Home/ Companies / Amazon flags regulatory risk in India

Bangalore: The world’s largest online retailer Amazon.com Inc. has warned its investors that the structure of the company’s Indian operations may violate local laws since there are “substantial uncertainties" regarding interpretation of foreign direct investment (FDI) and other regulations in the country.

Amazon made the disclosure in its standard quarterly regulatory filing with the US stock market regulator Securities and Exchange Commission following the company’s third quarter earnings earlier this month.

Still, the complicated structures have caught the eye of Indian regulators. The enforcement directorate is probing Flipkart for possible violation of FDI laws; the regulator has also asked Amazon India and Snapdeal for more information about their business models.

Mint reported on 15 September that Karnataka’s tax department stopped Amazon India from selling electronics and several other products from its warehouse in the state by cancelling the licences of more than 100 third-party merchants that work with the local unit of the company.

“Although we believe these structures and activities comply with existing laws, they involve unique risks. There are substantial uncertainties regarding the interpretation of PRC and Indian laws and regulations, and it is possible that the government will ultimately take a view contrary to ours," Amazon wrote in its quarterly filing.

PRC refers to People’s Republic of China.

“India has been covered as part of our International Market Segments in the Risk Factors section of our 10-Q (quarterly regulatory filing). Given our rapid growth and announcement of substantial investment, we called out India explicitly for the first time this quarter," an Amazon India spokesperson said in an email.

The Hindu newspaper first reported the news of Amazon’s filing.

To be sure, Amazon’s disclosure was part of its “risk factors" statement in which the company is expected to disclose significant risks to its business even if there are unlikely to materialize.

Still, rival eBay Inc., which also runs a marketplace in India but which has been far more conservative in investing in the country compared with Amazon, doesn’t mention a similar risk in its quarterly filing.

In India, Amazon and others, despite being structured as marketplaces, work very closely with their sellers and provide various services. Some 75% of Amazon India’s sales volume come through a service called “Fulfilment by Amazon", in which Amazon stores products owned by third-party merchants at its warehouse even before a customer has ordered them. In other cases, Amazon simply picks up products from merchants after a customer has placed an order on its site.

But because Amazon believes its technology can predict customer orders, the company encourages its merchants to store their goods at its warehouses so that it can deliver them much faster when orders are actually placed.

After the products are sold, Amazon collects money from customers, keeps a cut for itself, and gives the remaining proceeds to its merchants. The merchants then pay value added tax (VAT) or sales tax to the state government.

However, the tax department in Karnataka has told Amazon that rather than the company’s merchants, Amazon must pay VAT on the orders it gets under the “Fulfilment by Amazon" service.

Amazon is contesting this and the issue is still unresolved even as most of the company’s sellers in Bangalore have been banned, at least temporarily, from working with it.

Apart from providing services, Amazon, Flipkart and Snapdeal also actually have a significant say in deciding product prices as all the three sites finance partly and, in some cases, the full amount of discounts offered by sellers albeit in an indirect manner, Mint reported on 21 October. Whereas pure marketplaces are supposed to maintain an “arm’s length distance" with their sellers.

Amazon is also selling products on its Indian website that are sourced by a joint venture with N.R. Narayana Murthy’s Catamaran Ventures, an arrangement that could draw additional regulatory scrutiny on the world’s largest online retailer, Mint reported on 6 October.

Amazon Asia and Catamaran Ventures have jointly formed an entity called Cloudtail India Pvt. Ltd to sell items such as books, phones and exclusive Amazon merchandise on Amazon.in under the seller name Cloudtail, according to documents available with the Registrar of Companies.

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Updated: 31 Oct 2014, 11:53 AM IST
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