E-commerce is doing well in Bangladesh. Digital Bangladesh is truly upon us, and everyone is busy digging the fruits of our latest gold rush. Inside sources indicate that e-commerce is growing at an astounding rate of 40%, currently maintaining a market size of 2000 crore BDT (23.612 Million USD). That’s a very, very good growth rate. In fact, it’s not just very good; it’s almost too good to be true. Perhaps that is part of the reason a new e-commerce VAT is being proposed by Finance Minister AMA Muhith. The proposed measure, effective from July 1, will exact 5% tax from e-commerce businesses.

A similar measure is being separately implemented for ride-sharing services such as Uber and Pathao, which will also be levied with 5% VAT. On the other hand, the corporate tax rate ceiling on traditional businesses has been lowered by 2.5% from 42.5% to 40%. “Due to advances in ICT, digital and virtual businesses are fast replacing conventional business,” Muhith stated while declaring the budget last Thursday. “To keep up with these changes, we need radical reform in our tax system.”

It should be noted that this measure is a follow-up to a previous attempt to levy tax on e-commerce for the 2015-2016 budget. Then, Muhith proposed a 4% VAT that was quickly withdrawn under pressure from concerned stakeholders.

From a taxation perspective, it seems logical to levy a single digit tax rate on a fast-growing industry. In fact, if the 40% growth rate holds true, then our e-commerce industry is growing more than twice as fast as India’s e-commerce industry. India’s e-commerce ecosystem currently has a mammoth market cap of 17 billion USD as of 2017, and a projected cumulative annual growth rate (CAGR) of 29.57% for the next 10 years. In comparison, if Bangladesh’s e-commerce industry continues to grow at a 40% CAGR, then it will have a market cap of 682 million USD by 2028.

From a capacity viewpoint, there is ample space for such meteoric growth. An estimated 2 million shoppers buy from popular e-commerce sites such as Daraz and Kiksha- in addition to using food delivery services such as Foodpanda and Hungry Naki- on a daily basis. However, this is simply 2.33% of the total number of active internet connections in Bangladesh (85.9 million). This number, in turn, will only grow as internet penetration increases with the expansion of 4G network and services.

Buyers, sellers and platform operators, however, are unlikely to greet this proposed measure with much enthusiasm. At the moment, e-commerce sales mostly take place in low-cost categories which are highly price sensitive. A price hike of 5% is negligible for upper-middle class urbanites in Dhaka, but it can be a deal breaker for cash-strapped bargain hunters. They can switch to smaller e-commerce sellers who undercut the market prices, or simply opt for brick and mortar purchases.

From a consumer perspective, a higher sales tax seems counter-intuitive. While e-commerce buying is highly convenient, we also suffer trade-offs in terms of waiting time, shipping cost and uncertainty over product quality and authenticity.

E-commerce is a godsend for those who hate shopping, but for those who love it- such as yours truly- e-commerce is still an imperfect substitute. A lower sales tax, which translates to a lower overall price tag compared to a physical purchase, is one of the panaceas which make swallowing the e-commerce pill easier. For e-commerce platforms, the mechanics of processing the new VAT paperwork can seem like a nightmare on its own. According to an insider, the largest e-commerce platforms process an average of 3000 orders per day. That means, on a monthly basis, each operator will have to process an average of 90,000 orders per month. VAT paperwork involves the processing of 5 official documents per order. Thus, 450,000 documents will need to be processed per month.

Return policies and discounts are an accepted norm in the industry. However, with a range of 5000-8000 returns per month, the amount of paperwork that needs to be processed, and then unprocessed, is incomprehensible for the current workforce. Whole new departments will need to be created simply for dealing with the extra paperwork. Not to mention all the money flowing to and fro between the buyer, seller, platform operator and eventually, the exchequer.

The proposed VAT, it should be noted, is still one-third of the standard VAT rate (15%). If the rate doesn’t increase in the foreseeable future, there is a possibility that consumers and sellers alike will adjust to the 5% rate and business will continue as usual. The Government can thus comfortably lay claim to 9.9 Crore BDT (1.18 Million USD) worth of tax revenue in this fiscal year, with hopes to collect a total of 289 Crore BDT over the next 10 years.

That’s a lot of money, indeed.

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