Indian regulators’ mantra to check the big tech boom

India’s tech regulators aren’t exactly known for being cutting edge in their thinking or nimble in their speeds. Quite the contrary.

Besides, it isn’t even clear how many regulators there are, or what exactly each one’s remit is. It’s an abundance of big egos, old bureaucrats, secretive committees, power plays and turf wars.

Pharma, telecom, financial services and e-commerce are just a few of the industry sectors where companies and business models have been either extinguished or supercharged due to regulatory decisions. A carry-over of this attitude while regulating technology companies can have disastrous consequences for innovation and conducting business. Death by compliance.

But could it be possible that India’s regulators may be at the forefront of devising regulations to check the uncontrolled growth and domination of “Big Tech”?

Could it be that Indian regulators already hold answers for their peers around the world on how best to control the unchecked dominance of tech giants such as Facebook, Google and Amazon?

Across the world, there has been a growing call to regulate big tech companies to protect citizens’ rights and competitiveness of markets. Many smart people have argued that the free hand given to tech companies in markets like the United States has resulted in them developing into behemoths, which has, in turn, led to deleterious effects, not just to economies but democracies around the world.

Sort of like an overfed, pampered and badly brought-up child growing up to be a bully as an adult.

So, if someone must discipline these bullies and teach them how to play by the rules, it won’t be their parent countries, but other countries in which they operate.

Indian regulators had, for the most part, taken a hands-off approach to the tech industry, similar to the US. This became one of the major factors that led to the growth of tech and Internet in India. “The fact that we have had a fairly lax regulatory environment, particularly around data, is itself quite a spur to a lot of innovative activities,” says Arghya Sengupta, Research Director at policy advisory group Vidhi Centre for Legal Policy.

But then things changed, as Indian regulators started hitting nails pretty accurately on their heads across different sectors.

Could India be the hero the world needs, even if not the one it deserves?

Forcing Amazon to choose

Amazon India is very different from Amazon US. In the US, its e-commerce operations are highly centralised as a corporate. Its control over every single component of its operations, by owning multiple related business lines, has led to it becoming one of the largest corporations in the world.

Failure to prevent violation

An organisation representing online vendors had filed petitions in the CCI alleging that Amazon and Flipkart had been favouring their own ‘associates’ over other sellers. The CCI dismissed the petition against Flipkart refusing to see the link between the sellers and the e-commerce website.

But in India, neither Amazon nor its arch-nemesis Flipkart (now owned by Walmart) has the kind of structural control over the e-commerce market like Amazon does in the United States. Why? One key reason is that Indian regulations explicitly forbid e-commerce players acting as both third-party marketplaces as well as their own stores. Thus, Amazon and Flipkart cannot sell their own products on their own websites. Under the FDI policy passed by the Department of Industrial Policy and Promotion, while 100% foreign investment is allowed for marketplace-based e-commerce, it is not allowed for retail-based e-commerce.

Jaideep Reddy, a Technology Lawyer at legal and tax consulting firm Nishith Desai Associates, says that the argument for not allowing these companies to sell their own products is to protect mom-and-pop stores; that these stores wouldn’t be able to afford the kind of deep discounting that the venture-backed companies can provide. He also says that there are those who make the argument that opening up foreign investment in the long-run could benefit the economy by, at the very least, increasing jobs.

Lina Khan, an antitrust scholar, in an article titled ‘Amazon’s Antitrust Paradox’, published in Yale Law Journal, makes a similar contention. She says that a company like Amazon has been able to grow to the extent that it has for two reasons—ability to sustain losses over a long period of time and presence in a range of related businesses.

The discussion around this topic so far has been on Flipkart and Amazon’s ability to sustain losses, but the latter plays out in a far more sophisticated manner to remove smaller sellers from the equation. This is already happening in the United States, where Amazon is said to be elbowing out smaller sellers from its platform. With access to information about the nature of the products that are sold, it is able to completely sideline these sellers by directly buying those products from the manufacturer.

The fact that these companies compete with the very people who have come to depend on it naturally creates a conflict of interest.

Khan contends that there are three elements that contribute to this. While she makes the argument specifically in the context of Amazon, it speaks for all platforms. First, their dominance as platforms necessitates independent merchants to use their site. Second, their vertical integration in selling as a retailer and acting as the marketplace for the same. Third, as an internet company, their ability to amass large swathes of data.

German antitrust watchdog, the Bundeskartellamt, just launched a probe into Amazon using its dual role as both a marketplace and retailer to effectively become a “gatekeeper for customers”.

Indian policies explicitly prevent this.

Although the sad part is that both Amazon and Flipkart rely on complicated corporate structures to bypass these. But I guess as long as we’re taking two steps forward, and one backwards, instead of one step forward, and two backwards.

The Google Tax

Foreign companies generally do not get taxed for every transaction that takes place in India due to the presence of Double Tax Avoidance Agreements. It’s only when these transactions cross a certain limit or threshold that taxes kick in.

Enter, the Google Tax, brought in through the Finance Bill in 2016. Every time a company has to pay advertising fees above Rs 1 lakh ($1,417) to a company that is based outside India, it has to withhold 6% of that payment. This amount then paid to the government is known as the equalisation levy.

“These thresholds were based on physical factors. For instance, the foreign company should have an office, agent in India or some kind of a physical presence. Now, with digital commerce, the issue is foreign companies do not require a presence in India and can conduct a lot of business earning significant amounts of revenues here. That is the reason why they brought the equalisation levy,” says Meyyappan Nagappan, a tax lawyer with Nishith Desai Associates.

There are, globally, at least three different versions of the Google Tax imposed in Australia, United Kingdom and India. All of them differ but are made with the singular aim to prevent tax avoidance by multinational companies, especially big tech companies like Google and Facebook. These companies have, for the longest time, been able to avoid paying taxes in the countries from where they earn their revenues. They did this by creating incredibly convoluted corporate structures to set up entities in tax havens, channelling their revenues through them. Which was entirely legal, since most countries have what is called a Double Tax Avoidance Agreement.  

Attempts to prevent tax avoidance are not limited to these three countries though. Countries across the world have started taking unilateral measures to tax digital businesses. The European Union is debating about introducing a 3% digital tax for money made through user data or digital advertising in a country. The Organisation for Economic Co-operation and Development also started a project known as the Base Shifting and Tax Erosion project in 2015. Additionally, the United Kingdom is in the process of moving toward a system similar to India.

Amidst reports that companies like Google, Facebook and Twitter have generated close to Rs 1,000 crore ($141 million) as revenue from local advertisers, there does seem to be some merit in taxing these companies like this.

But as with all taxes, solutions often need tweaking. The Google Tax works in a manner similar to indirect taxes, which means the charge can be passed on to Google’s customer. 

“This is counter-productive since if the cost is passed on to the customer, you are only increasing the costs of domestic companies”

Meyyappan Nagappan, Nishith Desai

Nailing down WhatsApp

Indians form WhatsApp’s largest userbase globally. And yet, till earlier this year, it neither had a corporate office in India nor a named official whom Indian users could contact if they had any complaints.

This is similar to many international tech companies who have a massive online presence in India but no local companies or officials empowered to take action when there’s a problem.

Yet, under pressure from the Indian government, WhatsApp recently appointed an India-specific “grievance officer” and also agreed to set up a corporate office in India. This is a one-off move where one company has ceded to the demands of a government.

Why is this significant? Because of the sheer scale of disinformation spreading on the WhatsApp platform. While disinformation is certainly not a unique problem for India, the way it spreads surely is. All across the world, this problem is largely limited to social networking platforms. In developing countries like India and Brazil, among a few others, false news spreads through messaging applications. WhatsApp had, for long, been shying away from taking any steps to deal with this issue, citing the fact that they had end-to-end encryption, and thus, no way to read messages sent between users.

“WhatsApp in that way is very different from other platforms which utilise algorithms to show their users content; with WhatsApp, there really is no way to hold anyone liable,” says Alok Prasanna Kumar, the head of the Vidhi Centre in Bengaluru. The problem this leads to though is that even law enforcement agencies do not know whom to approach. In many cases, they have arrested group admins for messages on the group.  

A permanent establishment (and individuals responsible for issues arising out of India) opens up the possibility for, at least, an attempt to deal with a very immediate and real problem.

It must be noted that the setting up of an office is not a regulation in any sense and certainly is an ad-hoc step. But it is a step in the right direction. This is one area where a lot more can be done, since several companies which have been operating in India for years, have still not set up India helplines says Ananth Padmanabhan from the Centre for Policy Research, an independent think tank.

Alok Prasanna, too, says that this is an ad-hoc solution. Since making any changes on the front of dealing with fake news will still require changes to the Intermediary Liability provisions in the Information Technology (IT) Act.

Strong and real network neutrality

On 11 June 2018, the Net Neutrality repeal took effect in the United States. Exactly a month afterwards, on 11 July, the Department of Telecom approved the Net Neutrality recommendation passed by Telecom Regulatory Authority of India (TRAI), one of the few in the world to accept the principle unambiguously. The clear rules prevent any sort of discrimination in data, and Internet Service Providers “would not be able to block, slow down or give preferential treatment to any content.”

This was a stronger reaffirmation of the pro-Net Neutrality stances taken by Trai between 2015 and 2016, culminating in India banning the concept of “zero rating”, the most prominent proponent of which was Facebook’s controversial “Free Basics” program. Today there are several countries in the world which are still debating mandating net neutrality, but India has some of the strongest net neutrality laws globally.

The Indian telecom market is, like most telecom markets across the world, oligopolistic. For all practical purposes, it is controlled by just three large players today. These players, in the absence of any rules related to Net Neutrality, would be able to misuse their market power to exploit content providers.

They would practically become gatekeepers of the internet.

Any entity that had the ability to pay the amount these operators desired would be given better speeds, whereas those without the backing of capital would simply find it impossible to break into this market. Even consumers would have to pay a premium to access services above and beyond those who had exclusive deals with the telecom operators.

It is an interesting regulation from the perspective of consumer welfare because the regulator was taking a decision for the long-term benefit of the sector and the diversity of content. But in the short term, it does affect the market in a restrictive way.

Getting a GPS fix on data

There is one element that is increasingly common across disparate regulators in India, whether they be central bank circulars, omnibus data privacy bills, or shoddy e-commerce policies—data localisation. While the final expression of each of these requirements differs, the core point is that companies mandatorily have to set up servers, to store and process personal data in India.

The regulators’ rationales are, for now, largely based on the idea of law enforcement. At one level, it is about getting international companies who trade primarily in data to comply with the local laws, by setting up servers in India, so regulators and governments have some degree of leverage over them. This can help them access data for the purposes of criminal and civil investigations without going through onerous and time-consuming multilateral procedures.

But, perhaps, even more importantly, data localisation also enables the government to gather revenues from these companies.

Data localisation is a contentious tool though. A policy professional who did not want to be named, says that unless the government presents the data for the number of cases related to requests for data for law enforcement, there is little that can be said about the merits of data localisation.

The localisation requirements in the draft Srikrishna Bill on Data Privacy, in particular, can prevent smaller players from entering the Indian market. This issue needs to be remedied by making the condition mandatory only for those players who meet a specific threshold of users. The benefits of data localisation depend on the objective that the regulators are trying to achieve and should be evaluated on a case-by-case basis.

“What is needed is for regulators to do consultative policy making, where the regulators spell out their concerns and ask, and then different stakeholders can come together and identify solutions for the problem,” says Nehaa Chaudhari of law firm Ikigai Law. These moves are in no way perfect as has been evidenced, but they may hold the key to regulating technology companies. A problem that countries world over are grappling with. 

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