FDI norms in trade: tight regime ahead

The government is planning changes in the rules governing wholesale trade carried out by foreign retail firms in India to ensure that only genuine institutional and bulk buyers purchase goods from cash-and-carry mega stores.

The government is planning changes in the rules governing wholesale trade carried out by foreign retail firms in India to ensure that only genuine institutional and bulk buyers purchase goods from cash-and-carry mega stores.

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The issue marks a key nuance in the controversy over foreign direct investment (FDI) in the retail industry.

The Department of Industrial Policy and Promotion has drafted a cabinet note detailing the guidelines to carry out wholesale cash-and-carry business to ensure that no front-end retail trading takes place in these stores. Foreign retailers such as Germany-based Metro have in the past faced criticism on the grounds that their wholesale stores were used for direct sales to end-consumers, something not allowed under current laws.

The world’s largest retailer, US-based Wal-Mart has entered India through a 50:50 joint venture deal with Bharti Enterprises, while Metro had entered India in 2003.

Under the proposed norms the yardstick to determine whether the sale is genuine will be based not on the size or volume of sales as so far has been the case. Instead, the decision will be made on who is the buyer. For this, anyone buying goods from the cash-and-carry stores would have to hold value added tax (VAT) registrations. “Wholesale trade would, accordingly, be sales for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption,” the draft guidelines said.

At present, FDI is prohibited in multi-brand retailing, although upto 51 per cent FDI is allowed in single brand retail. However, 100 per cent FDI is allowed in wholesale cash-and-carry business.