Pakistan’s e-commerce industry is worth just $100m and India’s is a whopping $12b

With an increasing number of internet service subscriptions and rising market penetration of smart phones in the country, the e-commerce sector in Pakistan has huge potential. The country already has 44 million broadband users, which is greater than the entire population of Canada. Yet our e-commerce industry is valued at a mere $100 million. In comparison, India’s e-commerce transactions are valued at $12 billion, China’s at $466 billion and the EU’s at $487 billion.
In 2016, Pakistan was ranked at 105th out of 137 countries on the UNCTAD’s B2C E-Commerce index, which measures the readiness of countries to engage in online commerce. This is actually a drop in our position compared to our rank of 86 in 2014, hence the urgent need to address the e-commerce issues.

E-commerce as a technology offers a level playing field for everyone. Even though Alibaba does not have a single office in Pakistan, its business is doing pretty well all across the country. According to the Economic Survey of Pakistan 2016-17, our wholesale and retail trade as a component of GDP is valued at Rs2,164,404 million ($20.54 billion approx). E-retailer Amazon alone has sales revenue of around $136 billion, six times more than what we sell as a country.
E-commerce has many spill-over benefits too. The online ride-sharing apps, for example, have not only generated employment and increased customer choice but they have also driven up automotive sales in Pakistan. As per industry data, Suzuki’s 1000cc Wagon R has seen a 172% surge in demand on a year-on-year basis. These improving figures are also a boon for the financing industry in the country.

There are only around 400 e-commerce merchants in the country. This translates to a mere 0.44% of the more than 900,000 physical retail stores. Also 80% of the value of e-commerce transactions in Pakistan is paid for by ‘Cash on Delivery’. Use of credit/debit cards is far too low at the moment; only 36 million (debit and credit) plastic cards are in issue so far. International payment systems providers such as PayPal do not operate in Pakistan. Due to this, Pakistani online shoppers face difficulties in making purchases online and IT services exporters face issues receiving their payments directly into their accounts in Pakistan. Even Google which offers localized versions of YouTube, Google, Google News and Google Maps for Pakistan does not have a single office in Pakistan. There is simply a lack of interest in Pakistan due to its strict regulatory regime and uncertain future.

Currently, online market place providers cannot ship products directly to customers on behalf of manufacturers because if they do that, they are deemed to be the sellers themselves. Online marketplaces also face uncertainty in quoting customs duty to its clients as the invoice value is more often than not, different than the FBR’s assessed value. Cyber marketplace providers cannot offer refunds to their foreign clients in case of non-satisfaction with service or product as our current legislation has no provision for such financial transfers.

E-marketplace firms in Pakistan also risk facing double taxation. It is unclear  who they should pay taxes to if an online marketplace has its address registered in Karachi and enables a customer based in Peshawar to make a purchase from a store based in Lahore; does it go to the Sindh Revenue Board, KP Revenue Authority or the Punjab Revenue Authority? The laws are not defined on this matter. More importantly, since this industry is still in its infancy, taxation should not even be a subject of concern.

The Finance Act, 2017 has introduced some relief for the e-commerce sector. Minimum tax on turnover of online marketplaces has been reduced to 0.5% instead of 1.25%. Tax on commissions has been set at 5% instead of 12%. But the major brands operating in the e-commerce sector in Pakistan are demanding tax exemptions for 3-5 years and an increase in the limit of duty-exempt gift item value from the current $200 to $250. And their demands are not unjustified given that the e-commerce industry at the moment is in its infancy.

IT exporters often use the SBP’s R-Form meant for remittances instead of the E-Form meant for exports, to repatriate their payments to Pakistan. This happens so because exporters naturally wish to circumvent payment on duties on exports. The FBR should eliminate or at least reduce tax on electronic payments so that the practice expands. Tax exemptions, at this point, should not be viewed as a loss of revenue but rather they should be viewed as a hook. Once people get accustomed to using plastic cards and e-wallets etc, all these transactions are going to become a part of our formal economy. Taxation at that point in time will be much more fruitful than it is now. Unless we build consumer trust in electronic payments and make cheaper for merchants the provision of non-cash payment solutions to its customers, e-commerce is not going to work towards its full potential in Pakistan.

The government signed an MoU in May this year, with Alibaba Group to promote Pakistan’s exports worldwide through e-commerce, which is certainly a good step. Companies such as PayPal also need to be lured to begin their operations in Pakistan. Provincial tax authorities should grant an exemption from GST on services to e-commerce for at least a period of five years. Once the industry flourishes and has gained a stronghold in the economy, only then should it be taxed. The primary aim of government is not taxation but generating economic activity to sustain growth. One should not think of slaughtering the hen that lays the golden egg in the hope of maximizing revenue collection today.

In 1996, 29 WTO members had signed the Information Technology Agreement (ITA), which calls for elimination of tariffs on IT products. Today it has 82 participants who represent 97% of the global trade in IT products. To this date, Pakistan, despite being a member of WTO is not yet a participant of ITA. The reason for this is not so much so to protect its domestic IT industry as it is to not to miss out on the customs duty collected on IT imports. When it comes to erecting barriers to free trade and imports, an important principle to remember is that what goes around comes around.

Shehryar Aziz is a Research Associate at Policy Research Institute of Market Economy (PRIME)

[email protected]

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January 2018
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