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Liberalisation of funding necessary for ecommerce industry: Naveen Aggarwal

Tuesday, 1 July 2014 - 6:55am IST | Agency: dna

Despite a host of challenges faced by ecommerce players in India, the industry offers significant potential for inclusive growth of the economy, feels Naveen Aggarwal, North India tax head, KPMG India. In an email interaction with Ashish K Tiwari, Aggarwal outlines the policy matters and other government initiatives that will help take the industry to its next level of growth.

What are the various business/policy related challenges being faced by the industry? How are these impacting growth?
The ecommerce industry is facing myriad challenges, ranging from regulatory to supply chain, logistics, payment processing and funding.
ecommerce sector is capital intensive and requires bulk of the investment in setting up of supply chain and related infrastructure. However, the existing capital available to most ecommerce companies to ramp up their infrastructure is not sufficient. An estimated 70-80% of ecommerce players are in dire need of funds. Considering the restricted avenues of domestic fund raising available for the sector, private equity (PE) and venture capital (VC) funds had backed the ecommerce industry from its inception.
As per the current foreign direct investment (FDI) regulations, 100% foreign funding is allowed in wholesale cash and carry model (ie B2B businesses) or under other models like marketplace model. However, the current prohibition of foreign investment by way of equity in inventory-based multi-brand retail trading model (ie B2C businesses) is adding to the woes of e-tail companies. Dried-up capital and restrictions on FDI is forcing ecommerce companies towards inorganic growth or change in their business models.
Adding to the existing woes are the challenges on the taxation side. In India, while taxation rules exist for real world transactions, these rules are unable to adequately address challenges of multi-jurisdictional business models arising in the virtual world. Multiple levy of transaction taxes and complex inter-state regulations pose additional challenges from an indirect tax perspective.
Adequacy of infrastructure is another significant challenge for ecommerce business. To add on, lack of regular and dependable power supply, leaves most of the customers with internet access that is intermittent and unreliable. The ecommerce industry is also facing multiple challenges related to supply chain logistics, especially with respect to procurement and order fulfillment.
Another very critical aspect is the confidence that the online financial transaction system inspires in ordinary consumers.

What needs to be done to correct this scenario?
The Indian ecommerce industry is growing at a compounded annual growth rate of 34% (Source: i-cube, IAMAI- IMRB). To continue this growth momentum, it is imperative that the Government of India (GoI) institutes favourable regulatory environment and promotes technological advancement of infrastructure.
Liberalisation of funding for the ecommerce industry is the need of the hour. The GoI should consider allowing FDI in ecommerce with requisite restrictions like threshold on capitalisation norms, investment lock-in period, sourcing of products, etc. Additionally, indigenous means of funding, like creating a corpus or setting aside funds for the industry or declaring the industry as a 'priority sector' to secure cheaper loans, should also be considered.
Relook by GoI at the existing taxation and jurisdiction laws to address the multi-jurisdictional nature of ecommerce transactions shall provide a predictable environment. Rolling-out and implementation of Goods and Services Tax (GST) would simplify inter-state transactions.
On the infrastructure front, GoI can play a major participative role, following the public, private partnership (PPP) model, to create an ecosystem for building adequate warehouses and support integrated logistics and supply chain models.

How will it help change the overall business environment? What kind of growth can be achieved in the next 3-5 years?
The ecommerce industry acts as a catalyst for growth and development of the Indian economy by offering enormous benefits to the government, the society and the customers.
According to a September 2013 KPMG-IAMAI Report on ecommerce, the industry is expected to contribute 4% of GDP by 2020. The report suggest that the size of e-tailing online payments in 2011 was at $240 million (Rs 1,320 crore) and is expected to reach $5 billion (Rs 275,000 crore) by 2016. This steep growth in the transaction value and volume shall definitely provide an impetus to the tax exchequer.
From a society perspective, basis the report, e-tailing alone is expected to generate employment for about 1.5 million people by 2020 and empower women by creating means of working from home. Various new small and medium enterprise (SME) ventures have emerged through ecommerce platform by negating the need for physical infrastructure investments, shortening the traditional supply chains, reduction in delivery cost and ultimately, increase in margins.

In your opinion, what policy initiatives can the industry expect from the government in the upcoming budget?
It is likely that the GoI may look at opening up FDI in ecommerce sector specifically in e-tailing segment, with certain conditions and ceilings. Allowing FDI in the sector would not only resolve sourcing and funding requirements for the sector but shall also allow ecommerce players to partner with local manufacturers to source local products giving Indian consumers unique and wider choices at lower price. Another priority area is to provide clarity on taxability of ecommerce transactions. The government should re-look at existing taxation and jurisdiction laws to address multi-jurisdictional nature of eCommerce transactions. The roll-out of GST would be another significant tax reform leading to synergy and streamlining of tax structures.

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