Data localisation in focus as govt unveils draft e-commerce policy

The Indian government has issued a draft national e-commerce policy that aims to regulate cross-border data flow, fight piracy and counterfeiting, and requires all online retailers to have a locally registered business entity.

The draft policy comes after the government scrapped a previous version in September 2018 amid opposition from some online retailers. The new version also follows the tightening of the foreign direct investment rules for e-commerce companies. 

The new policy restricts cross-border flow of critical data of Indian users collected by e-commerce platforms and social media sites. This is similar to the draft Personal Data Protection Bill, released last year, and the Reserve Bank of India's directive last year to payments companies such as Visa and MasterCard to store all data locally.

The draft e-commerce policy calls for developing more data-storage facilities, data centres and server farms in India. It also favoured creating a legal and technological framework to provide the basis for imposing restrictions on cross-border data flow.

Overall, the new draft addresses six key areas--data, infrastructure development, e-commerce marketplaces, regulatory issues, domestic digital economy and export promotion. The draft recognises e-commerce as an interdisciplinary subject falling under the ambit of multiple ministries, departments and state governments. It suggested creating a Standing Group of Secretaries on e-commerce to tackle inter-departmental issues.

The policy also seeks to ban all parcels with the exception of lifesaving drugs under the ‘gifting’ route is used by international e-commerce companies to avoid taxes in India. 

Besides, the policy draws from the draft IT intermediaries guidelines on the issue of taxation and proposes that e-commerce companies providing services in India have a significance local presence. 

As part of its focus on consumer protection and stopping counterfeit products from being sold online, the draft asks e-commerce marketplaces to inform trademark owners and refund customers for delivery of counterfeit products. It also said that the marketplace should financially discourage sellers who are found to be selling counterfeit products. 

Industry reaction

The draft policy drew mixed reactions from stakeholders. While local e-commerce company Snapdeal welcomed the policy, Amazon was guarded in its reaction.

A Snapdeal spokesperson said the draft policy’s “categorical rejection of inventory-based e-commerce model must be followed by effective implementation of FDI norms to ensure marketplaces do not own or control inventory, directly or indirectly”.

A spokesperson for Amazon India said that the company is studying the draft policy and will provide its inputs during the public review period.

“We look forward to an enabling policy to serve over 4.5 lakh sellers and a policy that will allow us to scale up our logistics network, create new jobs and infrastructure, digitise payments and delight our customers.”

Rameesh Kailasam, CEO of industry group IndiaTech, said the draft recognises the need for a permanent establishment in India for e-commerce companies operating locally and supports provisions that will contribute to a level-playing field. 

“This cannot be termed as protectionist as it applies and binds any entity whether owned by a foreign or Indian company which may be registered outside India but serves the Indian market and does not have a permanent establishment here,” he said.

IndiaTech represents Indian internet companies such as MakeMyTrip, Ola and Hike and investors such as Steadview Capital, Matrix Partners and Kalaari Capital.

Kailasam also said that the draft for the first time acknowledges the ongoing negotiations at the World Trade Organization that may have a bearing on India not only in the e-commerce sector but also the potential impact  it may have on other industries. 

“Given that India has a thriving ecosystem of technology companies and startups, accepting a permanent moratorium on custom duties  could be detrimental to their future growth since Indian startups are yet to reach a critical mass and India still needs time to move up the digital economy curve," said Kailasam.

The All India Online Vendors Association said in a tweet that the draft covered a lot of issues and made some bold decisions. But a spokesperson for the industry group said marketplaces should not be allowed to penalise sellers for selling counterfeit products.

The Confederation of All India Traders (CAIT), which has been pushing for a national policy on e-commerce, said domestic e-commerce players should also be included under the policy. “We fear that it will culminate into an uneven playing field and will give liberty to domestic e-commerce players to adopt malpractices as was being done by global players,” said Praveen Khandelwal, general secretary, CAIT. 

Digital advertising, piracy

The draft policy also takes on content streaming platforms, digital advertising and artificial intelligence-led personalisation and product recommendations to users. It mentions that the “government reserves its right to seek disclosure of source code and algorithms” in order to strike a balance between commercial interests and consumer protection. 

Alluding to Google and Facebook, the draft states that a few social media sites control access to large amounts of consumer data and monopolise advertising prices. This impacts smaller e-commerce companies. “Advertising charges in e-commerce must be regulated, especially for small enterprises and startups,” states the draft.

Atul Pandey, partner at law firm Khaitan & Co LLP, says that the Department for Promotion of Industry and Internal Trade (DPIIT) cannot take any action to curtail monopoly of any of these players. “However, the DPIIT may be within its rights to curtail the amount of information available to advertisers from the users of Google, Facebook (and other websites) which are used to make targeted advertisements and require explicit consent as well as disclosure for the information being taken from such users,” said Pandey. 

The draft touches upon identifying ‘rogue websites’ which deal with pirated content. According to Pandey, this provision will impact content distribution and streaming sites such as Netflix and Amazon Prime. “As a standard protocol, any content being hosted should be self-certified by the seller that it is not in breach of copyright laws,” he added.

The draft also seeks to promote “domestic alternatives to foreign-based clouds and email facilities” including budgetary support by the DPIIT. This move might see smaller e-commerce players moving to a licensing models from domestic cloud providers or those run by Indian entities under requirements for data protection and localisation.

The last date for submission of comments on the draft policy is March 9.