Foreign Direct Investments (FDI) in E-Commerce & Dropshipping in India-2: Lawyers Advice on Incorporating a Corporation in India by a Foreign Investor | Law Firm for Foreign Investments in India | FDI Attorney in India | India Business Entry | Legal Services for Setting-up Business in India
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Company Registrations, Licenses and Permits which are to be procured:
An e-commerce entity can be set up as a private or a public limited company, or a sole proprietorship, or a cooperative, or a limited liability partnership. The required documents vary depending on the type of entity chosen to do business in. But some of the basic important documents required for any e-commerce or drop shipping company are:
• Company Incorporation
• Director’s Identification Number (DIN) from the official website of Ministry of Corporate Affairs
• Permanent Account Number (PAN) and Digital Signature Certificate.
• Goods and Service Tax (GST) certificate.
• VAT Registration
• Privacy Policy
Precautionary Measures:
• The seller or the owner of the e-commerce website, along with complying with the applicable laws and obtaining the required documents is also supposed to create a payment gateway. Since the seller is going to be receiving the payments online, they must have a secure payment gateway. Examples of payment gateways in India are Paypal or Payumoney.
• The e-commerce website must also have an efficient data protection. The personal details of the customers have to be protected.
• The foreign company carrying out e-commerce in India shall also submit a FDI policy compliance report to the Government annually. This is a recent step taken by the Government.
• The foreign e-commerce companies must also set proper pricing on the goods and not provide steep discounts.
Functioning and Management:
• Drop shipping is an e-commerce business which functions in a way where the retailer takes the customers’ orders and gives them to a third party who will store, pack, and deliver the product directly to the customer.
• The retailer first has to join one of these drop shipping websites. After that, the drop shipping company so chosen by the retailer provides some products to the retailer in a CSV file. Now, the retailer has to upload this list of products on their website, offering the products to their customers.
• After this, the retailers receive a number of orders from their customers and this list is transferred to the drop shipping company and they store, pack, and ship the products to the customers. This is the basic functioning of drop shipping.
• The drop shipper is basically a third party or a facilitator between the retailer and the customer. This is exactly what a market place model is.
• So, such a model can take place between many jurisdictions. Like the drop shipping company can be India based and facilitate transactions between two other countries. In such cases certain taxation aspects should be taken care of.
Taxation Aspects:
• All suppliers selling goods through e-commerce have to be registered under GST. The applicability of GST can be classified into two situations:
1) When the sale is made outside India
2) When the sale is made in India
• Section 7 of the IGST Act, 2017 states that, if the supplier is located in India and destination is outside India, then the supply of Goods shall be considered as Interstate supply. So, in such case IGST is applicable. So, in case of exports, GST compliance becomes very important to determine the sales price because the price shown on the website should be inclusive of all taxes. However, while purchasing the products from the supplier GST will not be applicable as the goods are directly delivered to the customer and they do not enter the customs order of India.
• In case of sales within India IGST will be applicable. In case of purchase from the suppliers GST will be applicable as the goods are entering the border of India.
Export Potential:
• According to a report by Federation of Indian Export Organisations (FIEO), exports through the e-commerce route have grown over 400 per cent to $1.4 billion in the years 2009, 2010 and 2011.
Recent Developments:
• Previously, the SBRT entities had to set up a physical store before being allowed to undertake e-commerce activities. But in 2019, the Union Cabinet had approved and proposal to relax the FDI norms for single brand retail trading entities to commence e-commerce activities before setting up a physical store. This new rule is expected to drive jobs, customer care services, training and product skilling.
• In January 2020, Amazon India announced investment of US$ 1 billion for digitizing small and medium businesses and creating one million jobs by 2025.
• In May 2018, Walmart acquired a 77 per cent stake in Flipkart for a consideration of US$ 16 billion.
• Even the allowance of 100 per cent FDI in the market place model in e-commerce was revised in 2018.
Authored By: Adv. Anant Sharma