E-Commerce Regulation in India

WHY IN NEWS:

• The Consumer Affairs Ministry in June 2021 issued a set of new draft e-commerce rules to protect consumer interest, prevent unfair trade practices, and encourage fair competition

WHAT IS ELECTRONIC COMMERCE?

• According to MeitY “E-commerce is a type of business model that enables a firm or individual to conduct business over an electronic network, typically the internet”
• E-commerce operates in all four of the major market segments: business to business, business to consumer, consumer to consumer and consumer to business
• E-commerce can be a substitute for brick-and-mortar stores, though some businesses choose to maintain both.
• Now-a-days nearly every imaginable product and service is available through e-commerce transactions, including books, music, plane tickets, and financial services such as stock investing and online banking.
• As such, it is considered a very disruptive technology.

STATISTICS:

• Driven by rising smartphone penetration, internet access and increasing consumer wealth, the Indian e-commerce market is expected to grow to USD 200 billion by 2026 from USD 38.5 billion in 2017.
• Indian e-commerce industry is expected to surpass the US to become the second-largest e-commerce market in the world by 2034.

ADVANTAGES OF E-COMMERCE:

• Benefits to consumers:
  • Ensure competition:
    • Enables sellers to come closer to customers that lead to increased productivity and perfect competition >> better quality products with affordable price will be available to consumers
  • More choice:
    • The customer can also choose between different sellers and buy the most relevant products as per requirements, preferences, and budget.
  • Easy access and convenience:
    • Customers have access to virtual stores 24/7, through their hand held devices such as smart phones etc.
  • Reduced transaction cost
    • E-commerce also leads to significant transaction cost reduction for consumers.
• Benefits to overall economy:
  • Facilitates international trade:
    • E-commerce has emerged as one of the fast-growing trade channels available for the cross-border trade of goods and services.
    • It provides a wider reach and reception across the global market, with minimum investments.
    • It enables sellers to sell to a global audience and also customers to make a global choice.
    • Geographical boundaries and challenges are drastically reduced.
  • Generates more employment:
    • Growth in the e-commerce sector can boost employment, not only through increased production houses, but also through ancillary services such as customer support services, social media marketing
• Benefits to government:
  • Fiscal benefits:
    • E-commerce sector is highly digitized in nature >> which enables transparent relation between tax authorities and business units >> thus helps to increase tax collection and curbing black money generation
  • Ease in regulation:
    • As the e-commerce entities are registered with Department for Promotion of Industry and Internal Trade and their business transactions can be tracked and traced online, enforcement agencies finds it easy to regulate them.
• Benefits to business
  • Wider market access:
    • E-commerce has helped businesses establish a wider market presence by providing cheaper and more efficient distribution channels for their products or services
  • Eliminate middle man:
    • One can promote their work and sell their products directly to the consumers without the interference of middlemen
  • Lesser investment:
    • Reduced the investment cost since in many cases money can be saved on buying a storeroom for the display of products

INITIATIVES:

• Constitutional/Legal Provisions
  • E-commerce (when it takes place within the country) falls under the category of inter-state trade and commerce.
  • Thus, has been allocated to the Centre (union list) under Schedule VII of the Constitution.
  • It is hence the responsibility of the Centre to ensure its growth and make rules
• National e-Commerce policy, 2019
  • In 2019, a draft National e-Commerce policy has been published
  • It lays down strategies to address issues pertinent to the sector - consumer protection, data privacy, and maintenance of a level playing field.
• Provisions on e-commerce in Consumer Protection Act 2019
  • The Act states that central Government may make rules for preventing unfair trade practices in e-commerce and direct selling, and to protect the rights of consumers.
  • Consumer Protection (E-Commerce) Rules, 2020:
    • Definition and classification:
      • The Draft Rules define an “e-commerce entity” as an entity, in India or abroad, which conducts e-commerce business either through:
        • (i) Inventory-based model, where the entity owns the inventory and sells it to consumer directly, or
        • (ii) Marketplace model, where entity acts as a technology platform facilitating transactions between buyers and sellers
    • Liabilities of an e-commerce entity:
      • Not to influence the prices of products and services
      • Not to adopt unfair methods to influence consumer decisions on products and decisions
      • Display the terms of contract with a seller or service provider
      • Take down listings of counterfeit products by sellers after conducting due diligence etc.
    • Consumer grievance redressal procedures:
      • Every e-commerce entity is required to provide a mechanism for users to submit their complaints on the website and publish the name and contact details of a grievance officer, and ensure redressal of the complaint within one month of receipt.
    • Proposed amendment in 2021
      • Mandatory display of country of origin:
        • To ensure that the domestic manufacturers and suppliers get a fair and equal treatment on the e-commerce platform it has been provided that where an e-commerce entity offers imported goods or services, it shall incorporate a filter mechanism to identify goods based on country of origin and suggest alternatives to ensure fair opportunity to domestic goods.
      • Flash sales ban
        • E-commerce companies should not hold flash sales - which see deep discounts on offer - if these are organised "fraudulently" using "technological means" with an intent to benefit select sellers.
      • Prohibition of affiliates as sellers
        • E-commerce companies must ensure none of their "related parties and associated enterprises" are listed as sellers on their shopping websites, and no related entity should sell goods to an online seller operating on the same platform.
        • The changes could impact business structures used by Flipkart and Amazon
      • Appointment of Chief Compliance Officer
        • A nodal contact person for 24x7 coordination with law enforcement agencies
      • Appointment of Resident Grievance Officer
        • An officer for redressing of the grievances of the consumers on the e-commerce platform.
      • Framework for registration of every e-commerce entity with the DPIIT
        • Registration of e-commerce entities with Department for Promotion of Industry and Internal Trade would help create a database of genuine e-commerce entities and ensure that the consumers are able to verify the genuineness of an e-commerce entity before transacting through their platform.
      • Prohibition of mis-selling
        • Mis-selling means selling goods and services by deliberate misrepresentation of information by such entities about such goods or services.
      • Prevention of search result manipulation
        • Online websites should not mislead users by manipulating search results and provide ranking for goods while ensuring its parameters do not discriminate against domestic goods and sellers.
• FDI guidelines for e-commerce by DIPP:
  • FDI Policy allows 100% FDI under the automatic route for the marketplace model of e-commerce activities.
  • However, FDI is not permitted for the inventory-based model of e-commerce activities.
  • The FDI Policy permits 100% FDI through automatic route for entities engaged in single-brand retail trading.
  • 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.
• Taxation:
  • Digital Services Tax (DST)
    • It is aimed at ensuring that non-resident, digital service providers pay their fair share of tax on revenues generated in the Indian digital market
    • India was one of the first countries in the world to introduce a 6% equalization levy in 2016, but the levy was restricted to online advertisement services
    • In March 2020, it expanded the scope of the existing equalization levy to a range of digital services that includes e-commerce platforms
• Capacity Building:
  • Efforts to boost digital economy
    • Rolling out the fibre network for 5G
    • BharatNet Project, to provide broadband services to 150,000-gram panchayats.
    • Digital India initiatives like Sugamya Bharat Abhiyan, BHIM, COE-IT, CERT-In, DigiDhanAbhiyaan, Digitize India, Ebiz, Electronic Development Fund
  • Data protection:
    • Justice SriKrishna Committee was constituted to make recommendations related to data protection framework and protection of privacy in the digital environment.
    • Personal Data Protection Bill was introduced in Lok Sabha in 2019 (yet to be passed)
• Inclusiveness:
  • Tribes India e-Marketplace:
    • It is an ambitious initiative through which TRIFED aims to onboard 5 lakh tribal producers for sourcing of various handicraft, handloom, natural food products across the country and brings to you the best of tribal produce
• Government e-Marketplace (GeM):
  • Government e Marketplace (GeM) is an online platform for public procurement in India.
  • The initiative was launched in 2016 with the objective to create an open and transparent procurement platform for government buyers
• Other initiatives:
  • National Integrated Logistics Plan
    • E-Commerce will also be included in the National Integrated Logistics Plan being prepared by the Department of Commerce, which would focus on faster delivery with emphasis on lower costs.

CONCERNS:

• Still at a nascent stage:
  • Despite the high rate of growth of e-commerce in India, the sector is still at a nascent stage and according to some estimates, it is only 4.2 per cent of the retail market
• Technological challenges:
  • It depends strongly on network connectivity and information technology.
  • Mechanical failures can cause unpredictable effects on total processes.
  • Considering poor internet quality in India>> it will be concern for the growth of the sector
• Presence of ‘network effects’
  • It means that in the era of data, larger the number of consumers and sellers it is connected to, the greater the access to potential sources of data and greater the likelihoods of its success.
  • Greater access to data provides a greater digital capital to a corporation, granting it an advantage over its competitors.
  • Without access to adequate data, MSMEs and start-ups remain at a disadvantage to develop a large number of innovative solutions.
  • Therefore a handful of companies today dominate the digital economy >> they are successfully exploiting the significant first mover’s advantage in the data-driven ecosystem.
• Limited customer service:
  • If you are shopping online for a computer, you cannot simply ask an employee to demonstrate a particular model's features in person.
  • And although some websites let you chat online with a staff member, this is not a typical practice.
• Lack of a separate legislation:
  • Definite legislations to regulate e-commerce transactions are still to be framed leading to lack of regulation of the sector.
• Vulnerable to cyber-crimes:
  • Engaging in e-commerce increases the chance of fraudulent financial transactions and loss of sensitive financial information.
• Failure in enforcing IPR:
  • Protecting intellectual property rights (IPR) on the Internet is a growing concern.
  • There are currently several significant IPR issues including misuse of trademark rights.
  • Online distribution of pirated content through e-commerce is also a matter of serious concern.
• Inter-disciplinary nature of e-commerce:
  • Given the inter-disciplinary nature of e-commerce, the tackling of specific issues that emerge may be the subject matter of different statutes the Information Technology Act and Rules, the Competition Act, the Consumer Protection Act etc.
• Unhealthy competition:
  • There are different players in the same area of business leading to decrease in profitability due to reasons such as aggressive pricing strategies, heavy discounts and offers, free delivery, high commissions to affiliates and vendors during sale period to name a few
• Predatory Pricing:
  • Predatory pricing as a short-term strategy, adopted by some of the market giants, may lead to wiping out competition from the market and could be detrimental to the consumers in the long run.
• Unfair trade practices:
  • Fake reviews
    • There are increasing cases of fake reviews and unfair favouritism in the display of goods.
  • Indulging in “back to back” or “flash” sales
    • Certain e-commerce entities are engaging in limiting consumer choice by indulging in “back to back” or “flash” sales wherein one seller selling on platform does not carry any inventory or order fulfilment capability but merely places a “flash or back to back” order with another seller controlled by platform.
    • This prevents a level playing field and ultimately limits customer choice and increases prices.
  • Privacy violation
    • E-commerce has rendered consumers vulnerable to new forms of unfair trade practices such as data theft and violation of privacy
• Issues with provisions of the draft rules on e-commerce
  • Regulatory overreach:
    • Proposed rules also seek to harden considerably the regulatory architecture in the online retail space
    • It can create more ambiguity over their operations, without imposing similar constraints on their traditional brick and mortar competitors.
  • Fall-back liability clause
    • According to rules e-commerce firms will be held liable in case a seller on their platform “fails to deliver goods or services due to negligent conduct” causing a loss to the consumer.
  • No distinction made between marketplace-model and inventory-model e-commerce entities:
    • While specifying the obligations of e-commerce entities, the Rules do not make a distinction between the two models.
    • For example, the Draft Rules state that e-commerce entities have the duty to not influence the prices of products and services and to maintain a level playing field.  These provisions prohibiting influencing of prices will not be relevant to an inventory model since in this model the e-commerce entity is also the seller of the product and must have the freedom to take decisions on pricing

WAY FORWARD:

• Making e-commerce sector more inclusive:
  • In the presence of network effects which create barriers to entry, small firms and start-ups attempting to enter the digital sector can be given ‘infant-industry’ status.
• Promoting domestic research and development:
  • This will bring innovation in the sector which will be suited for the Indian market
• Granting data the status of capital:
  • Granting ‘data’ the status of ‘capital’ at par with financial capital of a corporation, helps in ascertaining the true size of business unit >> hence government could effectively target its fiscal incentives towards small firms >> and destroy monopoly of MNCs in e-commerce sector.
• Anti-piracy measures
  • Intermediaries should put in place measures to prevent online dissemination of pirated content.
  • A body of industry stakeholders should be created that shall identify ‘rogue websites’.
• Authentic ratings and reviews
  • There should be transparency and non-discrimination in publishing of ratings and reviews.
  • All ratings and reviews for verified purchases must be published as registered by the consumer
• Robust taxation:
  • The current practice of not imposing custom duties on electronic transmissions must be reviewed in the light of the changing digital economy and the increased role that additive manufacturing is expected to take.
• Local data centres:
  • All major e-marketplace entities should establish their data centre in India, so that consumer data are not hosted on a server outside the borders of the country, which may be misused by an enemy country.
• Consumer protection
  • The atypical nature of an e-commerce transaction necessitates a consumer protection framework specific to this sector.
  • India should move towards a system for electronic redressal of grievances including making available compensation to the aggrieved consumer electronically
• Addressing the payment related issues
  • Issues related to payment processes and other financial transactions which are inherent to e-commerce should be addressed in order to prevent data-leaks/theft, protect privacy and sensitive data, and enabling secured transactions
• Clear definition:
  • There should be a more clear-cut definition of what constitutes ‘Unfair Trade Practice’ and practical legal remedy to tackle such circumventing practices by e-commerce entities specifically Multinational Companies (MNCs)
• Categorization of personal data:
  • For protection of privacy of users and security of their data, the parliamentary panel on the Consumer Protection (E-Commerce) Rules, 2020 has recommended that users’ personal data may be categorised as per the level of sensitivity and appropriate protection may be assigned for each level.
• Fixing delivery charges:
  • The Ministry of Consumer Affairs, Food and Public Distribution should issue broad guidelines for the fixation of delivery charges charged by the e-commerce entities along with a cap on the highest limits of the delivery charges in peak hours of service.

PRACTICE QUESTION:

Q. “Overregulation may retard growth and job creation in expanding e-commerce sector”. Analyze this statement in the context of recent amendments made to Consumer Protection (E-Commerce) Rules, 2020