A Report on E-Commerce Retail Trading in India

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A Report on E-Commerce Retail Trading in India

May 3, 2018


Currently, there is no concurrent definition of E-commerce other than the one provided by the FDI Policy[1], which states that: “E-commerce activities refer to the activity of buying and selling by a company through the E-commerce platform”.

The definition of E-commerce makes it clear that any buy / sale transactions would be covered. But this definition does not seem to cover other forms of transactions which could take place on E-commerce platforms such as information sharing and advance bookings (without payments being made).

Retail trading is defined[2] as, “the re-sale (sale without transformation) of new and used goods to the general public, for personal or household consumption or utilization”

E-commerce has defied the traditional structure of businesses trading with consumers bringing forward various business models which has empowered consumers.


The common business models which are facilitated by e-commerce are:

  1. B2B (Business to Business): This enables various businesses to build new relationships with other businesses for efficiently managing several of their business functions. B2B E-commerce could comprise of various models, which may include distribution services, procurement services, digital / online market place like services etc. ‘IndiaMART.com’ and ‘Tradeindia.com’ are examples of such B2B online market place which provides a platform for businesses to find other competitive suppliers.
  2. B2C (Business to consumer): Direct dealings between businesses and consumers have gained momentum through E-commerce, allowing the Manufacturer or retailer to directly deal with the customer without any other intermediary, also allowing the sellers to provide a virtual shop with images of the products sold by them. This along with providing cost benefits to the sellers as brick and mortar type of investments would be considerably reduced, but the seller is also able to provide other benefits to the consumers in terms of discounts and free additions (such as free delivery). Making their products more appealing to the consumers.
  3. C2C (Consumer to Consumer): Traditionally consumers have had dealings with other consumers, but only few of those activities were in a commercial sense. E-commerce has made it possible to bring together strangers and providing a platform for them to trade on. Online portals such as eBay, Quikr and OLX are examples of the same which enable consumers to transact with other consumers.
  4. C2B (Consumers to Business): This is relatively a new model of commerce and is the reverse of traditional commerce models, where consumers (as individuals) provide services/ goods to businesses and create value for the business. This type of transaction can be seen in internet forums where consumers provide product development ideas or in online platforms where consumers provide product reviews which are then used for advertising purposes. Food companies asking food bloggers to include a new product in a recipe, and reviewing it for readers of their blogs or YouTube reviews being incentivized by free products or direct payment or including paid advertisement space on the consumer website are examples of the same.
  5. B2B2C (Business to Business to Consumers): This is a variant of the B2C model where an additional intermediary business assists the first business to transact with the end consumer. This model is poised to do much better in a web base commerce with the reduced costs of having an intermediary. For instance, Flipkart is one of the most successful E-commerce portals which provide a platform for consumers to purchase a wide variety of goods. The growth of this model is evident from the heave in the number of E-commerce players adopting this model in recent times, such as ‘fashionandyou’, ‘Jabong’.


Foreign direct investment (“FDI”) in India is regulated under the Foreign Exchange Management Act 1999 (“FEMA”). The Department of Industrial Policy and Promotion (“DIPP”), Ministry of Commerce and Industry, Government of India makes policy pronouncements on FDI through Press Notes and Press Releases which are notified by the Reserve Bank of India (“RBI”) as amendments to Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000.

The consolidated FDI policy issued by the DIPP lays down two entry routes for investment:

  1. Automatic Route where foreign investments do not require prior approval of the government and;
  2. Government / Approval Route where prior approval of the Government of India through Foreign Investment Promotion Board (“FIPB”) is required.

The FDI policy in 2012 in the trading sector, removed the cap on foreign equity in single brand retail trade, thereby allowing 100 per cent foreign ownership. Simultaneously, FDI up to 51 % was allowed in multi brand retail trading (“MBRT”). However, it permitted only B2B E-commerce and prohibits E-commerce based retail trading in any form by companies with FDI which are engaged in the activity of single-brand or multi-brand retail trading.

In 2015 certain amendments through press notes by DIPP were made to the FDI policy. The current regulatory status with respect to foreign investments in the E-commerce space is as follows:

  1. 100% FDI is allowed under the automatic route (i.e. no FIPB approval is required) in companies engaged in B2B E-commerce.[3]
  2. No FDI is allowed in companies which engage in multi brand retail trading by means of E-commerce.[4]
  3. An entity that has been granted permission to undertake Single Brand Retail Trade will be permitted to undertake E-commerce activities. [5]
  4. In case of FDI in Indian Brands, certain conditions are in placed by the FDI policy, namely, products to be sold under the same brand internationally and investment by non-resident entity/ entities as the brand owner or under legally tenable agreement with the brand owner, will not be made applicable in case of FDI in Indian brands. [6]
  5. An Indian manufacturer is permitted to sell its own branded products in any manner, i.e., wholesale, retail, including through E-commerce platforms. For the purposes of FDI Policy, Indian manufacturer would be the investee company, which is the owner of the Indian brand and which manufactures in India.

These restrictions are related to sale of goods and not services.

E‐commerce activities have been divided into sub‐categories based on their business model:

  1. Marketplace model is one in which the E-commerce portal provides a platform for business transactions between buyers and sellers and earns commission from the sellers of goods/services. Ownership of the inventory in this model vests with the enterprises which advertise their products on the website and who are the ultimate sellers of goods or services. The Market Place, thus, works as a facilitator of E‐

There are two types of business models followed by online marketplaces:

  1. Open Marketplaces: These marketplaces only connect buyers and sellers, leaving the mechanics and logistics of the transactions to the respective counterparties i.e. the buyers and sellers. A number of big online retailers follow this business model, the most prominent being eBay, Indian start-up OLX.com.
  2. Managed Marketplaces: These marketplaces are similar to traditional retailing in the sense that these platform operators maintain “fulfillment centers” which aggregate orders and dispatch the goods on behalf of the seller. Sometimes the goods may also be repacked before being dispatched. Amazon which is one of India’s leading online retailers’ follows this model. It has established very large distribution centers which act as facilitation centers for its seller.
  3. The other is the Inventory Based model in which ownership of goods and services and the market place vests with the same entity (the ecommerce portal). In this model the portal does not work as a facilitator of E-commerce but is engaged in ecommerce directly.[7] Wal-Mart is an example of this. They buy the products from other sellers and then sell them to the consumers through their E-commerce portals. Although, India’s FDI policy does not allow FDI in retail ecommerce activities in this model. 
  • Advantages of allowing FDI in retail in E-commerce: 
  1. Allowing retail in E-commerce would give a boost to the infrastructural development. Increased capital will help to establish supply chain, distribution system and warehousing. 
  2. It would be impetus to the manufacturing sector. Growth in the retail sector would have a cascading effect on the manufacturing sector which will positively contribute to overall growth of economy and job creation.
  3. It would create a more efficient supply chain management. This will reduce the need for middlemen leading to lower transaction costs, reduced overhead and reduced inventory and labour costs.
  4. It will lead to adopting best global business practices and to better work culture and customer service.
  5. It will increase the outreach. This will provide increased access to buyers/ sellers; allow Micro, Small & Medium Enterprises (“MSME”) and artisans to reach out to customers far beyond their immediate location, both locally within India and abroad.
  6. It will allow traceability and increase transparency. Will this not only empower consumers with information and data but also help in better compliance of regulatory framework.
  7. It will reduce costs such as marketing and distribution, travel, materials and supplies benefitting the businesses.
  8. It will improve customer service by providing more responsive order taking and after-sales service to customers and competitive pricing.
  • Disadvantages of allowing FDI in retail in E-commerce: 
  1. Allowing FDI in E-commerce will provide E-commerce players with complete geographical reach which will be against the regulations of FDI in multi brand retail trade i.e. being restricted to cities with a population of more than one million or any other city as per the choice of consenting states.
  2. The Indian market is not yet ready for opening up e-retail space to foreign investors as it would seriously impair small time trading of brick and mortar stores. Small time shopkeepers are not highly qualified and will not be able to compete with sound e-retail business format.
  3. Because of scale of economic operations, E-commerce players in the inventory based model will have more bargaining power than standalone traders and such situation will resort to predatory pricing.
  4. The infrastructure created by major E-commerce players will be captive and government will not be able to achieve its objective of creating back end infrastructure.
  5. Indian E-commerce market is at a budding stage of development. With FDI in E-commerce, global players will have adverse impact on this domestic industry. It will lead to monopolies in E-commerce, manufacturing, logistics and retail sector.
  6. Inventory based E-commerce competes directly with MSMEs. Indian e-commerce B2C is growing in an eco- system with Indian owned/led companies offering open marketplace models which provide a technology platform to help MSMEs to reach across India and even globally. These marketplaces do not compete with MSMEs or retailers and allow everyone to trade. On the other hand, allowing the entry of inventory based large foreign e-tailers may shrink Indian entrepreneurship and the MSME sector.


A joint report of KPMG and IAMAI has established a direct co-relation between the size of the consumer E-Commerce industry and openness to FDI in inventory based E-Commerce and found that unlike countries such as US, China, Australia, Srilanka and Pakistan, India was the only one among a list of developed and developing economies that did not allow FDI in inventory based E-Commerce.


A petition was filed by the Retailers Association of India (“RAI”) and the All India Footwear Manufacturers and Retailers Association (“AIFMRA”) seeking clarity on FDI in E-commerce, in which they argued that the ecommerce companies have been acting like retailers, which is in violation of the current FDI norms. In the beginning of November, 2015, the Confederation of All India Traders (“CAIT”) had also raised similar objections in a complaint sent to the Secretary DIPP at the Ministry of Commerce and Industry. The letter in particular singled out Flipkart, Amazon and Snapdeal for infringing FDI regulations when offering huge discounts during the festive season sales. The commerce ministry in turn has requested the Enforcement Directorate (“ED”) and RBI to look into these companies and examine if they are indeed engaging in retailing activity.

This is not the first time that these E-commerce companies have been pulled up by the authorities. A similar probe was raised in April 2013 when Flipkart shifted to the marketplace model, converting itself into a platform for independent buyers and sellers to conduct business on its site.

Flipkart dodged those allegations by basically, changing its corporate structure.

Flipkart Online Services Private Limited (“FOSL”) was incorporated in 2008 and started its commercial operations through its website flipkart.com. During the period of April – July in 2009 it was involved in online retail distribution of goods and services. After which it started operating as a wholesale distributor. In 2009, the promoters of FOSL incorporated another company called WS Retail which sold various goods through the Flipkart website. Moreover, the auditors of FOSL suggested that for the year 2011‐12, WS Retail was the only seller at the Flipkart website.[9] During the period 2009 -2012 FOSL raised around US $ 180 million from different foreign Private equity investors.[10] But before these fund raising activities led to the ED investigation against Flipkart in 2012, the promoters of Flipkart, in February 2011 resigned from the Board of WS Retail and transferred their shareholding to others and WS Retail continued the same business under the new ownership and management.

In case of ED finding any FDI violation, it has the power to impose a fine up to three times the actual investment allegedly made in violation of FDI laws. Although, no violation by these companies have been found to date.


In any dispute, one of the primary issues that a court determines is whether or not the said court has jurisdiction to try the dispute; a court must have both subject-matter jurisdiction (i.e. jurisdiction over the parties involved in the dispute) and territorial jurisdiction. The increase in the use of the internet led to the creation of a virtual world which is not possible to be restricted in terms of traditional concepts of territory complicating the determination of jurisdiction. According to the traditional rules for determining jurisdiction, the courts in a country have jurisdiction over individuals who are within the country and/or to the transactions and events that occur within the natural borders of the nation.[11] Therefore in E-commerce transactions, if a business derives customers from a particular country as a result of their website, it may be required to defend any litigation that may result in that country. As a result, any content placed on an E-commerce platform should be reviewed for compliance with the laws of any jurisdiction where an organization wishes to market, promote or sell its products or services as it may run the risk of being sued in any jurisdiction where the goods are bought or where the services are availed of.


The absence of national boundaries and physical nature of transacting in goods/ services in the case of E-commerce makes taxation of such activities difficult, raising several issues. Due to the accessibility of internet across borders, E-commerce transactions can involve people who are resident of more than one country. Causing income arising out of such transactions may be taxed in more than one country.

1. Direct Tax:

Taxation of income in India is governed by the provisions of the Income Tax Act, 1961 (“ITA”). Under the ITA, residents are subject to tax in India on their worldwide income, whereas non-residents are taxed only on income sourced in India.

In an online market place model, a website operator basically hosts electronic catalogues of multiple merchants on its server, and a user of such website selects the products of their choice and places an order.

Normally, the website operator has no contractual relationship with shoppers but merely transmits orders to the merchants, who are responsible for accepting and fulfilling orders. In turn, the merchants pay the website operator a user fee/listing fee/commission based on orders placed through the site.

The main issue with respect to this model is the characterization of income earned by such entities for tax purposes. It has been debated whether the commission earned by such entities is in the nature of business income or Fees for Technical Services (“FTS”).

The revenue authorities in India argue that such payments should be treated as FTS on the basis that services provided by the website operator are managerial in nature since a platform is provided where users can manage their orders. Also, as the services are technical in nature since the sale of products is routed through the entity’s website, as come into existence through necessary technical inputs and by employing technical experts.

However, the Technical Advisory Group (“TAG”)[12], in a report[13] analyzing tax issues with respect to E-commerce, had classified such fees as business income. The TAG had opined that usage of technology for providing a service does not amount to rendition of technical services. Similarly, the delivery of a service via technological means does not imply that the service is technical in nature. The TAG further stated that provision of a platform for buying and selling does not qualify as providing managerial services.

The High Powered Committee (“HPC”)[14] set up by the Indian government also concurred with this view of TAG’s that such fee is in the nature of business income and not FTS.

This was backed by the Mumbai Tax Tribunal in the case of eBay[15] in which it was held that the user fee charged by eBay is in the nature of business income. Where it stated that services rendered by eBay are not managerial services as the portal had no role in the process of acquiring or completing successful sales and that it merely allows buyers and sellers to interact with each other

2. Indirect Tax:

In India, there are two types of taxes on sale of goods. Central Sales Tax (“CST”), which is levied by the central government,  which is generally payable on the sale of goods in the course of inter-state trade or commerce at the rate of 2%. Intra-state sale is governed by the respective State Value Added Tax (“VAT”) legislations. VAT is levied at standard rates of 0%, 1%, 5%, and 14.5% for different goods, although there may be variations in some states. In case of VAT, tax credits are available on VAT paid on input goods procured by the dealer.

The Amazon mode of E-commerce is based on the managed marketplace model (as mentioned before). It has “facilitation centers” such as the one in Bangalore, Karnataka, which stock goods being sold by them on their online commerce portal. However the goods remain the property of the sellers. When an item is purchased online, the seller’s invoice is raised directly in the name of the buyer and the item is dispatched. Officially, the actual transaction is between the seller and the buyer, while Amazon collects a commission for the services it offers. Although in reality, Amazon generates the invoice, dispatches the goods and collects the payment, all on behalf of the seller. It then passes on the payment to the seller after deducting its commission.

The main issue in this regards is the applicability of VAT on the e-tailer. In the marketplace model, the e-tailer stocks goods of third party merchant in his own warehouse. Goods are primarily stocked on the basis of technical analysis of customer choices recorded on the portal. This enables improved speed of delivery of products, since these are available in their warehouse. The intention of the e-tailer is to save time and logistical cost. Buyers place order for a product, which is processed by the website. However, sales invoice is raised by the third party merchant on the end consumer. The portal collects money from the buyer and remits the proceeds to the merchant after deducting its commission including charges towards storage of goods, etc.

At the moment, the third party merchants approached the tax department to add the e-tailer’s warehouse as their additional place of business in VAT registrations, which is also one of the terms and conditions for third party merchants while enrolling in Marketplace model of the e-tailer. The VAT department is of the view that there is an element of value-addition in the process of analyzing the customer choice and hence needs to be taxed. 

Applying existing tax laws to the above online transaction throws up many challenges. Firstly there is the problem of identifying the “dealer” and his “place of business” for the purpose of registering under the commercial tax regime. 

Amazon’s Position:

Amazon claims that the dealer is the seller and his place of business is the facilitation centre. Therefore hundreds of sellers are registered as dealers at the facilitation centre.  E-tailers argue that they neither own the goods nor sell them on behalf of any seller. The goods, if remain unsold, are taken back by the merchant seller. They are only providing services such as storage, delivery, collection of payment from end customer, etc. for which they charge commission to the merchant seller. Furthermore, it claims that it is not involved as such in the commercial transaction between the buyer and the seller. It only acts as a facilitator by allowing the seller to take advantage of its E-commerce portal. Hence, they are not liable to pay sales tax. 

Position of the KVAT department:

The term “dealer” as defined u/s. 2(12) of the Karnataka Value Added Tax Act, 2003 includes, “among others, commission agent/broker who supplies or distributes goods directly or otherwise for commission on behalf of any principal.”

Department contends that these e-tailers (as commission agents) fall into the definition of dealer.

However, just because the e-tailer is becoming a dealer may not necessarily mean that it is involved in the activity liable to tax. In this context, Section 3 defines the taxable event as, “every sale of goods on which a registered dealer or a dealer who is liable for registration should pay tax.”

The taxable event talks about “sale” defined in Section 2(29) to include “a transfer otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration”. The explanation (3) to definition of “sale” is relevant here as the explanation deems two independent sales or purchases in case of selling/buying agent scenario, i.e., one from principal to agent and another from agent to third party based on criteria such as rate difference in two transactions, etc.

Section 29 requires registered dealer to raise tax invoice on the customer and charge VAT on sale of goods. In this case, the third party merchant is raising tax invoice on customer. The transfer of title in goods also passes through tax invoice of third party merchant.

Furthermore, the place where the goods are stored and dispatched from is operated by Amazon, which also collects the proceeds of the sale. As per Explanation 1 to clause 2(b)[16] , such a person is deemed as the dealer and therefore it is liable to be taxed.

This is likely to lead to a situation where same products will be taxed twice in VAT and will also suffer the additional cost burden of Service tax paid by e-tailers on their activities. This cannot be the intention of lawmakers to impose additional tax burden on the end consumer. But the ambiguity still continues as no conclusion was drawn to this issue.

Also, recently, Footwear Manufacturers and Retailers Association (AIFMRA) filed a writ petition seeking for clarity on FDI in e-commerce. On 23rd Sep, 2015, Justice Rajiv Sahai questioned as to how the Union of India/State Governments could treat sales through the online portals as retail for the purpose of tax and on not for the purposes of investment. The Government is yet to reply to this.


On 30th March 2015, the Securities and Exchange Board of India (SEBI) had proposed an ‘Alternate Capital Raising Platform’ which will initially be made applicable to companies that are in the area of software product development, E-commerce and new-age companies having innovative business models allowing them to raise money from institutions and high net-worth individuals under a relaxed regulatory regime.

In India, tight guidelines for launching an IPO, especially the 3 year track-record requirement, has put hurdles for the listing plans of such companies. In a discussion paper[17] on ‘Alternate Capital Raising Platform’, SEBI proposed that capital raising would be allowed on the Institutional Trading platform (“ITP”). The proposed platform will have two categories of investors- qualified institutional buyers (“QIB”) and non-institutional investors (“NII”). It has been suggested that the family trusts may also be allowed to apply under the QIB category. The listing on the institutional platform would be for a period of at least 1 year. After that, the company would have the option to migrate to the main board subject to compliance with eligibility requirements of the stock exchanges.

The regulator also said that retail investors would be restricted from investing in such companies, given the risks involved. However, it said that adequate disclosures would be required to be made without hampering the capital-raising potential of such firms in new-age sectors like technology.

Currently, this proposal is at a nascent stage and the rules and regulations with this regard are yet to be finalized.


At the current stage, it would not be optimum for India, to open its economy for FDI in MBRT as the economic structure nor are the laws with respect to its taxation or functioning ready to handle this competition. The rapid pace of growth of the e-commerce industry has not given enough time for the Indian laws to adapt to it causing various issues arise and allowing the e-tailers to find loopholes in it. Therefore an in-depth understanding of the legal regime and the possible issues that an e-commerce business would face coupled with effective risk management strategies is the need of the hour for e-commerce businesses to thrive in this industry.


  2. Electronic Commerce: Taxation Framework Conditions” a Report by the Committee on Fiscal Affairs, OECD, retrieved from :http://www.oecd.org/ctp/consumptiontax/1923256.pdf
  3. India’s FDI policy on ecommerce: Some Observations”, By Rahul Nath Choudary; viewed at: http://www.isid.org.in/pdf/DN1503.pdf
  4. E-Commerce: Rhetoric, Reality and Opportunity”, KPMG and IAMAI; viewed at: https://www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/KPMG-IAMAI-ES.pdf
  5. “E-Commerce in India- legal, Tax and regulatory Analysis”, Nitish Desai Associates
  6. “Legal and taxation issues concerning E-commerce websites”, Gopal Saxena, Indian Journal of Law and Technology, Volume 11.
  8. http://forbesindia.com/blog/business-strategy/ecommerce-taxation-a-work-in-progress/
  9. http://www.rashminsanghvi.com/articles/taxation/electronic_commerce/ecommerce_tax1.html
  10. http://blog.ipleaders.in/debate-indias-fdi-policy-e-commerce/
  11. http://dipp.nic.in/English/Policies/FDI_Circular_2014.pdf
  12. http://indiataxinsightsblog.ey.com/2014/11/26/vat-on-e-commerce-transactions/
  13. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1427713523817.pdf

[1] Paragraph of the Consolidated FDI Policy, 2015

[2] The International Standard Industrial Classification (ISIC), Revision 3

[3] Para of the Consolidated FDI Policy 2015

[4] Para – (1) (ix) of the Consolidated FDI Policy 2015

[5] Press Note on ‘Foreign Direct Investment Policy’, released on November 10, 2015

[6] Ibid.

[7] Discussion Paper issued by DIPP on ecommerce in January, 2014

[8]e-Commerce: Rhetoric, Reality and Opportunity”,  KPMG and IAMAI; viewed at: https://www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/KPMG-IAMAI-ES.pdf

[9]INDIA’S FDI POLICY ON ECOMMERCE: Some Observations”, By Rahul Nath Choudary; viewed at:


[10] Ibid.

[11] Paras Diwan and Piyush Diwan, “Private International Law”, 4th rev., Deep & Deep Publications, New Delhi.

[12] Technical Advisory Group on Treaty Characterization Issues Arising from E-commerce was set up by the OECD Committee on Fiscal Affairs in January 1999

[13] Viewed at: http://www.oecd.org/tax/consumption/1923248.pdf

[14] The High Powered Committee was constituted by the Indian government in 1999 to examine the position of e-commerce transactions under existing taxation laws and recommend changes

[15] Ebay International AG v. DDIT, (2012) 25 taxmann.com 500 (Mum.)

[16]  Central Sales Tax Act, 1956.

[17] Viewed at: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1427713523817.pdf

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