E-Commerce in Pakistan: Non-GST vs GST Sales Advantage.

Pakistan's Digital Economy

Recently, a relative of mine decided to buy a television. Being a person who values every Rupee she earns, she did a fair bit of research into the make, model and features of the kind of television set she wanted to buy. She eventually settled on a 55” Samsung LED TV, and this is where it gets interesting. She confronted me with a dilemma that she could not understand. The same television, the same make and model number had different pricing in the market. From one website she was getting it for Rs. 230,000 (approx.) and another website was selling it for Rs. 271,000 (approx.) She could not understand why there was a discrepancy in price.

The difference was simple. The cheaper price did not include GST and the one that was more expensive included GST. Where do you think she bought the TV from? Needless to say, she opted for the Rs 230,000 option. Same TV, same warranty. Same product. Just better pricing! Classical salesmanship? No! Unfair advantage!

E-Commerce sales are invariably picking up in Pakistan. Based on a personal survey done, in by mid year 2013 there were about 650 or so online merchants (websites and/or Facebook pages) that were selling SKU based products. By the end of September, 2013, that number climbed to about 750, by December it was well over 900. [The margin of error in the survey was about +/- 12%]. What this showed was that more and more people are now catapulting their products (or services) online in the hopes of getting more customers. Not to mention, it is more convenient. It is estimated that the number of merchant would increase to 1,500 to 2,000 by ear of year 2014.

Pakistan is a classical case of what is called a ROPO economy. Research Online and Pay Offline. Buyers today spend a considerable time in researching for their product online and then the payment mechanism is offline. In most cases the offline model is Cash On Delivery (COD). Within this ecosystem, then there are two types of online stores:

  • Those that charge GST
  • Those that do NOT charge GST

One does not need to be a rocket scientist to figure it out, that the Non-GST players have a distinctive price advantage over the players who are implementing GST into their end pricing. How can this gap be reduced? How can GST players see a level playing field?

If you ask the Government, the obvious answer is, that the non-GST players need to come into the tax bracket and start paying GST on products/services being sold. That is easier said than done. In the survey done, we found less than 30 businesses who were registered for GST, the remaining are doing business in a parallel economy and see no reason to document their sales.

GST vs Non-GST Online Sales

Let me suggest a more pragmatic solution to this problem. What if we removed GST from online sales all together. Seriously! Think about it. If we need the online space to grow, we need to foster a level playing field. Actions by the government that promotes growth and not stunt it. We need a catalyst. Removing GST, in my opinion is that catalyst.

What is the likely scenario of implementing this suggestion. Well, lets take a look. Back to the example of my relative who is buying the television. If both vendors (one legally documented and one not), are now both selling the Television at the same price (GST not being an differentiator here), then the one who offers a better customer experience, better after-sales-service, has a better brand recognition, etc. would most likely win!

Think about all the official sales that are happening online by vendors who are paying GST. What does that figure amount to? A pretty small figure if I were to guess it. Assuming the online does say Rs. 1 Billion in sales, this would equate to about Rs. 170 Million in taxes. Fair enough. That’s a decent number. But by keeping up this path…

  • Does the government convert any of the online stores operating in the grey economy on to the white economy? No!
  • Do electronic payment systems get more traction? No!
  • Will we see more online payment solution partners enter our market (think PayPal, et. al.)? No!
  • Will we see online payments mushroom in Pakistan? No!
  • Will we ever rid ourselves of the Cash-On-Delivery model? No!
  • Is there any incentive for a merchant who is not paying GST to conduct online electronic transactions? No!
  • Is there any incentive for a merchant who is not documented to get documented? No!

So, lets revisit the scenario again, if GST is eliminated, the sales would increase. All the merchants who are paying GST, agree on this unanimously. These are documented sales increasing in the taxed economy. If there are more sales from GST registered entities, then it is definitely good for the economy. By merely eliminating GST from online sales, you will start to see a leakage of sales from the non-documented economy to the documented economy. That is a pretty strong argument.

What else will happen? I predict, you will see more non-documented merchants opting to get documented. Why? Because better payment options will enable (and require) that. I’ve talked to literally 100s of merchants and if they have no pressure for GST for  online sales and can accept credit/debit cards, they would jump at the opportunity! If the government offers a 3%-7% tax rebate on online sales only, the official online retailer would clearly have a pricing advantage also. What do you think the merchant who is not offering online payments would do? They’d jump at the offer!

I hear counter-arguments that such an incentive is not necessary, as branchless banking wallets and IBFT (Interbank Funds Transfer) are already available and do the job. I’m not disagreeing with that approach, however, I think in the greater scheme of things when debit cards processing comes online and other payment wallets come online, non-registered merchants would not qualify for such processing facilities. The software industry got a tax-break, as did many other industries. I see no reason why a tax break cannot be offered to online merchants. Think of it as a cottage industry (which it is in many ways). This industry is growing and the government needs to incentivize it, rather than penalize it. I am in the minority when I say that if you are going to sell, do so legally. You might get away with it now, but as more and more digitization of payments takes place, it is only a matter of time, the tax net will seek you. Irrespective of our views on how tax money is utilized, it is a responsibility of all legal entities to eventually embrace it. It can happen voluntarily or in the end it will happen by force. If we can find a common ground to smoothen the transition from a non-tax paying entity to one that is a tax paying entity and reward those who do, I think the greater good will prevail.

The disadvantages that GST paying merchant have right now is something to seriously consider and address. They are, struggling against all odds and trying to sell in a marketplace that is dominated by merchants who do not pay GST. If the larger players exit this market, this would be a blow to our official statistics and for solution providers in the payments space who are investing millions of Dollars to make the economy more in tune with digital payments.

This page was last updated on January 27, 2014.

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