Can online businesses drive economic growth?

Published: April 15, 2019
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Due to lack of awareness, most ventures are operating outside of the formal sector. PHOTO: FILE

Due to lack of awareness, most ventures are operating outside of the formal sector. PHOTO: FILE

KARACHI: The size of Pakistan’s economy is only $275 billion at present, which does not include the unobserved economy. According to a World Bank report, nearly half of the country’s population is not part of the formal sector.

It is worth thinking that if this number comes under the formal net, then the economy’s size can grow exponentially. Although no research or studies have been conducted into the potential of home-based businesses, the sector offers a massive potential in terms of job creation and expansion of economic growth if supported through prudent policies.

The introduction of 3G and 4G telecom services in the country has provided internet access to many. It has played a pivotal role in turning ideas of home-based businesses into profitable ventures, which mainly include freelancers.

More importantly, it has promoted a culture of entrepreneurship largely driven by women. There is a need to explore what this sector offers.

Highlighting the role of social media, ICT expert Parvez Iftikhar told The Express Tribune, “A lot of businesses have started operating on Facebook especially and are also using other social media platforms. It is probably the fastest-growing segment and is developing rapidly.”

He said it is this thriving business sector, operating on social media, which when picks up pace creates a ripple effect by creating employment opportunities and same is the case with the freelancers. Hence, the potential of the segment can be easily gauged. Iftikhar was of the view that Pakistan is very advanced in freelancing and is amongst countries which have the largest number of freelancers.

Explaining as to how these ventures develop, he said they begin as a side project but mature into full-time business when they become successful. “These successful businesses then become job providers.”

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What online businesses say

As the revenue authority believes that small businesses mostly comply with regulations and register voluntarily, its main focus is on large enterprises. In this regard, The Express Tribune reached out to a few entrepreneurs who operate online.

Sara, who owns an event planning business by the name of Sparkle, said she has not registered her business since she believes her earnings are not enough and there is no need for it.

Amena Zoeb of Taha’s Choco Mania also said she has not registered her business. This is despite the business earning profit of over Rs100,000 per month.

Xera CEO Zehra Hussain, who operates a successful walk-in boutique of plus-size clothes at her own house, said her business is not registered at the moment as she is not aware of it. “It is a new concept for me right now,” she said.

While unawareness is a major factor, an overall lack of willingness is also one of the reasons why online businesses mostly do not register themselves.

Nevertheless, there is also a segment of business that not only registers their business but also submits tax returns because it is aware of the process.

Trims Herbal Products Founder and CEO Tooba Abbasi revealed that she is diligent in tax return filing. However, she said, “I have many friends who have a different approach towards tax filing and registration (that it is a tedious process, we do not earn enough).”

In certain cases, some individuals register their business to avoid unnecessary probe into inflows in their bank accounts.

Sharing her experience, a home-based makeup artist said, “My name is registered with the SECP (Securities and Exchange Commission of Pakistan) because without that we cannot transfer much to banks. We just got it done recently and a majority of home-based businesses are required to do that as now they have started questioning.”

However, she continued that a major disincentive for filing returns is that a major amount of their business goes to taxes.

Why shift to formal sector?

Having formal status is beneficial for both the business and the government as the former would not have to bear additional cost of taxes and the latter will benefit from expansion of the formal economy.

FBR official Hamid Ateeq said in order to discourage the culture of not filing returns, they force people through a passive mechanism. “We have kept different tax rates for filers and non-filers. For example, the tax rate of Rs100 for a filer can reach up to Rs150-200 for a non-filer,” he said.

Talking about the active mechanism, he said, “We keep on looking if we find something on social media. For that we have an organisation – the Broadening of Tax Base (BTB), which constantly keeps a close watch on social media, newspapers and anything like that.”

“The registration process only takes five minutes. You can easily register online through a CNIC, mobile number and email address in your name. It is a short process, where you get an email and we send keys,” he added.

“There are 100% people in Canada who file returns, whereas we have less than 1%,” he said.

Moreover, there are regulations for the registration of a company, but none for home-based businesses; thus, these businesses do not enjoy any protection.

SECP official Sajid Gondal said, “Currently, the focus is on the ease of doing business only.” There is no data available on home-based or such online businesses operating in the country. “We should at least maintain a database or keep record of such businesses, when census is conducted,” he said.

Reforms

Informal businesses need to be incentivised to encourage them to register themselves and file returns. Simplification of regulations for registration, filing of tax returns, assistance in social security and fiscal incentives may encourage these units.

The FBR official said, “We are trying to incentivise the sector. We may provide pre-payment credits or something similar as new ideas are emerging.”

The FBR is planning to launch a mobile application to make return filing easier and more convenient for such individuals.  An app aimed at assisting people in registering will be launched next year, said Ateeq, adding that after opening the app, only three to four windows will pop up with fields of personal information.

Talking about the need to create awareness, the FBR official said, “We organised an awareness campaign in October last year, but it requires a lot of money and the government can’t spend too much on it.”

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“But we have designed a communication policy, whereby awareness will be created through press briefings.”

Furthermore, the SECP may tighten the noose around social media web channels, where, for example, if you want to open a web channel, you will have to register.

According to the recent guidelines of Pemra, the new law may include regularisation of social media-based businesses as well, said SECP official Gondal.

Bringing more transactions online

The informal economy is more common in offline businesses than the online ones as online transactions have a greater chance of being recorded. Good-quality internet and incentivising e-payments could pave the way for bringing more businesses online.

The government should incentivise electronic payments to make it more attractive or beneficial for the users, who mostly rely on cash on delivery, said the ICT expert. “A lower tax rate on electronic payments and rationalising sales tax in case of paying online could be done. Just like the government has tax filer and non-filer discrimination, it could promote cash and electronic payment discrimination.”

Talking about how the current taxation regime for e-commerce is discouraging, he said, “If you pay by mobile, or electronically make a payment, the taxation rate is higher. It should be facilitated,” Iftikhar remarked.

The writer is a staff correspondent

 

Published in The Express Tribune, April 15th, 2019.

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