Join WTO e-com talks, have a say in global rules

As many as 76 members of the World Trade Organisation (WTO) — nearly half the WTO’s membership — have begun a process of framing rules governing cross-border e-commerce. The initiative is being spearheaded by the United States, China, the European Union and Japan — the four largest trading nations in the world economy — and has the tacit support of leading multinational companies (MNCs) in the e-commerce space such as Amazon, Walmart/Flipkart and Alibaba. India has strongly objected to the move.

The objection stems primarily from an apprehension that in the event of India being a part of the negotiations, it will have to commit itself to harmonised WTO rules on e-commerce which will take away the ‘policy space’ currently available to the government in crafting its policies to suit its national objectives.

So, what are the apprehensions? How does the government seek to address these concerns by not being a part of the consultative process? Will it not be better placed by joining the negotiations? What is the way forward?

First, the government fears that initiating negotiations on substantive obligations relating to e-commerce will oblige India to permanently accept the current moratorium on imposing customs duties on electronic transmissions such as books, films, music, video games, etc.

Second, it fears that it will lose flexibility in formulating policies on foreign direct investment in multi-brand retail. Third, it fears that it won’t be able to control the cross-border movement of data, heightening concerns on privacy and national security. All the fears are either completely unfounded or exaggerated.

The government must not do anything which comes in the way of free flow of creative/innovative content (films, books, video games, etc). Since levy of customs duty on the transmission of such stuff is a major speed-breaker, it should be shunned. In this backdrop, even if the current moratorium on imposing duties continues post-agreement on e-commerce, that should be welcome.

As regards loss of revenue (due to non-levy of customs duty), this can be taken care of by imposition of a tax (tantalisingly christened as ‘digital tax’) on revenue derived from the activities/transactions of Indian users on the search engines, social media platforms and online marketplaces of these companies. The Central Board of Direct Taxes (CBDT) has already mooted a proposal using the digital permanent establishment (DPE) concept. This is also mentioned in the draft policy on e-commerce released by the department for promotion of industry and internal trade (DPIIT).

As regards, FDI in multi-brand retail (MBR), under a policy notified in 2016-17, 100% FDI in the marketplace model of e-commerce is allowed. The marketplace is an electronic platform on which vendors sell their products to consumers. The platform owner can only provide support services — warehousing, logistics, order fulfillment, etc. — to the vendor but cannot undertake direct selling.

However, the guidelines were vague and lacked transparency, which enabled the likes of Amazon and Flipkart to enter into direct selling without appearing to be in violation of the policy. To put it straight, 100% FDI in MBR was already permitted, albeit through the backdoor. Through a circular issued on December 26, 2018, the government clarified that the owner of the marketplace can neither hold equity in, nor control the inventory of, the vendor.

That circular had thus put fetters on global majors, though it stopped short of barring them from getting into direct selling. The government would like to retain this dispensation. It apprehends that if it joins the negotiations on e-commerce, it will have to make way for ‘unconditional’ entry of foreign companies in MBR. This is a very myopic approach.

The way forward is to allow 100% FDI in ‘online’ MBR and concurrently open up offline retail to 100% FDI (at present, 51% FDI is permitted in this segment, subject to riders). This will result in ‘clarity’ and ‘certainty’ of the policy environment and be beneficial to all stakeholders, including MNCs and small traders. It will also give our policy makers confidence to join WTO negotiations.

On cross-border movement of data, too, India appears to have taken a rigid position — as articulated in the draft policy which requires foreign companies to set up local data storage facilities, mandatorily register business and have a representative locally, besides giving to the government access to source code and algorithms of AI (artificial intelligence) systems.

Such a restrictive data protection and regulatory regime would be out of sync with the requirements under a WTO-sponsored architecture. The latter is expected to reflect the concerns of global majors who won’t be comfortable with the hassles of setting up data storage locally and even handover the ‘data key’ (source code and algorithms of AI systems) to the local government.

India should consider pragmatic and flexible arrangements to address the concerns on protection of ‘sensitive’ data. Its approach should be one of risk assessment, identification of misuse and timely pre-emptive action taken in collaboration with the MNCs, who are bound to extend full support. Such a dispensation is also likely to pass muster under the WTO scheme of things.

This approach, guided by the philosophy of mutual trust and accommodation, will also help in capturing all the digital transactions needed for garnering tax revenue — indirect and direct — from the vendors as well as the marketplace owner.

India needs to shift gears from the current protectionist stance to being more open and forward-looking and proactively engage with US/EU/Japan/China to frame the rules of the e-commerce game. Considering that the negotiations will move on irrespective of whether India joins or not, this is the only way forward. For India, not to join will be suicidal since then it will be presented with a fait accompli on the rules of global e-commerce.

(The writer is a New Delhi-based policy analyst)