The flip side to online retail

Shanker Gopalkrishnan | Updated on March 10, 2018 Published on October 10, 2014


It could wipe out livelihoods in the brick-and-mortar segment and deprive governments of tax revenue

The brick-and-mortar retail sector is a policy orphan; the Centre can make changes but State governments can reject them.

However, there seem to be no rules governing the entry and operations of the online retail sector. Any clever high-schooler with a laptop and broadband connection can set up and operate an online retail store as long as he or she can access goods or services and arrange a payment gateway.

Entry into the online sector is now a free-for-all. From the global online giants to Indian entrepreneurs, they are all making their presence felt in India. India’s FDI policies seem to have been given the go-by to online retailing.

Pros and cons

There are obvious benefits in online retailing: you can order products and services from the comfort of your home, at attractive prices; it saves the shopper time and the cost of heading to a retail outlet; and the consumer gets a much greater choice and access to products that may not be available in the neighbourhood, in the city or even in the country.

The downside is that a product that seems attractive on the web may not look quite same when it actually arrives. There are issues relating to the terms of warranty, and adequate consumer protection measures need to be introduced.

That apart, scamsters are already at work — emails now arrive regularly with a zipped file from leading global online retailers. These are obviously spam.

However, many unsuspecting individuals may end up with malware in their systems or order products that may never arrive. A bigger danger is that of credit card fraud. All banks are now required to issue cards with PIN — recently, at a store, I saw a shopper revealing his PIN number to the cashier.

On the regulatory and taxation front, the picture is fuzzy. Foreign entities including online retailers have a significant shareholding in Indian online retail. There are no separate tax laws governing online retailers — States such as Kerala have imposed sales tax which is being strongly resisted by the online lobby. It appears the Kerala government is merely attempting to level the playing field.

Next comes the question of Cenvat or excise duty — most consumers buy online because the cost is significantly lower owing to disintermediation. If the online retailer buys from several small manufacturers who are below the excise limit and aggregates the sale under their own brand name, are the online retailers liable to excise duty? Is the Government losing out on indirect taxes?

Protecting shopkeepers

Coming to brick-and-mortar retailing, the BJP-led Government has categorically stated that FDI in retail will not be permitted in order to protect the interests and the livelihood of the small and medium shopkeepers.

The value of retail trade in India is estimated at ₹25,00,000-30,00,000 crore. Of this, over 60 per cent is accounted for by food and grocery; textiles and apparel follow next at 8-10 per cent.

Of the total retail, organised retailing is a reported ₹2,00,000 crore or about 8 per cent of the total. In terms of number of retail outlets, India is the largest in the world with an estimated 12-15 million outlets, primarily owner-driven. According to one estimate, the retail sector provides employment to 40 million persons or roughly 6 per cent of the working population of India.

A rough estimate of employment in the small retailing sector is 10-15 persons per crore of turnover.

Hence, the issue is whether the loss of sale for the brick and mortar sector is likely to result in a loss of jobs, primarily among the underprivileged.

According to several studies, online sales are likely to touch ₹50,000 crore to ₹70,000 crore within the next five years.

Online retailing is here to stay and will poach into mainstream retail — however, it is important to provide a level playing field, especially for the small and medium retailers who provide employment to vast numbers.

The Centre and the States need to ensure that they do not lose out on taxation.

The writer is the president of the Madras Consultancy Group

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Published on October 10, 2014
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