E-commerce Policy Framework Finalized-Islamabad Federal Government

ISLAMABAD, July 29: The federal government has finalized E-commerce policy framework envisaging creating an enabling environment for holistic growth of e-commerce across all sectors of the country, with special focus on development and promotion of SMEs, for making Pakistan a significant player of the regional and global digital economy.

According to the draft policy framework prepared by the Commerce Ministry and a copy of which is available with this correspondent, its main goal is to augment e-commerce industry’s growth to make it one of the key drivers of Pakistan’s economy.

Further the second goal is to streamline regulatory framework for e-commerce businesses in Pakistan, to contribute achieving higher export growth through enhanced activities from e-commerce platforms, to promote small e-businesses and create employment opportunities through digital connectivity for empowering youth, especially in remote areas, to provide an efficient e-payment infrastructure that allows for smooth and quick local and cross border transactions, to ensure data sovereignty/ownership and data localization as a valuable resource for development planning and national security, to create enabling environment for e-businesses to operate and flourish by addressing challenges and gaps more specifically related to legal systems, taxation structures, digital infrastructure, to create such an e-commerce ecosystem, which is responsive to consumers’ interests including dispute resolution and to ensure transparency and accountability in digital industry.

The goal of this policy framework is to recommend policy measures for fostering holistic growth of e-commerce in Pakistan and thereby stimulating the local digital economy. Although the digital industry is still in its infancy in Pakistan, statistical data shows a steady rise in e-commerce transactions and the number of registered e-commerce merchants.

In the first quarter of the financial year 2017-18, the number of registered e-commerce merchants was 496 which reached 1,094 by year-end and was around 1,242 by the first quarter of 2018-19. E-commerce transactions processed by these merchants are also increasing proportionately. This policy framework seeks to augment this positive trend and pave the way for developing e-commerce in Pakistan by creating an enabling environment for the growth of existing e-commerce enterprises, allowing and encouraging new entrants, facilitating local and cross-border trade (especially exports), enhancing competitiveness and contribution to an overall digital economy.Pakistan’s e-commerce industry is emerging rapidly and has the potential to strengthen country’s economy by creating more job opportunities, linking remote areas to the mainstream, development of small and medium enterprises and finally enhancing exports through online platforms. Capitalizing on the efforts made by the public and private sectors so far, Pakistan now needs to step up and take measures to increase the competitiveness of local enterprises, thereby enhancing their share in global trade. For this, it is crucial to develop a policy framework for addressing key areas of concern i.e. consumer protection, the role of the financial sector in optimizing its growth and its revenue-generating potential in the medium and long run.

This policy framework provides a glimpse of the current status of Pakistan’s e-commerce with primary focus on (i) regulatory framework, (ii) payment infrastructure, (iii) taxation issues, (iv) consumer protection in the digital environment, (v) issues relating to logistics and (vi) data ownership/sovereignty and data localization.

Key stakeholders identified in this policy framework are e-commerce business enterprises including the innovative digital industries, financial institutions, revenue authorities, regulatory bodies, entities concerned with local/cross-border logistics and the consumers. While reflecting on the current issues being faced in each of the above-mentioned six areas, this policy framework discusses the views and concerns of all stakeholders and makes recommendations based on them.

The strategies in the policy framework have been proposed with the objective of providing an enabling environment to the private sector, including SMEs while allowing the government to regulate e-commerce sector for the benefit of the public at large in addition to achieving long term revenue generation goals. The strategies proposed in the policy framework tend to facilitate existing e-commerce business and also encourage entities involved in traditional commerce to venture into e-commerce, thereby improving prospects of productivity, generation of new employment opportunities and enhanced levels of consumer protection.

Regulatory Framework

Pakistan’s basic laws concerning Information Technology (IT) extend legal recognition to transactions carried out in the digital environment and electronic payments. However, generally, e-commerce is regulated under the statutes concerning traditional commerce. This gives rise to various concerns for the industry and the concerned authorities. For addressing these issues it is necessary to take measures for allowing re-export/re-shipment of goods, launch National Single Window (NSW) for speedy processing, especially for the export of large volume of low-cost goods/items. To cater for the possible impact of import of digital goods in Pakistan, infrastructure and technical capacity should be developed to enable the government to impose customs duties on such products on their import. At present, there is no mechanism/registry for e-commerce businesses. This policy framework proposes registration of e-commerce businesses with the Securities & Exchange Commission of Pakistan (SECP) and making it mandatory for them to maintain a physical address in Pakistan. In addition, for enhancing consumers’ trust, measures for protection against counterfeit goods and a code of conduct are proposed under this Policy Framework.

Payment Infrastructure

With e-commerce enterprises making their presence felt, laws and regulations have been introduced to enable the existing financial institutions to cater to electronic transactions and encourage new private sector intermediaries to enter the field. However, a lot more is required to be done to address the needs of a large segment of the population which the e-commerce industry shall target as its consumer base in future. In relation to this, it is essential to enable Card-Not-Present (CNP) transactions and explore the possibility of co-badging with international card payment schemes. Moreover, it is proposed that banking services should be improved for promoting the use of local online merchant accounts by online businesses and exploring the possibility of establishing an international payment gateway in Pakistan.

Consumer Protection

Existing consumer protection laws in Pakistan do not contain specific provisions for addressing concerns of consumers transacting in the digital environment. In relation to this, recommendations have been made for introducing specific amendments in these laws. An important aspect of consumer protection is ‘dispute resolution mechanism’. This Policy Framework proposes that it should be mandatory for all online businesses to provide for an efficient customer support and dispute resolution mechanisms and federal and provincial governments should make arrangements for establishing independent alternate dispute resolution centres for expeditious settlement of disputes.

Taxation Structure

Taxation is one of the major issues for stakeholders of online marketplaces. The primary concerns relating to taxation are the imposition of minimum income tax, withholding tax and provincial sales tax. This policy framework proposes that for the purposes of provincial sales tax online businesses should be treated at part with other businesses and parallel to that, provincial sales tax regimes should be harmonized to address the concerns of online marketplaces.

Logistics and e-commerce

In Pakistan, business-to-consumer (B2C) e-commerce model has grown significantly in the last few years and this trend is likely to continue. Logistics play a pivotal role in the B2C model. The main area of concern to be addressed is system automation of B2C players and third-party-logistics (3PL) businesses. In addition, within the framework of Pakistan’s National Transport Policy a policy on logistics shall be formulated to address concerns relating to e-commerce industry including expeditious processing for export of low-priced small consumer goods.

Data Ownership/sovereignty and Localization

Data is termed as ‘oil’ of the digital industry and is the most valuable resource in the digital economy. To unleash the true potential of e-commerce, it is essential to localize the data generated in Pakistan and prevent its transfer to any other country or any entity not incorporated in Pakistan for the utilization of local digital industry. At present, the Ministry of Information Technology and Telecommunication (MoIT) is the process of formulating Pakistan Cloud Policy. The said policy should also address issues concerning e-commerce. Small and medium enterprises (SMEs) can play a vital role in the growth of e-commerce. In order to improve their competitiveness and domestic and international e-commerce arena special incentives have been proposed for entrepreneurial training of e-commerce start-ups and formulation of policies for providing them micro-finance facilities. Overall, this policy framework attempts to pave the way for holistic growth of e-commerce in Pakistan by creating an enabling environment in which small and large enterprises have equal opportunity to grow steadily. It is hoped that Pakistan’s e-commerce sector grows exponentially to claim a substantial share in global trade, which in turn will create employment opportunities and generate revenue for the state. Global e-commerce has been growing exponentially since the last 2 decades.

According to the Information Economy Report (2017), global e-commerce sales amounted to $25.3 trillion in 2015 in which B2B claimed a larger share of $22.4 trillion and B2C smaller share $2.9 trillion in 2015.The global growth rate of B2C in 2015 was 20% whereas in Asia-Pacific it was 28%. The overall share of e-commerce in global GDP was 3.1% in 2015, whereas in Asia-Pacific it was 4.5% of GDP, followed by North America at 3.1% and Europe 2.6%.

In 2017 Asia-Pacific was the fastest-growing region in the global e-commerce marketplace and accounts for the largest share of the world’s B2C market, i.e. over $1 trillion out of the global market of $2.3 trillion, followed by North America with $644 billion.UNCTAD’s latest figures reveal that global e-commerce sales grew 13% in 2017 and reached an estimated $29 trillion. The number of online shoppers grew by 12% and reached 1.3 billion. While most of the online buyers preferred their local markets, but cross-border buying increased from 15% in 2015 to 21% in 2017.

According to UNCTAD, this growth was mainly driven by online buyers in the United States. B2B sales accounted for 88% of all online sales, but B2C had a better growth rate of 22% to reach 3.9 trillion in 2017.8 E-commerce in Pakistan In Pakistan, the overall share of services sector in real GDP is around 60% at end FY 2018, and around 56% in nominal GDP; the latter is higher than South Asia average. The service sector has been witnessing a shift towards the digitization.

Growing internet penetration is revolutionizing the way consumers and businesses gain and share information, executes transactions, and manages their day- to- day operations. Improving digital connectivity is reshaping consumer behaviour, which is increasingly tilted in favour of convenience, cost savings, and customized retail experiences. Businesses are also capitalizing on opportunities enraging from the digitization, such as supply chain efficiency, lower transaction cost, and enhanced flexibility in addressing consumer needs. Pakistan is among the economies where digitization is triggering changes in some components of the service sector.

The shift is most prominent in areas like e-commerce, fintech, and e-government, where new ventures and approaches to deliver services are picking. Specifically, the market size of e-commerce has grown significantly in Pakistan over the last few years, transforming the way consumers interact with – and especially pay businesses.As per UNCTAD’s B2C E-Commerce Index, in 2017 Pakistan ranked 120 (out of 144 countries) on e-commerce readiness index with a score of 24.0. However, a noticeable surge has been witnessed in the recent past in the number of online vendors, local e-commerce platforms, online payment facilities introduced by banks and large cellular service providers. Improved internet accessibility and significant efforts of the government for financial inclusion in most parts of the country can be rightly credited for this. PTA’s data reveals that as of March 2019, there were 159 million cellular subscribers, 66 million 3G/4G subscribers and 68 million broadband subscribers. From 2017-2018 the number of local e-commerce merchants increased 2.6 times and e-commerce payments increased by 2.3 times in just 12 months.SBP’s Annual Report on the State of Economy 2017-18 shows that sales of local and international e-commerce merchants were Rs. 20.7 billion in 2017 growing by 93.7% in 2018 to reach Rs. 40.1 billion.

These figures do not include all the post-paid cash-on-delivery transactions which account for 60% of the total value of e-commerce in Pakistan.12 Around 64% of Pakistan’s Population in under the age of 29 and the country will continue to enjoy the youth bulge for another 30 years or so, according to a report from United Nations Human Development, 2017.As the young population is more open to embracing technology as compared to the old generation, the promotion and regulation of e-commerce become more significant in providing employment to around 130 million Pakistan’s youth in the next 30 years. Although the pace of increase in e-commerce adoption in Pakistan has been encouraging over the past few years, the country still lags behind the regional and comparable economies in terms of e-commerce.Therefore, there is a need to formulate a comprehensive policy to not only provide impetus to e-commerce but also to regulate the businesses.

The existing e-commerce models in Pakistan

i. Retail model:

Manufacturer, distributor, retailer or service provider uses a self-owned website to sell its owned products and controls the price of the products. Examples include websites of various famous clothing brands and other consumer goods.

ii. Online Market place model

An Online Marketplace is an information technology platform run by an e-commerce entity over an electronic network that acts as a facilitator in transactions that occur between a buyer and a seller. Facilitation services of an Online Marketplace may include warehousing and logistics, marketing services, customer service, payment aggregation, after-sales services and other services. Examples of such models in Pakistan are daraz.pk and yayvo.pk amongst others.

iii. Online information and financial intermediaries

Channels such as PakWheels, Rozze.pk, and Zameen.com fall into this category. The players of this nature serve to fill the information gap and mostly earn profits through contract making and commission fees.

iv. Electronic Transportation Firms

This category includes players like Careem, Bykea, and Uride, who provide ride-hailing and car-pooling services through internet channels such as a mobile application.

v. Social Media Based Sellers

These players are either one-to-many or many-to-many stores that operate purely through social media platforms like Facebook and Instagram. Customers book their orders via the retailer’s “page” and can then “review” their purchase in the form of likes and comments.

vi. Auction Market Place

An auction market is a market in which buyers enter competitive bids, and sellers enter competitive offers at the same time. The price at which a stock is traded represents the highest price that a buyer is willing to pay and the lowest price that a seller is willing to sell. Matching bids and offers are then paired together, and the orders are executed.