Indian state brings Amazon to its knees

For the past week, apparently Jeff Bezos has been making the rounds in India, calling on Prime Minister Narendar Modi, talking about building a new datacenter, and cooing about how India is "unbelievably energizing".

You would imagine that he would instead be talking about how India is unbelievably enervating.

For, just a few weeks ago, Amazon, in return for its mammoth $2 billion investment in India, received the equivalent of a firm kick in its teeth. First, the Indian state of Karnataka, whose capital is Bangalore, the "Silicon Valley" of the country, decided that Amazon was in violation of the state's tax laws and tacked on a prohibitive measure that is certain to bring its operations in the state to a halt. Of course, almost all of the large e-commerce players in India followed in the footsteps of Amazon (or should we say Alibaba?) and decided to operate a storefront for merchants rather than house and sell everything themselves.

Still, in order to ensure rapid delivery of merchandise, Amazon decided that it would lend a helping hand (and burnish its reputation for facilitating fast delivery) by opening up a fulfilment center — a warehouse that would temporarily store goods of 100 of its top-selling merchants before they were dispatched to eager e-customers.

So what's the fuss all about? Well, the state of Karnataka, home to half of the e-commerce and tech outfits in the country (the irony is thick), says that Amazon is in fact an owner of these goods and needs to fork up VAT — value added tax, levied by state governments at each stage of the distribution process — on the value of the goods at that stage. Amazon has protested, but the Karnataka government isn't having any of it.

If this isn't bad enough, the Enforcement Directorate, the powerful law enforcement arm of the government that tackles economic crimes, says that if in fact Amazon is convicted of being a "seller" and not a service provider as it claims, it would have violated the country’s foreign direct investment (FDI) laws that prevent more than 51 percent investment in the retail sector.

Amazon's response: "We understand this to be a case where the laws have not kept pace with the new-age online business models that enable a faster, convenient, and nationwide access to customers for sellers, especially small and medium businesses, at significantly low costs. We look forward to an early resolution in order to avoid closing our local warehousing operations in Karnataka and to stay on course for bringing more investments in the state," an Amazon spokesperson said in a statement.

The company is absolutely right. If India has any hope of shedding its old-world garb and entering the modern era of commerce and trade, it needs to unscramble the dichotomy of wanting to be an economic superpower that still pays lip service to antediluvian laws that desperately need reform.

After all, if other states decided to follow suit — especially in Delhi, Chennai, Jaipur, Ahmedabad, and Tauru (outskirts of Gurgaon) where Amazon is plonking that $2 billion in order to build fulfilment centers in addition to the ones in Bangalore and Mumbai — the whole thing may snowball into a public relations disaster for the country. And it isn't just Amazon that will get hit; rivals, such as FlipKart and Snapdeal, which are often looked at as "local" players but are in fact almost completely backed by foreign venture capital, will be sure to meet the same fate.

Now, there was a lot of hope that with the arrival of Narendar Modi, the tech-fixated new prime minister of India, who deftly used holograms of himself giving speeches to reach vast audiences during the recent elections, that this whole FDI in retail conundrum would be sorted out, perhaps during the annual budget for the year ahead. No such thing transpired. Apparently, it's too hot a political potato to handle.

As I had remarked in this prior story on FDI in India on ZDNet, Indian governments are too scared to pull the trigger on an FDI policy thanks to the millions of small shops that fear they may be put out of work, as well as scores of middlemen who are living large thanks to the killing they make from the spread of, say, grain or vegetables, that wouldn't exist if the farmer had the option of selling directly or through large companies that would investment in supply chains. Here's a fascinating account of how some marginalized groups are prevented from taking part in India's retail trade. These small businessfolk, traders, shopkeepers, and the like represent an important votebank for all political parties, and pissing them off is not something that anyone wants to risk.

Meanwhile, India is starved of much-needed capital that could go towards building a modern supply chain, agricultural products continue to rot in large quantities thanks to the lack of a cold chain, farmers get stiffed of market prices for their products, the country experiences vast amounts of tax avoidance which modern retail would rectify, and the middle class is starved of the millions of jobs that FDI in retail could generate.

Not exactly the kind of policy that will propel us into a new era of economic prosperity.