The "T+2" of Online Marketplaces

Online Marketplaces in India are governed by host of RBI and Government regulations. Probably the most important of all those regulations is the Payment and Settlement Act of 2007 ("PSS Act"). The reason why this is important is because it is governed by RBI, has provisions of jail term for violations and has huge per day penalties if you default on it. Here I summarize the "T+2" requirement under this act for online marketplaces.Before we get to the "T+2" of this story, lets analyze what is an online marketplace and who is an online retailer since given that most of the e-commerce companies are funded by foreign funds, either they will have to comply with FDI norms of multi-brand retail or the PSS Act or both if a combination of retail and marketplace is being tried which off course is a dangerous combo for a firm to adopt.

A "pure" online marketplace is the one which does not take "title" of the goods and is purely an "intermediary", a "facilitator" and/or a "platform" to connect sellers and buyers. Taking "title" of goods means that "risk/liability/reward" of the goods have been passed to you and you are now entitled to sell that as a retailer and invoice the customer for those goods. As an online marketplace therefore you would never invoice the customer since you are "not selling" to customer but the seller is. You are just connecting the seller to buyer and therefore would invoice the seller for those services. From taxation point of view therefore, you would fall into central government "service taxation" regime rather than state VAT or central CST taxation regime. Easiest way to differentiate is that you are like an Ebay.com and not like Amazon.com although Amazon.com also provides seller services but not in India yet.

For online marketplaces, to ensure faster settlement of payment from customers to the sellers and to reduce the risk of default by the intermediary (which is the online marketplace), RBI has mandated that the intermediary should settle/pay to the seller, the money received from customers within T+2 days. The "T" here is defined as the day on which the intimation is given to the seller that the goods has been delivered. This means that if you receive the money today, the seller dispatches and goods get delivered on the day T, you would have to pay the seller within T+2 days. You would need to open a nodal bank account with any of the banks and your nodal bank has to ensure payment is released to seller within T+2. There would be concurrent audits of your account and you would need to furnish details of your transactions to RBI.

While T+2 is possible for electronic payments received from payment gateways, Cash on Delivery can pose a major challenge for online marketplaces, although it is not explicitly mentioned in the Act. And as the Act is only talking about electronic/online payments from customers, COD payments would be assumed to fall under the Act since the same payment risks remain for sellers for the COD shipments. In COD, there happens to be two intermediaries, one which is courier company which collects cash from the customer and the other being the online marketplace company which pays the seller the money received. Usually COD payments are settled by courier companies in 30 days and by some in 15 days. While the goods are delivered to the customer usually within 3-7 days, the settlement to the seller can practically happen to seller only after 2-4 weeks of the "T" which can create default of payments risks for the sellers by the intermediary. Given this complexity, "T+2" settlement is not possible in COD. If RBI brings COD under this Act, it can create major issues for online marketplaces since these marketplaces rely heavily on COD orders. RBI clarification on COD can be very beneficial to online marketplaces.

So while you are busy running your online marketplace, try spending some time on "T+2" cycles of your payments to sellers so that in longer run you can avoid regulatory pit falls and build a company which you can sustain for longer duration.

About the author:

Manoj Gupta is Founder/CEO of Craftsvilla.com and was previously Principal at Nexus Venture Partners. He was also previously board member of multiple companies including Yebhi.com and Sohanlal Commodities.