During the past year and a half, e-commerce in Pakistan developed at a frenzied pace. The same was acknowledged by the finance minister, Shaukat Tarin during his budget speech. However, he also made a proposal of that goes against supporting the ongoing pace in this nascent sector as well as overall digital revolution.

There are two types of general commerce models: one is where the supplier himself is supplying goods or services through e-commerce portal or website; and the second is where an e-commerce operator or a platform offers the service to various suppliers and sellers of using the platform for a commission. One of the first revenue measures pertaining to sales tax for FY22 suggested by the government is going to impact this second type of e-commerce model, also called the aggregator model followed by key online marketplaces in Pakistan like Daraz, Homeshopping, Foodpanda, Grocerapp, Airlift and many others. The government has proposed to bring the sale of goods through online marketplace into the sales tax net by viewing the online marketplace as supplier in respect of third-party sales through their platform.

What this means is that the online marketplaces under this proposal will now have to make sure that all the sellers and suppliers on the platform must be registered in sales tax. Despite the growth that e-commerce sector has seen recently, it’s a budding sector and much smaller than its regional peers in comparison; online marketplace as the service provider largely hosts small and medium enterprises, suppliers, startups and individual sellers. Mind you, as many as 80 percent of the small sellers and suppliers are in the informal sector, which means they might not be registered for sales tax.

Connect the dots and you can see an adverse impact on the e-commerce industry as a whole. Already the sellers have been hesitant of selling online – especially the small sellers, also highlighted by Ehsan Saya, MD Daraz In his recent interview with BR Research. While documenting sellers is vital in the long run, industry experts highlight the additional responsibility and burden on the online marketplaces as there is no way they can make sure if all sellers are paying sales tax especially when their business models is being transformed to payments going directly to sellers’ accounts from customers with post pay commission to the platforms. What is also being raised as a concern is that the move would further discourage the sellers and suppliers to sell online as only a small portion of their goods are generally being sold through online platforms, while their unregistered shops account for over 95 percent of their sales.

This is a B2B model that aggregates demand from small merchants and integrates with the small suppliers, which means that these SMEs would face the real damage. Startups that have recently raised funding based on the existing model will cripple. Transaction liquidity would fall. Yes, the sellers must be documented and registered for Sales Tax, but that should be done through enough time to document, long term vision, value recognition and behavioral change.

Like ensuring GST/VAT payment through these online marketplaces by making them liable and responsible for the sellers, there are other steps towards sophistication such as introduction of destination taxation in EU or the digital tax in India introduced as an equalization levy to bring level playing field for its local and offshore e-commerce firms. But regulation for marketplaces in these countries and others have only come after there has been significant growth and penetration of the sector. It might just be too early for Pakistan!