USTR report lists trade irritants for investors in e-commerce, banking, insurance in India

Indian regulations on foreign ownership in e-commerce, banks, insurance and other online-related services were major barriers for overseas investors, according to a report by the U.S. President Donald Trump’s administration.

The findings were part of the report on foreign trade barriers from the Office of the United States Trade Representative (USTR). The annual report points to a list of trade irritants in 63 nations.

“India allows for 100% foreign direct investment in business-to-business (B2B) electronic commerce, but largely prohibits foreign investment in business-to-consumer (B2C) electronic commerce transactions,” according to the report.

Inventory-based model

Foreign direct investment is allowed in a market-based electronic retailing model, but not in the inventory-based model, it added.

According to the report, the only exception that was granted was to single-brand retailers. Single-brand retailers who meet certain conditions including the operation of physical stores in India may undertake to trade through electronic commerce. “This narrow exception limits the ability of the majority of potential B2C electronic commerce foreign investors to access the Indian market.”

The trade barriers report also pointed out India’s tax (6% equalisation levy) on foreign online advertising platforms was not par with the international norms and warned the levy in its current form may impede foreign trade and increase the risk of retaliation from other countries where Indian companies are doing business.

“India recently began assessing an ‘equalisation levy’, which is an additional 6% withholding tax on foreign online advertising platforms, with the ostensible goal of “equalising the playing field” between resident service providers and non-resident service providers. However, its provisions do not provide credit for tax paid in other countries for the service provided in India,” according to the report.

The report also pointed out that the levy would result in taxes on business income even when a foreign resident does not have a permanent establishment in India or when underlying activities are not carried out in India.

“The current structure of the equalisation levy represents a shift from internationally accepted principles, which provide that digital taxation mechanisms should be developed on a multilateral basis in order to prevent double taxation.”

Data storage

According to the USTR, the Indian requirements of storage of data within India reduce productivity, dampen domestic investment and undermine the ability of information and communications technology companies to offer cutting-edge services.

The 2012 National Data Sharing and Accessibility Policy, issued by the Ministry of Science & Technology, which requires that all data collected using public funds — including weather data — be stored within the borders of India, it added. It also pointed out the Department of Electronics and Information Technology (DEITY) guidelines requiring cloud computing service providers to store data within India to qualify for bidding for government procurements. The report stated that ownership restrictions in terms of insurance and banks, was a hurdle for foreign investors.

Even though the FDI limit in insurance has been increased to 49%, the regulatory requirement for the appointment of directors and other operational requirements are a concern, it said.

“Foreign investors have expressed concern that the new requirements create a rigid structure that ignores operational realities and will dilute the rights of foreign investors in Indian insurance companies, making additional FDI in the sector unattractive.”

The report also highlighted Insurance Regulatory and Development Authority’s (IRDA) discussion paper that called for the compulsory public listing of life insurers that have been in operation in India for seven years or more.

“Such a requirement to publicly list is rare, and companies generally decide whether to undertake an initial public offering based on an analysis of company-specific facts. If implemented, this requirement would be another measure that would have a discouraging effect on foreign investors,” it noted.

“Foreign banks are required to submit their internal branch expansion plans on an annual basis, and their ability to expand is hindered by non-transparent limitations on branch office expansion. Foreign banks also face restrictions on direct investment in Indian private banks,” according to the report.