Opinion | Why the draft e-commerce policy is unlikely to change the marketplace

Shishir Asthana

One of the fastest-moving sectors in the country is being closely watched by the government. The Centre will be introducing a national regulator for e-commerce with rules that include mandatory basing of servers in India, and a draft policy has already been floated.

While some may point out to loss of freedom after the government starts regulating the sector, there’s no arguing that these steps are necessary as aggressive marketing by companies was resulting in the destruction of other players in the marketplace. The draft policy document identifies options for addressing anti-competitive practices, effectively protecting both small market players and consumers, who are at risk of being landed with sub-standard goods.

But as long as price is paramount, as it is likely to remain in a market like India, such measures are unlikely to work.

E-commerce companies, especially the bigger ones, have been using predatory pricing as a means of client acquisition. Through their ‘billion-dollar-sale’ days, they achieved their goal of deeper market penetration. Though the consumers were, broadly speaking, benefited by cheaper prices, the brick and mortar stores were badly impacted, especially since such sales were timed around the festive season. The government has introduced a sunset clause, which defines the maximum duration of differential pricing strategies (such as deep discounts).

There is, however, a problem here. Nothing really changes in compacting the duration of the sale. These e-commerce companies are not bound by restrictions of space like a mall where a flash sale would attract lots of people and security has to be used to control the crowd. In the e-commerce space, the same sale is applicable to every single person with a mobile phone.

Reducing the period from four days to even one day would not make much of a difference: a move by the companies themselves to limit the duration of a certain flash sale to 15 minutes from four hours earlier did not in any way hamper sales of mobile phones. All that is needed is higher quality machinery to support higher number of consumers who will be in the market place for a lesser period of time.

The income tax department had also tried to attack this practice earlier. The IT department argued that the discounts which were classified as market expenditure and discounts needed to be classified as capital expenditure.

For an e-commerce company, client acquisition is as important, if not more, as selling goods. Such deep discounts were meant to attract the client. This was the crux of the logic behind the IT department’s demand of Rs 110 crore in taxes from Flipkart, an argument eventually rejected by the Income Tax Appellate Tribunal. The above mentioned cases were fought in Karnataka: whether other states will abide by this ruling has to be seen.

The draft policy has also touched upon the point of related parties exploiting the system. This issue was pointed out in the report where it addressed the issue of bulk purchases of branded goods such as electronic products (especially mobile phones), white goods and branded fashion by certain dealers, who would then sell these goods through e-commerce platforms, leading to distortions in the market place.

This is not too difficult to circumvent as such dealers could sell their products to individuals or other traders who would then sell through e-commerce sites. The introduction of Goods and Services Tax has made this easier; the individual or trader merely claims the GST back after the sale through the platform.

While the government has tried to create a level-playing field, there are still enough gaps in the system that can be exploited. The new generation of entrepreneurs who mainly operate in the e-commerce space is swift-footed and with international experience. In fact, India is now the battleground for two of the largest e-commerce companies in the world – Amazon and Walmart — who have the experience, size and money power to influence decisions.

The smaller players and the brick and mortar players are on a weak wicket, since for the customer what matters is price, everything else being equal.