Malik Zohaib Nawaz
Government spends alot in gathering information and data of transactions in order to document the economy. It has been a dream of every government to document the economy but in reality, no one has achieved this target in real sense. In developing economies, like Pakistan, due to various limitations and budgetary pressures, governments do not have enough dedicated resources to gather information of businesses and transactions. Therefore, a less expensive technological tool would be a blessing for developing economies.
With the growing E-commerce businesses in all over the world, it has become imperative for Pakistan to embrace the opportunity to gather information of transactions which otherwise is a very difficult task for the institutions. Such data would not only be a ‘data’ but a meaningful information. The only task is to use that information for specific legal purposes.
At the start of 2010, E-commerce companies started their operations in Pakistan. Very few foreign investors were interested in this sector at that time. Those who started the investments had bigger dreams for which they heavily invested in this sector. Those investments did not only help Pakistan in creating new job opportunities but also provided the customers / consumers to avail quality products at lesser cost. With the launch of 3g and 4g facility; the business grew manifold. It was the time when growth in E-commerce induced more local and foreign investors which created further jobs whilst creating healthy competition. The induction of new players in the market enhanced the quality standards of the products and customers services as customers have wider range of choices.
E-commerce is not like traditional trading sector where buyer and sellers exchange the goods for a specific value; but it has various other dynamics and aspects. Under an E-commerce business, a transaction involves more than buyer and seller. E-commerce platform provides enormous options and choices to consumers. Once the consumer chooses a product and places an order, E-commerce operator helps to execute the order by tracking the shipment. Courier companies are also engaged to pick and deliver the products safely to the consumers. In short, a single transaction involves various parties each of which plays its defined role in completing the transaction. The transaction is documented electronically from initiation till delivery and collection of payment from customer. This electronic record is an automatic gathering of information for which institutions of Pakistan have been trying since long.
Such information gathering by private companies can help the government to document the economy with accuracy and less chances of errors. However, like other policies of Pakistan, E-commerce policy has not been rationalized which not only discouraged the investments but also encouraged the non-documented sector. Through Finance Act 2021, certain provisions were introduced to the Sales Tax Act, 1990 which shows that government has not understood the nature and issues of this infant industry. Like Final Tax Regime (FTR) and collection of taxes through the mechanism of withholding; Online Market Place (OMP)operators have been held responsible to collect / withhold sales tax from the unregistered sellers. The concept is not new in Pakistan, but it would not be a solution to document the economy rather it would encourage the non-documentation. Sellers (who owns the goods) would remain out of documentation and tax net, whereas; OMP operator would suffer more cost and burden of taxes. The step could have been appreciated if there were substantial revenue involved but unfortunately it is not the case. The sellers (most of which are small retailers) would go offline and would keep on doing the business out of tax net.
The intention of government cannot be doubted, but the path / strategy should be revisited. The first step should be to encourage the small retailers to join E-commerce platforms so that they may come into picture. Once those retailers would start trading through OMP, then the government should start tax registration process gradually. The persuasive approach would not fetch substantial revenue initially but in long run it would help businesses and tax authorities.
Besides above, the OMP can help the government free of charge. The data is captured by E-commerce companies through modern tools which contain all the details of buyers and sellers. These details can be used by tax authorities to analyze and approach the tax evaders. Systematic analyses would result in focusing on potential revenue areas. FBR may establish specialized department having mandate of analyzing and sharing the information with other relevant bodies of the government. For example: one of the major challenges for the current government is to escape from grey list of FATF. E-commerce companies can help the government in providing information as these companies are well equipped. While enlisting the products of any seller, all the basic information is captured which government machinery cannot do easily. In addition to that, outreach of these companies can help to capture the information which otherwise is difficult task. Therefore, government should reconsider its approach to collect the taxes through mechanism of withholding (especially in E-commerce sector) in the wider interest.
I believe that if goals of the institutions are aligned then there is no doubt that we can document the economy through latest technological tools in partnership with the private sector instead of only introducing new tax regimes. The cost and benefit analyses would reveal that imposition of sales tax withholding on E-commerce operators would not be a win-win situation for government and businesses. Major E-commerce companies operates at very thick margins and incur loss for many years after starting the business. COVID has further enhances the importance of E-commerce businesses as it facilitates the consumers at the time of lockdown. Therefore, government should constitute the special committee which should be headed by Finance Minister. The committee should discuss the mechanism to enhance the documentation whilst focusing on educating the sellers (especially retailers) so that all the goals of government are achieved through single platform.If we would not support the infant E-commerce industry, there is a risk that we would not be able to catch the foreign investment.
The goal of digitalization can not come true unless the path is paved with business-friendly policies taking the stakeholders on board. Consultative approach would help the government to formulate the clear policies which would be beneficial for everyone. It is not the matter of taxation but the matter of survival of small retailers and SMEs.