What is the difference between marketplace and inventory-based e-commerce under FDI policy?

Under FDI policy, marketplace-based e-commerce (where the platform connects buyers and sellers without owning the inventory) permits 100% FDI under the Automatic Route. Inventory-based e-commerce (where the e-commerce entity owns the inventory) does NOT permit any FDI — it is restricted to Indian-owned and controlled entities. This distinction, formalised in Press Note 2 of 2018, prevents foreign-owned marketplaces from owning inventory through related parties and shapes the structure of every major foreign e-commerce platform in India.

Can a foreign brand sell directly to Indian consumers via e-commerce?

A foreign brand cannot directly own inventory and sell via e-commerce to Indian consumers (that would be inventory-based e-commerce with FDI, which is prohibited). However, the foreign brand can: (1) sell to Indian customers through a third-party marketplace (Amazon, Flipkart, Myntra); (2) appoint an unrelated Indian distributor who imports and sells; (3) set up an Indian Wholly Owned Subsidiary that imports goods and sells through retail channels (subject to single-brand retail FDI conditions for branded goods); (4) sell B2B to Indian importers / distributors.

What are the Press Note 2 of 2018 conditions for foreign marketplaces?

Key conditions: (1) any vendor on the marketplace where the marketplace entity has equity participation cannot account for more than 25% of total marketplace sales; (2) the marketplace cannot exercise ownership or control over the inventory of sellers on its platform; (3) goods sold by sellers having equity from the marketplace entity cannot be sold on its platform; (4) marketplace must provide level playing field for all sellers, no preferential treatment. These conditions reshaped Amazon and Flipkart's seller-relationship structures in 2019.

What is Section 194-O TDS on e-commerce transactions?

Section 194-O of the Income Tax Act requires every e-commerce operator to deduct TDS at 0.1% (1% for non-PAN) on the gross amount of sale of goods or provision of services facilitated through its platform, at the time of credit or payment to the e-commerce participant (seller). The marketplace operator pays this TDS even if it doesn't actually pay the seller (e.g., via collection-on-delivery models). This applies to both Indian and foreign e-commerce operators with Indian operations.

What GST framework applies to e-commerce operators?

GST mandates e-commerce operators to collect Tax Collected at Source (TCS) at 0.5% on net taxable supplies through their platform (Section 52). The TCS is deposited monthly via GSTR-8. Additionally, every e-commerce operator must be GST registered regardless of turnover threshold. For foreign-owned marketplaces, the GST registration is taken by the Indian subsidiary that operates the platform. Sellers on the platform must also be GST registered (with limited exceptions for handicraft and unregistered services suppliers).

Foreign E-commerce Company Setup in India | FDI, Marketplace

Marketplace Yes, Inventory No — The FDI Rule That Shapes Every Decision

Indian e-commerce is among the fastest-growing markets globally (estimated USD 350+ billion GMV by 2030). But it is also one of the most regulated for foreign investors. Press Note 2 of 2018 hard-codes the distinction between marketplace e-commerce (100% FDI allowed under Automatic Route) and inventory-based e-commerce (no FDI permitted), with detailed conditions that constrain how foreign marketplaces structure seller relationships, related-party inventory, and platform pricing. Add Section 194-O TDS, GST TCS, the Digital Personal Data Protection Act 2023, and the still-evolving e-commerce policy, and the structuring choices made at incorporation have multi-year operational consequences.

The Marketplace vs Inventory Distinction

Marketplace Model (100% FDI Automatic)

Platform connects buyers and independent sellers.
Platform does not own inventory.
Revenue from commissions, listing fees, ads.
Examples: Amazon India, Flipkart, Myntra, Meesho, Snapdeal, Nykaa (mixed).

Inventory Model (No FDI)

Platform owns inventory and sells directly to consumers.
Restricted to Indian-owned and Indian-controlled entities.
Examples: pure D2C with own inventory; many Indian-founded brands.
Foreign brand cannot directly operate inventory-based e-commerce in India.

Press Note 2 of 2018 — Operational Constraints

25% concentration cap: any single vendor (where the marketplace has equity participation) cannot exceed 25% of marketplace sales.
No control over seller inventory: marketplace cannot dictate or own the inventory carried by sellers.
Equity vendor exclusion: a seller in which the marketplace has equity participation cannot sell on the marketplace.
Level playing field: no preferential treatment to specific sellers; equal logistics, payment, advertising terms.

Alternatives for Foreign Brands Wanting to Sell to Indian Consumers

Third-party marketplace listing: sell through Amazon / Flipkart / Myntra as a seller. Simplest, no Indian subsidiary needed beyond payment receipt.
Independent Indian distributor: appoint unrelated Indian distributor / importer; arms-length basis.
Single-brand retail WOS: for branded goods, set up Indian WOS under single-brand retail FDI policy (100% Automatic, subject to 30% domestic sourcing condition above 51% FDI).
Wholesale cash-and-carry WOS: sell B2B (registered businesses only) without retail restrictions.
Hybrid via Indian-controlled JV: minority foreign stake in an Indian-controlled e-commerce entity that operates inventory model.

E-commerce Tax & Compliance Stack

Section 194-O TDS: 0.1% (1% for non-PAN) on gross sale value, deducted by operator at credit / payment to seller.
GST TCS (Section 52): 0.5% on net taxable supplies; deposited monthly via GSTR-8.
Mandatory GST registration for every e-commerce operator regardless of threshold.
Equalisation Levy 2% on e-commerce: abolished from 1 August 2024 (Budget 2024); only 6% on online ads continues.
DPDPA 2023: consent management, data fiduciary obligations, breach reporting for platforms handling personal data of Indian users.
Consumer Protection Act 2019 & E-commerce Rules: grievance redressal officer mandatory, country of origin disclosure, return / refund obligations.

Planning to enter Indian e-commerce as a foreign brand, marketplace, or D2C? Talk to us first — the marketplace / inventory / single-brand retail / wholesale distinction is one-way-door; getting it right at incorporation matters.

Foreign E-commerce
Company Setup in India