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Killing the Goose that Lays Golden Eggs

The FBR initiative to tax the online marketplace looks like a ploy to literally kill Pakistan’s nascent eCommerce sector. What about PM Khan’s Digital Pakistan?

Apparently the temptation was too much to pass up. The Federal Board of Revenue (FBR) has decided to go after the flourishing online marketplace and imposed a 2 percent withholding sales tax on the goods sold through these platforms.

FBR’s decision has perturbed the individuals and businesses working the online marketplace, who have reacted strongly and termed it a counterproductive measure of the government which may result in flight of capital and growth of unregistered business in Pakistan.

Through the Finance Act 2021-22, FBR has defined the online marketplace as an electronic interface such as a marketplace, e-commerce platform, portal or similar means which facilitate sale of goods, including third party sale, in any of the following manner, namely: (a) by controlling the terms and conditions of the sale; (b) authorizing the charge to the customers in respect of the payment for the supply; or(c) ordering or delivering the goods.”.

Furthermore FBR has expanded the scope of Tier-1 retailers and included a retailer

operating an online marketplace supplying goods through e-commerce platform, whether or not the goods are owned by him; and a retailer who has acquired a point of sale for accepting payment through debit or credit cards from banking companies or any other digital payment service provider authorized by State Bank of Pakistan.

Also, Section 3(3) has been amended to impose liability to pay sales tax (in the case of supply of goods through online market- place), of the person running online market- place, whether or not the goods are owned by him.

According to FBR, Daraz has issued 391,343 cash invoices aggregating to PKR

292.394 million and it has charged a tax of PKR 34.446 million. Similarly, it has issued 7018 credit or debit card invoices having sale value of PKR 18.76 million and charged tax to the tune of PKR 1.974 million.

“This is against the Prime Minister’s initiative of making digital Pakistan”, Daraz Pakistan President Ahsan Saya told to The Truth International (TTI). “It will push online sellers to go offline”.

“Online marketplace is a nascent industry it has not developed very much. It is the future of Pakistan and if it is not encouraged today, it would not grow,” Saya said.

He added: “It is very difficult to pay taxes for the online marketplaces at the moment because most of the sellers are already registered; few are offline; some are exempted and FBR has data of those who are unregistered; FBR cannot simply shift its responsibility of collecting sales tax from unregistered to the online sellers”.

The Daraz chief said FBR had increased the compliances for online marketplaces which will take around six to eight months to be implemented and as a result, new investment in the online industry would stop.

Ahsan saya has urged that FBR to revisit its decision as this will get only PKR 7.5 to 15 million as a tax but would create unsurmountable problems for online sellers. “Daraz has more than 35,000 online sellers which were only 3,000 three years before. The government should facilitate online sellers. One seller is creating three to five jobs”, he said.

Online market industry is worth more than USD 1 billion in Pakistan it has a huge potential and is growing with the speed of 50 percent to 80 percent annually. Accord- ing to recent estimates around 1.5 percent of the retail market in Pakistan is online. Globally it is about 20 percent but in China it is 50 percent.

Saya says he has no doubt the FBR proposal will push online consumers to offline markets. Online marketplaces will founder, more than 50 thousands marketplace jobs will be lost, and foreign market will become more attractive to Pakistani consumers.

The COVID-19 pandemic and the subsequent lockdowns have helped startups worldwide lap quick growth. According to invest2innovate, in Pakistan as well, the onslaught of the pandemic this year has promoted an increased reliance on online shopping.

Fashion is the largest segment of eCommerce in Pakistan and accounts for 70 percent of the revenue. This is followed by electronics & media with 12 percent, food & personal care with 9 percent, toys, hobbies & DIY with 4 percent, and furniture & appliances with the remaining 4 percent.

“The world is moving to online markets”, says Zulfikar Thaver, President Union of Small and Medium Enterprises (UNIS- AME). “The government of Pakistan is trying to promote it as well but FBR’s policies are taking the opposite direction. General sales tax has already been imposed to discourage consumptions. If FBR wishes

to collect income tax from the online marketplace, it should withdraw GST”.

FBR measures will be discouraging in a way that there will be tax on every online merchant and this tax will be collected by the marketplace themselves from the customers. This will literally have such a negative impact on the ecommerce industry, he said.

Pakistan is the 46th largest market for e-Commerce with revenue of USD 4 billion in 2020, placing it ahead of Peru and behind Greece.

CFO Daraz Pakistan Ahmad Hassan said: “We believe that it would drastically hamper the industry. Without online marketplaces that help sellers effectively reach and engage with users by leveraging internet and leading technology, SMEs likely would not be able to compete effectively and complete as many transac- tions; therefore reducing the overall economic activities, number of jobs created, and tax collections”.

From consumers’ perspective, they would also lose convenient access to a large number of goods across categories that are important to their daily lives, negatively impacting the quality of their lives. This similarly would likely result in reduced level of economic activities, he added.

Pakistan has a predominantly young population with 65 percent below the age of 24 years, who have responded positively to the online retail format offered by modern online grocery retailers. Therefore, a retail market worth USD 125 billion a year, out of which USD 48 billion attributed to groceries alone presents the startup ecosystem with an abundance of opportunities.

FBR measures have also provoked startup companies in Pakistan which termed it would discourage our young population’s uptake of the online marketplace.

According to Invest2Innovent, E-commerce accounted for the highest average ticket size (USD 6.6 million), followed by health-tech (USD 4.8 million), and Fintech (USD 3.5 million) in 2021

Pakistani startup ecosystem continues to reach new highs. Pakistani startups have raised USD 101.12 million in 2021; Top funded sectors in terms of total amount raised include e-commerce USD 84 million (44 deals), fintech USD 48.62 million (26 deals), transportation/mobility USD 44.53 million (12 deals), and health USD 19.07 million (24 deals)

Market expansion in Pakistan is expected to continue over the next few years, as indicated by the Statista Digital Market Outlook. It has been predicted that the compound annual growth rate (CAGR 20-24) for the next four years will be 16 percent.

Compared to the year-on-year growth of 84 percent, this decrease suggests a moderately flooded market. Another indicator of market saturation is the online penetration of 19 percent in Pakistan; in other words, 19 percent of the Pakistani population has bought at least one product online in 2020.

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