India Regulatory Brief: FDI Reform for B2C E-commerce Unlikely, New VNO License Proposed

May 18, 2015 Posted by India Briefing Reading Time: 4 minutes

FDI Cap for B2C E-commerce to Remain

Last week, Commerce Minister Nirmala Sitharaman met with public and private sector representatives to discuss foreign direct investment (FDI) for e-commerce in India. Local observers in the media speculated that the discussion might lead the government to raise, or even lift, the FDI cap on business-to-consumer (B2C) e-commerce. However, domestic e-tailers predictably voiced their opposition to any such reform, and while the discussion did not produce any concrete outcomes, the government has long sought to protect India’s booming B2C e-commerce industry from foreign competition.

Although the government allows 100 percent FDI in business-to-business (B2B) e-commerce, it does not allow any FDI in B2C e-commerce. Many foreign e-commerce companies, such as Amazon and Alibaba, have shifted from an ‘inventory model’ to a ‘marketplace model’ to sidestep this FDI cap and access the Indian market. However, the marketplace model is cost prohibitive for many small and medium sized e-tailers based abroad. While many government officials and domestic e-tailers remain opposed to reforming the B2C FDI cap, domestic industry groups, foreign retailers, and some foreign governments have encouraged the Indian government to lift the cap.

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New Licensing Proposed for VNOs

The Telecom Regulatory Authority of India (TRAI) recently recommended the creation of a new license for virtual network operators (VNOs). TRAI specifically recommended that the Department of Telecommunications develop a licensing framework for VNOs, which are companies that provide management or network services but do not own telecommunication infrastructure.

In its recommendation to the department, TRAI suggested that the licensing cost for VNOs start at Rs 15 lakh (US $23,000) for companies that want to provide a limited number of services. TRAI further suggested that companies that would like to provide country-wide internet services should pay Rs 1.25 crore (US$ 197,000) for a license, while companies that would like to provide all VNO services should pay Rs 7.5 crore (US$ 1.18 million) for a license.

At present, VNOs are not subject to a license specifically for their voice, data or video services. Based on the nature of their operations, many companies that qualify as VNOs apply for internet service provider or unified licenses to conduct business in India. However, industry experts note that the licenses, particularly the Unified License, are cost prohibitive for many VNOs. Domestic telecom providers will likely oppose TRAI’s proposal, but a new license regime would represent a good opportunity for foreign VNO companies that want to do business in India.

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Black Money Bill Passed

Last week, India’s parliament passed the much anticipated Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015. Under the new law, Indians that have undeclared assets above Rs 5 lakh (USD $7,850) abroad are liable for a flat 30 percent tax, a 90 percent penalty and up to 10 years in prison. Although the law does not take effect until April 1, 2016, the government is reportedly setting up Central Board of Direct Taxes (CBDT) offices in Delhi and Mumbai to process claims from non-compliant taxpayers during a clemency period. Local media reports state that the clemency window will remain open for two to three months; non-compliant taxpayers will be eligible for a 30 percent tax and a 30 percent penalty during this period.

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