In its attempt to digitize, document and bring the sellers and retailers in the tax ambit, the government has proposed in the federal budget FY22 that online marketplaces will have to register for GST collection from the sellers at 17 percent, bringing goods being sold through online platforms under the sales tax net and the online marketplace as supplier in respect of third-party sales through the platform. However, it hasn’t been taken well by the e-commerce sector including the online marketplaces as well as the budding SMEs and startup, and entrepreneurship experts.
There is little debate whether sellers and suppliers must be registered for sales tax. Is the strategy right to spur sales tax registration as well as growth of SMEs and small sellers and suppliers on online marketplaces? There are varying views depending on the time horizon. In simple terms, government proposed legislation will require an online marketplace provider or the facilitator to collect sales tax on behalf of its sellers whether or not the goods are owned by the platform. This in the long run should help document, register, and create a level playing field, whereas the crux behind shifting the tax collection burden from small sellers to the online marketplaces could be streamlined and simplified collection mechanism from one entity instead of a large number of smaller sellers.
But the online marketplaces are not happy with the proposed move. They believe that it could be counterproductive and further incentivize unregistered sellers to stay away from digital marketplace platforms (which otherwise is a step closer to getting documented). On the other hand, they are also weary of the fact that the onus and burden of collecting and depositing sales tax as an output tax will be on the online marketplace industry under the new proposal; and they won’t be able to claim input tax on the invoices in case the sellers and suppliers are from the informal/unregistered segment (which is a huge majority of the sellers on their platforms).
Such changes in legislation are not uncommon; Many states in the US have enacted similar laws that require the online marketplaces to collect and remit sales tax on sales facilitated on behalf of the sellers. The catch here however is that such changed have been brought only recently after decades of industry growth and development. Pakistan is still too young into the industry.
Where on one hand, the government seems to be focusing on seller documentation that could attract foreign investment in the sector, it looks like an abrupt switch the way it is proposed could slowdown growth in the overall e-commerce activity and the online marketplaces that mostly include SMEs, early startups, home-based sellers and small and medium suppliers. Online platforms are key in the digital transition of economies; COVID-19 has further strengthened their role in helping SMEs “going digital”. A balanced, gradual and a staggered approach with conditions and thresholds might work better than a hasty switch over.
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