The ill-considered proposal in the 2017 Budget to compel all e commerce transactions to be conducted over a yet-to-be-designed government platform has come up for discussion again. Lahiru Pathmalal, CEO of Takas, one of the Sri Lanka’s more visible e-commerce businesses had this to say to the Sunday Times:

“What is ideal is a tax holiday for e-commerce/tech related business that makes heavy investments into growth,” he said.

“There has been discussion in regard to travel related booking engines being taxed such as AirBNB and Bookings.com. I believe taxing of booking engines is be ill timed,” he claimed.

All funds collected by these booking engines are transferred to the Sri Lankan business other than the commission they charge for their services (much like a traditional travel agent who is based outside Lanka).

“Which means the hotel revenue (if making profits) is taxable by the Lankan government. If taxes are levied on these booking engines without prior consultation and agreement there is a chance of these leaving Sri Lanka which means small businesses that depend on these will get adversely affected,” he pointed out.

AirBnB will close down operations in Sri Lanka if the government tries to interfere in their business. This will affect around 7000 families depending on it by renting out their spare rooms for foreign travelers, another e-commerce firm head said.

The ministry should start a dialogue with e-commerce firms, ICT experts and eminent economists, before trying to regularise the sector and impose any taxes on the industry, he emphasised.

Pathmalal is right. The government must consider the revenues small businesses will lose if they are shut out from the use of the popular platforms.

This is what we said when the proposal was first floated:

But it would have helped if the Minister had actually consulted knowledgeable people within government and outside before announcing his solution. Or considered the ability of the government of Sri Lanka to leverage access to a market of only 20 million to compel international giants such as Amazon and E Bay to use his yet-to-be developed common platform.

The identified problem is simple enough: a “bricks and mortar” supplier located in Sri Lanka is liable to collect VAT or other relevant taxes for certain transactions, while a digital commerce vendor located outside the country engaged in the identical business is not. How can the “playing field” be levelled in favour of the domestic, tax-paying vendor? How can this be balanced with the objectives of promoting digital commerce?

Sri Lanka is not the first country to face this problem. But it is the first country to ask a poorly performing government ICT agency to create a common platform and hope that all international digital commerce vendors start using it.

It is worth looking at how the European Union, which seeks to create a digital single market by removing barriers to cross-border digital commerce, has sought to address this problem. With digital commerce already amounting to 7% of retail sales (both the base and the percentage being magnitudes higher than Sri Lanka), the EU would have significant leverage over digital commerce vendors who could not afford to stay out of this massive market. Was the solution a “common government platform” that would be operated by Government? No.

– See more on Daily FT.