Know how Flipkart, Amazon, Snapdeal offer huge discounts

E-commerce companies including Flipkart, Amazon and Snapdeal are funding discounts on their sites using mechanisms as complex as the complicated structures some have adopted to circumvent foreign direct investment (FDI) laws in India.

The three major e-commerce companies operating in India—Flipkart, Amazon and Snapdeal—all operate as marketplaces. That’s primarily because Indian law doesn’t allow FDI in e-commerce sites that sell directly to customers, but allows it in marketplaces that link sellers and buyers. The marketplaces also provide services such as payment, storage and delivery.

As direct retail is banned, marketplaces are not allowed to exercise control over the product prices of the sellers on their platforms, including on the matter of discounts. Still, Flipkart, Amazon and Snapdeal do actually have a significant say in deciding product prices as all the three sites finance part and, in some cases, the full amount of discounts offered by sellers albeit in an indirect manner, according to six people with direct knowledge of the matter. None of them wished to be identified, given the sensitivity of the matter. The indirect manner of funding discounts (detailed below) may pose another headache for state tax authorities, which are already struggling to understand the business models of e-commerce firms.

The Karnataka commercial tax department has stopped Amazon India from selling electronics and several other products from its warehouse in the state by cancelling the licences of third-party merchants that work with the local unit of the world’s largest online retailer, Mint reported on 15 September. Discounts are essential for e-commerce firms. Shoppers have taken to online shopping in a big way, mostly because of the lucrative discounts offered by e-commerce firms. At the same time, the deep discounting has attracted the ire of brick-and-mortar retailers, which are fighting to survive after losing customers to online retailers. The discounting process highlights some of the ways in which these sites spend the huge amounts of money that they have raised from investors, or in Amazon’s case, received from its parent company.

Since starting out in 2007, Flipkart has raised $1.8 billion from investors such as Tiger Global Management and Naspers, including $1.2 billion this year. Snapdeal will soon receive more than $600 million from investors led by Softbank Corp., adding to the $233.7 million it raised earlier this year, Mint reported on 18 September.

According to analysts, the various methods of offering discounts adopted by e-commerce firms also reinforces the need for state governments to issue clarifications on e-commerce and come up with a clear tax code addressing the nascent but fast-growing business.