DIPP replies to Delhi
High Court on E-commerce Model vis-à-vis India’s FDI Policy
As reported by The
Economic Times, an Indian daily, the Department of Industrial Policy and
Promotion (DIPP), which is responsible for the formulation and
implementation of foreign investment in India, has told the Delhi High Court
that the marketplace model used by e-commerce websites is “not recognized” in
the country’s foreign direct investment (FDI) policy.
The DIPP reportedly told
the Delhi High Court that FDI is a capital account transaction and thus any
violation of FDI regulations are covered by penal provisions of FEMA (Foreign
Exchange Management Act).
The current regulatory
status of Consolidated FDI Policy 2015 with respect to foreign investments in
the e-commerce space is as under:
- 100% FDI is allowed
under the automatic route in companies engaged in B2B e-commerce.
- NNo FDI is allowed
in companies which engage in single brand retail trading by means of
e-commerce.
- No FDI is allowed
in companies which engage in multi brand retail trading by means of
e-commerce. These restrictions are related to sale of goods and not
services.
The above statements
made by the DIPP is a reply in furtherance to the writ petitions filed by the
Retailers Association of India and the All India Footwear Manufacturers &
Retailers Association in May and June, 2015 i.e. W.P.(C) 5034/2015 and W.P.(C)
NO. 7479/2015 respectively, against the Union of India in the Delhi High Court
alleging the circumstances of eluding FDI norms by e-commerce companies. Vide
its order dated May 20, 2015, the Delhi High Court had disposed off the writ
petition W.P.(C) 5034/2015 with a direction to the Respondents to consider the
writ petition as a representation and deliberate upon the same with due
expedition.
The said order
dated May 20, 2015 can be accessed here. Meanwhile, the
writ petition W.P.(C) NO. 7479/2015, besides being addressed to the DIPP, was
also addressed to the Ministry of Finance, Department of Economic Affairs, the
Governor of the Reserve Bank of India (RBI) and the Enforcement Directorate. On
further enquiry on whether sales by e-commerce entities through the medium of
internet are being taxed by the Government as retail sales, the senior counsel
for the petitioners informed that the Union of India (UOI) and other State
Governments have been treating such sales as sales by retailers and have raised
tax on them which are however under challenge under different fora / courts,
and further, as far as the Supreme Court of United States is concerned, it has
held such transactions taxable as a retail sale. The Delhi High Court observed
in its order dated September 23, 2015 that prima facie, it appeared that the
UOI / State Governments cannot, on the one hand, for the purpose of tax, treat
such sales as retail and on the other hand, for the purposes of investment, not
treat the same as retail sale. The case is listed for further hearing on
February 26, 2016.
The Delhi High Court has already ordered the Enforcement
Directorate to investigate whether ecommerce companies have flouted FDI rules.
Meanwhile, the DIPP has pointed out in its reply to the Court that
“The petitioners have failed to show that the FDI policy is arbitrary, mala
fide or ultra vires of the constitution,” and has asked why the ecommerce
companies haven’t been made parties to the ongoing case as any decision in the
present writ is bound to have an adverse impact on them.
With the growth of the internet and app based smartphone
technology, there has been a tremendous increase in e-commerce and this matter
is likely to bring clarity to the issue.
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