Online retailers may have to register in India
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New Delhi: Online retailers such as the UK’s fashion and beauty store ASOS.com, Japanese e-commerce firm Rakuten.com and Overstock.com of the US that sell in India without registering an Indian arm may soon have to, if the government decides on a literal interpretation of the Companies Act of 2013.
Companies outsourcing work to Indian back-offices, information technology (IT) companies, and analytics hotshops may also have to follow suit.
According to section 2(42) of the new Companies Act of 2013, which was passed by Parliament in August, “any company or body corporate incorporated outside India” which “has a place of business in India whether by itself or through an agent, physically or through electronic mode” or which “conducts any business activity in India in any other manner,” is classified as a “foreign company”.
The new Act that came into force on 1 April requires (via section 380) every such foreign firm to register in India, establish a permanent place of work and appoint at least one resident Indian director on its board.
Further, rule 2(c) of the Companies (Registration of Foreign Companies) Rules 2014 brings under the ambit of ‘electronic mode’ all transactions that may be business-to-business or business-to-consumer, involving data transfer, deposits and securities, financial settlements, online marketing, advisory services, telemarketing, telecommuting, telemedicine and information research.
Such a provision could potentially lead to a seemingly absurd situation where practically every foreign company doing businesses in India in areas such as financial and consulting services and online retail may be bound to register and establish a permanent presence in the country, said Pavan Kumar Vijay, managing director at New Delhi-based financial consultancy Corporate Professionals (India) Pvt Ltd.
“Any foreign company which is doing business in India via e-commerce, whether its server is in India or abroad, comes under the ambit of the law, which says that such a company has to be registered in India,” says Vijay.
Simply put, an e-commerce portal based out of the US selling goods internationally or a consultant based in Dubai providing services to clients in India may have to register in India.
A literal reading of the law could even make it applicable to companies outsourcing work (and piping data) to Indian IT and back-office firms.
The new stipulations could potentially have an impact on thousands of firms, said Bharat Anand, partner (corporate) at legal services firm Khaitan & Co.
Foreign companies which want to be absolutely ‘in the clear’ will register in India, but there could be several others that may not want to trade with India.
“Why would a company whose business from India is a small fraction of its total trade, want to take pains to register a company in India?” he asks.
A January report by BMR & Advisors pegs the total e-commerce trade in India (international and domestic) at $12 billion of which it estimates that the travel and ticketing segment is 70% while the online retail segment is about 10%.
Besides the ones mentioned above, some well known online retailers that sell their goods in India but do not have a physical presence in the country include fashion and lifestyle portals such as Lookfantastic, Net-a-porter and Beautyexpert.
These firms did not respond to email queries seeking comment.
It is unlikely the government will read the law literally, say some experts who add that they would prefer a clarification anyway.
“It will be extremely aggressive and anti-business if the regulator wants the foreign company to do registration in India just because the customer is here,” says Amit Jain, partner, BMR & Associates, adding that this is a grey area and requires clarity from the government.
Jain further says that the provisions on foreign companies should principally get triggered if the company has a foot in India via an agent, subsidiary or branch.
“The intention of the law is to go after people who actively want to do business in India but are not physically present in the country, I don’t think it is intended towards the people who are buying online,” says Joebin Devassy, partner, Desai & Diwanji, a Mumbai-based law firm.
According to Devassy, even if these online portals are on the wrong side of the law, penalizing or taking action against them would be very difficult for the regulator.
“These companies are not in India’s jurisdiction, how do you keep track of individual shipments coming into the country? You can ask companies to pay penalty, which they are not liable to pay since they do not have any assets here.”
In a worst-case scenario, the government may block the website, but that is not a permanent solution, Devassy adds.
Vijay agrees with Devassy’s view that the government would find it hard to monitor such companies.
“The government will have to work out at what level an international financial transaction has to be monitored,” he said. “Suppose you are paying money via credit or debit card, will the transaction be routed via RBI (Reserve Bank of India) and MCA (ministry of corporate affairs) servers and be approved? If that is the case, will all transactions that are going via Indian servers have to go via RBI and MCA servers,” he asks.
Some other experts such as Amrish Shah, transactions tax leader at EY, are sure the government will not go after e-commerce firms.
“In fact, the new act seeks to promote e-commerce. Why would the government create hurdles for foreign companies?” Shah said.