Why Amazon and Uber puzzle Indian lawmakers
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In rapid succession now, two of the world’s most innovative companies have found themselves reined in by the long arm of the Indian law. Last month Uber Cabs, the breakthrough taxi-sharing service that was picking up massive momentum with its operations in India, found its payment model questioned and banned by the Reserve Bank of India (RBI), which does not allow Indian companies to charge credit cards without a two-step authentication process. Uber, which uses an overseas payments gateway, was sidestepping this directive.
Then last week tax authorities in Karnataka provided their own interpretation to the e-commerce model followed by Amazon, effectively curbing its operations. With foreign direct investment (FDI) in online retail banned in India, Amazon, along with its Indian counterparts such as Flipkart and Snapdeal, function effectively as marketplaces, wherein they merely host third-party merchants on their websites and deliver on order to customers. While doing so, Amazon pre-orders some products to stock in its warehouse in anticipation of customer demand. Karnataka’s tax mandarins would have none of that, ruling that these goods then belong to Amazon which is selling directly to customers. For them it is a question of applying existing rules to a business situation that was not envisaged when these were framed. Karnataka’s tax laws, as indeed for the rest of the states, were framed long before Amazon re-invented commerce. The fulfilment centre, the storehouse, that has so got the taxman’s goat, is the vital backroom of an e-commerce operation. It allows companies such as Amazon and Flipkart to address the needs of online shoppers—faster delivery, lower cost and ease of ordering. Decades ago retailers such as Wal-Mart addressed these very issues by sourcing products centrally from across the globe to offer their discount retailing model. Not without their set of problems with regulators.
That clearly, is the nub of the issue. Through the ages, innovation, especially when it threatens to disrupt the existing structure of a well-established, powerful industry, has always found itself ruthlessly slammed by legal and bureaucratic action. RBI and the tax folks in Karnataka are not the only forces to be threatened by the winds of change. Ride-sharing platforms such as Uber and Lyft have invited regulatory censure all over the world. Recently, a German court ruled that Uber doesn’t have the proper permits in order to operate anywhere within the country. Significantly, Germany’s main taxi industry body was among the first to welcome the ruling. In India too, Uber’s principal rivals in the taxi business were obviously behind its ouster.
The funny thing of course is that, Uber isn’t a taxi company at all. It is a digital platform which facilitates ride-sharing with potential passengers connecting with taxi drivers using a smartphone app which allows location sharing, pickup timing and payment to be executed online. Thus no money exchanges hands, saving on the ride time for the passenger and allowing the drivers to be utilized optimally. Similarly, Amazon isn’t a gigantic store, in the Wal-Mart mould nor is Airbnb a hospitality company. They are the early offsprings of a new knowledge and sharing economy the likes of which rule-makers across the world have never seen. And that is hardly surprising: innovation will always precede regulation. It is like expecting the telecom billing structure and the tariff plans to have been ready before Graham Bell made his historic call.
Neither Uber nor Amazon nor Airbnb have any cars or rooms or products of their own—they simply connect users with product owners. Uber’s model is also a great example of the network effect where more of each—passengers and drivers—leads to efficiency gains on both sides. That’s true of Airbnb as well, and points to the enormous potential lying untapped in all these spaces. From zero, e-commerce in India is already a $2.3 billion business and is expected to scale up to $32 billion by 2020. That’s not a business: it is a revolution and it is being driven by newer and more audacious technologies and innovations which have a way of coalescing to create even newer services. Thus, select Airbnb hosts are now being given free thermostats from Nest (a Google company) to install in their apartments and homes to control the air-conditioning costs. It’s a win-win for both since it makes Airbnb’s rental service more environmentally friendly while giving Nest exposure to a vast market.
While RBI governor Raghuram Rajan is right in saying the laws must be obeyed by all companies, the trouble is these laws are not geared to accommodate these new models. The need is for enabling provisions that will ensure India does not lose out on the leapfrogging such technologies offer.
Can Indian laws keep up with the pace of innovation that e-commerce offers? Tell us at firstname.lastname@example.org
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