The Possible Repercussions of Sales Tax on Online Marketplaces

COVID-19 pandemic and the resulting country-wide lockdown made e-commerce a necessity in Pakistan, along with the rest of the world. E-commerce grew at an unprecedented speed in the country during the past year and a half.

Multiple online marketplace startups springing across the country are a testament to this growth itself, along with the commendable funding that Pakistani online market businesses have obtained from investors from all across the world. The Finance Minister, Shaukat Tarin, himself lauded the growth of e-commerce in Pakistan during his budget speech.

That said, the proposals made in the very budget that the Finance Minister presented seem to have been made either with indifference to this sector or have been deliberately made to squeeze this segment for tax revenues instead of providing it with the much-needed support.

Proposed Amendment

Under the Finance Bill, 2021, the sale of goods through online marketplaces is now going to be taxed at 17 percent General Sales Tax (GST) as the marketplace has been added to the Sales Tax Act, 1990.

Until now, there was no specific provision for collecting taxes on sales made through online channels by using third-party tier-1 retailers. The Act also does not provide any specific law or operational details of collecting taxes on transactions made through such channels.

Now, the new budget includes two amendments – the sales tax act is to be expanded to include the supply of goods through online marketplaces, and the definition of tier-1 retailer is also to be expanded to include online marketplaces.

The impact of these measures will be seen in two ways:

The online marketplace where the sellers are also the owners of the online space – for instance, the online platforms of large general stores – will now be subject to the same retail laws as the traditional brick-and-mortar shops.

Secondly, the online marketplace, which is only acting as a third party channel to bring together suppliers and customers – such as Daraz, GrocerApp, etc. – will now have to make sure that all the suppliers on their platform are registered in sales tax.

What does it mean for retailers and online marketplaces?

The onus and burden of collecting and depositing sales tax (as an output tax) have been placed on the online marketplace industry.

The online market places will need to start issuing sales tax invoices on our books for all taxable goods processed through our platforms regardless if we own them or not.

Online marketplace platforms will receive sales tax invoices from the registered sellers (yet to be clarified under the revised procedures) and will have to claim these as input tax in their tax submissions.

In the case of unregistered sellers, online marketplace platforms will not be able to claim input tax on the invoices due to the unregistered nature of the suppliers.

Without owning the physical goods, the sales transaction will have to take place to complete the input-output tax chain.

Why is it likely to do more harm than good?

The point of concern here is that these online marketplaces are catering to several very small vendors and suppliers, who not only operate in the informal sector but also have no financial or operational muscle to compete with their much larger counterparts. With this new condition of GST being imposed, this will only benefit the already big retail businesses at the cost of small suppliers and reduce the range of products and lower prices for final customers.

Even logistically, these third-party online platforms can’t ensure if all their suppliers are paying taxes. While the inclusion of all traders – big and small – into the tax net is imperative in the long run, in the present time, especially with the pandemic still raging, this move seems highly shortsighted and untimely. Small vendors are already aversive to adopting technology and selling online, and with this new condition, it is highly likely that the sellers and suppliers will once again drop out of the online marketplaces.

Such small vendors already make a very small portion of their total sales through online channels, while most of their sales come from unregistered brick-and-mortar shops. The end impact of this move by the government will only be of reducing the comfort of shopping online for customers, along with the reduced choice in products and higher prices.

On the industrial side, the SME sector will bear the most brunt. The budding startups that had only just begun to take root will be crumbled under this new pressure – their liquidity will decrease, and the number of their customers and suppliers will drop steeply.

In addition to direct adverse impacts on the online marketplace, this proposed amendment in the finance bill will also discourage and slow down the digitization pace in the country. It will also likely lead to unemployment, particularly from the delivery channels that are used by these online platforms to deliver orders.

It will also act as another push towards the informal and undocumented economy. The added GST on online sales will also unequally impact these platforms as the traditional wholesale retail channels already have the benefit of lower prices, which cannot be readily replicated to online e-commerce platforms.

All in all, while the move may be logically sound aiming towards documenting informal economy, the timing of such a move is highly imprudent, especially as it comes without any additional operational details of online transactions or channels to smoothen payments and registration of such vendors that operate online and in the informal economy.

Courtesy: Pro Pakistani

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