Globalization has altered the perspective as well as the functioning of the markets in recent times. A substantial shift has been observed from producer-oriented markets to customer-oriented ones. One must keep pace with the customer’s needs and accordingly introduce services and products which could be availed by the customer by a simple click at their doorstep. Thus evolves the E-commerce industry which has successfully catered to consumers’ needs and has eased and supplied the consumers with what they require i.e., innumerable options, easy return, delivery at the doorstep and such other services as per their comfort.
The ease of e-commerce is not just limited to ordering food online or purchasing clothes while on the go, it has significantly impacted the lifestyle and time spent in purchasing goods and services alike. E-commerce has turned the tables completely. Today E-commerce has become an important part of our lives. Access to E-commerce platforms is not a privilege but rather a necessity for people around the globe as everything is available at a simple click. Pertaining to its necessity and wide reach, the e-commerce sector needs to be regulated to protect the interests of consumers and sellers alike.
The growth of Internet subscribers, smartphone users, revised refund policies and inexpensive data rates have given a boost to the consumers on these E-commerce platforms resulting in a growth of E-commerce business in India. Ever-evolving E-commerce laws and regulations in India results in entrepreneurs being unaware of many useful updates. There is a general misbelief that E-commerce businesses require less legal enforcement than their offline counterparts.
On the other hand, selling online does not always save money or relieve a business of the responsibility of complying with the applicable rules and regulations. The law considers all businesses, whether online and/ or offline as equal. The main challenges to overcome in the E-commerce industry are unfamiliarity with digital systems and a diverse array of languages, to begin with. [SM1] These factors demand the introduction of an appropriate omnichannel strategy. By combining this with a robust offline-to-online model, knowledge about the E-commerce website’s legal requirements assisted sales and product curation, the E-commerce market can expect a smooth integration into the wider E-commerce ecosystem. The main reasons for India’s underperformance are market inefficiencies and underdevelopment and the lack of knowledge of the people about the benefits of E-commerce business in India.
Legal Requirements of E-commerce business in India
E-commerce broadly means a commercial activity conducted with the support of electronic devices. Under E-commerce, there are digital business transactions/trades which are wholly/partially performed by using the internet. As E-commerce has evolved and become more feasible and a safer way of shopping/trading, it is such an industry that requires a well-built regulatory framework in order to ensure accountability and consumer protection. The legal obligations to start an E-commerce business in India are as follows:
1. Company or LLP Registration
Every business is required to get registered with the Ministry of Corporate Affairs under the applicable laws. Such a business shall either be incorporated under the (Indian) Companies Act, 2013 or a foreign company or an office, branch or an agency outside India and necessarily be owned or controlled by an Indian resident.
While establishing an E-commerce business, it is suggested to have a company or LLP in place to relish the limited liability protection and at the same time, run a business with ease. Such registration ensures that the bank account is opened in the name of the company/ LLP which in return shall make the process of GST registration convenient and quicker.
As almost all marketplaces permit proprietorship and partnership firms to trade on their website, therefore, it is suggested to run the business through an LLP or a Company. In the event, where the promoters plan to establish an E-commerce website, as a Company it is the most suitable option as it is the only type of entity that have the access to angel funding or equity funding, which acts as a precondition to run a successful E-commerce business.
2. GST Registration
For a successful establishment of an E-commerce business, GST registration is mandatory. Every E-commerce business irrespective of its turnover is required to be compulsorily registered under the Central Goods & Service Tax (CGST) Act.
3. Bank Account
Opening a bank account in the name of the business is a convenient process. In case of a Proprietorship firm, the first step is to obtain a GST registration in the name of the business in order to open a bank account. An active bank account is the bare minimum requirement to be able to list a business on an E-commerce marketplace or to obtain a payment gateway for a proprietary E-commerce website.
4. Payment Gateway
A payment gateway is mandatory for a proprietary E-commerce website to process the payments. It allows the website to accept payments through credit card(s), debit card(s), net banking, internet banking from multiple banks. Therefore, one payment gateway is sufficient to accept various forms of online payments. Further, once the payment is received by the customer by the website, such payment is sent to that respective business’s bank account through the payment gateway.
In the event, where the business runs through the online marketplaces, the marketplace would accept the payment through their payment gateway and directly credit such an amount to the bank account of the seller. Hence, a bank account shall be in place for smooth transactions.
5. Legal Documents
If any business operates through online marketplaces, then the marketplace provides the seller with a legal document or sellers’ agreement and the seller must abide by the sellers’ agreement. It is important for any business to go through the sellers’ agreement(s) in detail before the execution as it is the legal binding agreement between the seller and the marketplace.
There are a few additional requirements such as cyber law due diligence, compliance under the Competition Laws of India and the laws related to data protection and appointment of a Nodal Officer in case of an international E-commerce business setup in India which are important to always be complied with.
Compliances for E-commerce business in India
The trend of E-commerce has been rapidly increasing since the last decade. Many players with new business ideas have entered the market, be it Zomato/Swiggy delivering food from various restaurants or Flipkart/Amazon delivering products or Grofers delivering groceries.
The scenario is such that you name the service and there is an E-commerce platform for it available at the doorstep. The swift development of the E-commerce industry has called for the attention of the government towards forming regulations and policies with respect to the same. India has various laws that monitor E-commerce business in terms of data privacy, security of consumers, settlement transaction safety, quality of products etc.
1. Foreign Direct Investment
Foreign Direct Investment means the investment made by the foreign entities in the companies situated in India. The same can be done either by opening a subsidiary or associate in a foreign country, acquiring a controlling interest in an existing foreign company, or by means of a merger or joint venture with a foreign company. In India, the Ministry of Commerce and Industry, The Department of Industrial Policy and Promotion, Government of India form policy pronouncements on FDI. There are two ways to invest in India through FDI:
‘Approval route’ in which the prior permission of the central government is required before doing any foreign investment in India under a particular sector.
‘Automated route’ in which no prior permission is required and foreign entities can directly invest in Indian businesses under a particular sector.
The FDI policy allows Foreign Direct Investment to the extent of 100% in the marketplace model of E-commerce by the way of the Automatic Route. A single brand retail trading entity operating through brick-and-mortar stores is allowed to carry on retail trading through E-commerce. However, many E-commerce businesses have disguised their inventory-based model as a marketplace model through a complex structure.
2. Information Technologies Act, 2000
The E-commerce sellers conduct business in the same manner as the physical sellers with the only distinction of non-availability of the physical body in order to sell things. Through E-commerce, the vendors are required to generate bills, file returns, pay taxes, prepare ledgers and maintain records. They must perform all the same on the online platform.
The Information Technology Act, 2000 (IT Act) is the primary legislation that governs the use of the internet, cybercrime as well as the digital business in India. The IT Act governs online behaviour and related aspects of E-commerce and recognizes electronic contracts and digital signatures.
The Information Technology Act, 2000 is based on the Model Law of E-commerce adopted by the United Nations Commission on International Trade Law (UNCITRAL) and acts as a developing E-commerce enabling legislation in India. The Act targets regulating the use of the internet by punishing the person for publishing any obscene information or hacking or altering the data from devices of another person. The salient features of the Act are:
- Transaction Security
- Digital signature
3. Payment and Settlements Systems Act, 2007
As per the Payment and Settlements Systems Act, the E-commerce business shall succeed as a payment system if it follows the Rules specified by RBI for online transactions and payments. Further, it is compulsory for an intermediary that is receiving payments through digital modes to have an active Nodal Account for settling the payments of the sellers on its E-commerce platform.
4. Consumer Protection Act, 2019
The E-commerce industry is also monitored by the Consumer Protection Act as it is working towards the interest of the consumers. In order to safeguard the consumers from unfair trade practices and further to address and solve their problems, the Ministry of Consumer Affairs, Food and Public Distribution on May 17, 2021, has notified the Consumer Protection (E-Commerce) Rules, 2021.
The rapid growth in the E-commerce industry is proof that E-commerce has become a vital and integral part of our lives. Long gone are the days where people used to hesitate from shopping online as they had doubts about the quality, their money being stolen, non-delivery of the product. It is observed that today a huge part of the population trusts E-commerce websites for their day-to-day needs. Therefore, nowadays most of the purchases are prepaid compared to Cash on Delivery. This is a sign of the acceptance of E-commerce platforms by the general public especially during the COVID-19 pandemic, the usage of E-commerce has increased tremendously.
Our legal system is constantly introducing new rules and regulations to deal with this significant shift in the business model in order to safeguard the interest of the consumers. Therefore, a thorough understanding of the legal system and the possible problem(s) that an E-commerce business would face along with an effective risk management strategy is required for E-commerce businesses to thrive in this industry.