this approach does not help in establishing a loyal customer base as the audience is most likely to go where they see better discounts. In order to ensure the sustainability of the e-commerce sector, it is important for the players to work on product differentiation. There needs to be long-term clarity on the future of FDI in retail. Tax irregularities bundled with lack of clarity on FDI can seriously hamper the e-commerce boom.

E-commerce, as new as it is, is an industry that has huge potential to reduce unemployment in India. A few expectations we have from the budget that would help the industry serve its purpose in a better manner are in:
Logistics and infrastructure: In order for the players to reach out to their target audience and ensure smooth and effective operations on ground, our infrastructure needs significant improvement. Poor infrastructure bundled with logistic concerns such as unreliable transportation, lower number of warehouses, etc. can seriously hamper the growth of e-tailers.

Policy reforms: The rapidly booming e-commerce sector can highly contribute to state revenues. The lack of clarity and uniform procedures however prevent e-commerce from unleashing its true potential. Existing laws and tax policies need to be revised and should be in line with the ever-evolving e-commerce business model.

Implementation of GST will be a big reform  for e-commerce to boom, especially with the sector now spreading fast and deep into rural India from the metros. For Indian e-commerce, Direct Tax or Income Tax does not pose to be a major hindrance due to the uniformly applicable laws that are in place. What is of concern are the Indirect Taxes including VAT/CST and Service Tax, the laws for which act as bottlenecks as they do not match the evolving business model. In the last year’s budget we saw an increase in service tax from 12.36% to 14%. The government needs to curb these rates in order to avoid the adverse effects it will have on online buyers.

Another major challenge that we see is the impediment faced by the players in identifying whether a transaction is carried out for the sales of a good as opposed to a service. This is a major cause for dispute and litigation issues. Smooth interstate business transactions face hassles such as requirement of road permits, statutory forms, etc., thus making interstate transactions cumbersome for the players.

The government should implement necessary changes for various e-commerce business models in order to help make the Indian e-commerce industry globally competitive. There is a need to bring in tax incentives that provide the e-retailers with the option to boost investments in sectors such as logistics, technology and innovation. Implementing GST would introduce uniform tax laws across the country which would make for a hassle free environment for the e-commerce players to do business in.
A clear approach regarding the tax mandates for transactions such as gift voucher, drop shipments, e-wallet, etc. needs to be in place.

In order to ensure rapid growth in India’s e-commerce sector, there is a need to promote foreign investment in the sector. A strategic investment by a foreign investor can help small online retailers grow faster which will catapult the sector to the next level. While most e-tailers favor 100% FDI in e-commerce, what is important is to bring in clarity in addition to a well-planned e-commerce and online business policy.

If you have an interesting article / experience / case study to share, please get in touch with us at [email protected]

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