Turbulence in e-commerce landscape in Bangladesh and regulatory concerns

E-commerce, a fairly recent phenomenon globally, and by all plausible indicators, seems to become the very ecosystem of retail and wholesale commerce in near future, if not already for some niche markets, has also gained currency in Bangladesh. E-commerce started in Bangladesh around  2013-14, and took quite a leap around 2016 and onward, gaining strength with increasing rates of mobile internet penetration, number of smartphone users, and mobile financial services. 

This potential was readily grasped by a few major players, the local ones at first, then followed by foreign direct investments, and venture capital in e-commerce enterprises. According to a report published by IDLC Finance Limited, a leading non-banking financial institution in Bangladesh, the business to consumers (B2C) e-commerce market size amounted to USD 110-115 million (around BDT 9 billion) against the BDT 133.57 billion total retail market in 2017. According to the IDLC report, the size of the Indian e-commerce market stood at USD 17 billion in 2017.

During the last few months, Bangladesh observed a flurry of events around the e-commerce business. It came to a wider public attention with the banks and mobile financial services stopping transactions with ten e-commerce companies , already listed and pointed out by the consumers, the Ministry of Commerce, and the central bank for fraud. 

These companies had amassed a massive amount of money from the consumers in form of advance payments against their purchase orders, which they had not delivered in months, and did not pay to the suppliers either. Then the CEOs and other top officials of some of these companies got arrested on charges of fraud and embezzlement of money. 

Meanwhile, the Ministry of Commerce published a policy guideline for regulating e-commerce business, the draft of which had been kept open for public consultation for many months seeking the inputs from the industry and general public. This set of guidelines has the clear purpose of improving transparency, and protecting consumer rights - a very timely and welcome move. 

There are reasons to believe that if implemented properly, this new policy framework will bring transparency and better governance in the e-commerce sub-sector in Bangladesh. In addition to the policy guidelines, there have been a number of propositions to streamline the e-commerce sector. 

However, there are needs for caution too. Some questions need to be answered clearly before e-commerce in Bangladesh can find a clear growth path ahead. Some of these important issues have been discussed as follows:

Escrow Account and its Implications:

 One notable feature of these guidelines is setting up an escrow account under the supervision of the central bank, to receive advance payments from the consumers against their purchase orders. No more than 10% of the invoice amount can be collected from the consumers in advance, as per the newly announced guidelines.

The money collected from the consumers would remain deposited in the escrow account, only to be released to the e-commerce company after confirmation of delivery of the purchased product to the retail consumers. Indeed, an excellent measure to cut down the false promises made by some of these e-commerce companies. 

It’s been learned that Bangladesh Bank will not operate the escrow account directly but will outsource the service, and the terms are not ready yet. Once the terms are ready, the tendering process will start. Hence, it is reasonable to say it will be at least 18 to 24 months before the escrow account system will be in place. 

Meanwhile, only ‘Cash on Delivery’ mode of payment will be applicable for retail e-commerce business, if e-commerce is to continue. Cash on Delivery is a widely accepted method, but it often leads to revenue and income figures kept undisclosed, and the applicable VAT amounts may remain undeposited by the businesses. 

Hence, operating in a ‘cash only’ business environment may result in revenue loss for the government. Additionally, the growth and profitability of this sector is likely to remain under-reported in a ‘cash only’ environment, and deter further local and foreign investments into this sector. 

Any possible charges and fees for the escrow account services, whenever it might become operational, needs to remain reasonable, any monopolistic environment for such services needs to be avoided.

Unique Business Identification (UBID): 

Another notable feature is the requirement to obtain a Unique Business Identification (UBID) number for e-commerce companies. This implies, e-commerce specific Business Identification Numbers (BIN) will have certain criteria. 

What will be the qualifying criteria? What will be the business rationale behind the qualifying criteria, if any at all? If the purpose of this new ID is to curb the scams, and protect the consumer interests, then what will the other specific laws and agencies already existing for the purpose will do? 

It can be noted that the major laws governing commercial activities include company law, tax and VAT laws, intellectual property related laws, competition law, and consumer rights protection law. In addition, criminal procedural codes can be applied to curb fraudulent activities, depending on the nature of fraud and breach of trust taking place. 

How likely is it that the BIN would end up as another tool restricting the budding e-commerce industry of the country? All precautions need to be exercised against increased administrative barriers and rent seeking arising from administering the proposed UBID. 

A pertinent question here would be, what will happen to the other standard registrations, and licenses, such as Tax Identification Number, trade license, VAT registration, or the regular Business Identification Number? 

Would any of these standard registration and licensing requirements be exempted, if an enterprise obtains UBID? These questions certainly need to be answered for a conducive business environment for e-commerce in Bangladesh.

Proposition for a Separate Tax Treatment: 

So far, e-commerce businesses are being registered as IT enabled services (ITES) at the time of incorporation with the Registrar of Joint Stock Companies and Firms, and for issuing trade licenses from the municipalities or city corporations.

 ITES companies enjoy a tax exemption till 2024, aligned with the government’s policy to promote Information Technology in the country. Being registered under the same category as ITES companies, e-commerce enterprises are enjoying tax exemption at present. 

Under the proposed separate tax treatment, would an e-commerce company still be exempted for tax obligation in the initial years? If so, for how many years? 

While it is a good policy intervention to offer tax exemptions to new and promising industrial sectors, Bangladesh unfortunately has a number of examples where perpetual inefficiency is nurtured by continued fiscal incentives and protection measures for over five decades. Frozen shrimp, ceramics, and accumulator batteries are some examples. 

If tax exemption is withdrawn, what will be applicable tax rates? Or they would be subject to turnover tax in the form of a fixed amount taxed over declared revenues? In addition, as mentioned earlier, it is likely that revenue from ‘cash on delivery’ can remain under-reported, and forensic of all sales reports will be difficult to obtain for tax officials, paving the way for e-commerce companies to evade taxes. 

In short, if tax exemption is withdrawn, transparency in financial reporting, and governance of the tax administration must be assured. 

Proposition for a Separate Regulatory Authority: 

We hear that a new regulatory body will be set up to regulate e-commerce business in Bangladesh. 

If a new regulatory body becomes a necessity for the right kind of functioning of the e-commerce enterprises, then so be it. 

However, we need to consider whether that new body should be constituted by a fair representation of the government agencies, private sector, intelligentsia, and domain experts, or only by a few clueless administrative bureaucrats. 

What would be the regulatory and overseeing role of that body? Who would define the roles, responsibilities, and jurisdiction? How would they handle complaints and grievances? Would that not be overlapping with the roles of the Consumer Rights Protection Authority? 

Moreover, it may take a couple of years more for the proposed body to be formed, and who would regulate e-commerce in the meantime? How would e-commerce remain unhindered from too much and too many regulations, and administrative restrictions?  

Conclusion: The many questions raised here are to provoke intrigue and start dialogues amongst the stakeholders, because e-commerce is here to stay and will definitely shape not only the retail and wholesale commerce, but a wide array of other economic activities - distribution, transportation, employment generation, internet use, and will bring the necessary changes in vocational demand. Bangladesh should get ready for the future.

*Shaquib Quoreshi, Enterpriser, Business Intelligence Limited (www.bisntel.com). He can be reached at shaquib.quoreshi@bisntel.com 

**Representative photo by Laura Chouette on Unsplash