Let us start by clarifying something for anyone who has a different impression: internet ecommerce platforms are not stores in any sense of the word. They are companies that provide services. People that own ecommerce websites provide a platform for different companies to sell their items. These platforms might be all-encompassing, listing anything from televisions to stationery and snacks, or they can be more narrowly focused, simply selling electronics or clothing.
However, regardless of the type of ecommerce platform, it is ultimately providing a service. Unfortunately, the federal government does not recognise this fundamental distinction. A revision to the Sales Tax Act of 1990 has been suggested in the recently disclosed and hotly disputed budget presented in parliament this month, which would shift the definition of online marketplaces from a “service providing agency” to a “retailer.”
If passed, the amendment will create a dangerous precedent for a sector in Pakistan that has enormous promise but is still in its infancy. To comprehend why this is such a difficult notion, we must first comprehend how online marketplaces operate. An online marketplace, such as Daraz, merely provides a venue for the sale of various products. Manufacturers invite Daraz to feature their items, and Daraz earns a percentage of sales as commission, while the original producer keeps the remainder.
When ecommerce websites initially appeared in Pakistan, the government was unsure how to tackle the problem of charging a sales tax because the online marketplaces were not shops and only made commissions. To dispel any doubts, the 2017 Tax Laws established that online marketplaces are subject to the agent-principal relationship paradigm. One entity legally appoints another to operate on its behalf in a principal-agent relationship. The principle is represented by the agent. Pepsi, for example, will be the principal and Daraz will be the agent if they wish to sell cartons of Lays on Daraz. Pepsi will be responsible for paying the sales tax.
The proposed changes to the 1990 Sales Tax Act toss caution to the wind and turn this term completely upside down. Online marketplaces will now be deemed retailers rather than service providers under the proposed amendment. They will be required to pay retail tax at the usual rate of 17 percent now that they are designated retailers. This makes little sense because, unlike shops who own the things they sell, the online marketplace does not own any of the products that are featured on their platform. The agent-principal connection is the foundation of the entire ecommerce business model, and it has thrived as a result. If internet marketplaces become more popular,
If the amendment passes, it will cause a slew of issues for ecommerce enterprises as well as the many businesses who have become dependant on the ability to sell their products through these platforms. Ecommerce is used by a significant number of small and medium businesses and cottage industries to sell their goods. Higher taxes will raise prices and make selling online more difficult. Then there’s the fact that, because so many entrepreneurs have built their entire businesses around the ecommerce model, this shift will lead to employment losses. Ecommerce has the ability to create millions of jobs, bring sellers online, and empower hundreds of thousands of people.
It’s also worth noting that ecommerce sites have played a significant part in making Pakistanis more comfortable with online purchases, and this revision will have an impact on the government’s digital Pakistan goals. Smaller sellers will be encouraged to migrate away from online marketplace platforms as a result of the shift, as their refunds will be net of sales tax withheld. As a result, these merchants will shift their operations to the undocumented retail market, where there are no such high standards.
It’s also worth noting that ecommerce sites have played a significant part in making Pakistanis more comfortable with online purchases, and this revision will have an impact on the government’s digital Pakistan goals. Smaller sellers will be encouraged to migrate away from online marketplace platforms as a result of the shift, as their refunds will be net of sales tax withheld. As a result, these merchants will shift their operations to the undocumented retail market, where there are no such high standards.
Online marketplaces will receive sales tax invoices from registered sellers (yet to be clarified under the amended processes) and will be required to claim these as input tax in their tax submissions. This, however, is only available to registered sellers. Due to the unregistered character of the suppliers, the online marketplace platform will not be able to claim input tax on invoices from unregistered vendors.
This, together with the decision to charge a single rate of 17% on all sales made through online marketplace platforms, represents a significant departure from the current tiered system of sales tax rates for various categories in the conventional retail universe. As a result, even registered merchants will have to pay a higher sales tax, discouraging them from selling through a digital and documented channel.
The proposed legislative modification to turn online marketplaces off is especially concerning because now is the moment to promote these platforms, not shut them down. The budget also includes some beneficial improvements, such as a reduction in the minimum turnover tax from 0.75 percent to 0.25 percent, but the change in the definition of what an online marketplace is changes the rules of the game in the middle of the game, which is unfair to everyone participating.
We merely need to look around to see how things ought to be. Bangladesh and India are two notable industry examples from nearby and emerging countries similar to Pakistan. Bangladesh did not establish a tax on the industry until 2018, and it is currently as low as 7.5 percent. Meanwhile, in India, the government makes it simple to file a smaller tax return so that the economy can grow and marketplaces are exempt from GST.
This is why the government must be persuaded to review the planned amendments to the Sales Tax Act in order for Pakistan to remain an attractive country for sustained investment in digitalization, which necessitates the use of the online marketplace model.
source: Profit.Pakistantoday
