Asia’s e-commerce industry has scale, to say the least. The continent is home to more than 4.5 billion people. Roughly half of them, 2.3 billion, shop online.
In 2018, Chinese e-commerce giant Alibaba generated US$30.8 billion in sales during Singles’ Day, an online shopping festival in China held every November 11. It’s a made-up sales event for solo shoppers, on 11.11. The 2018 edition was the biggest one-day event in the short history of e-commerce.
Alibaba’s gross merchandise value within that 24-hour period almost doubled the combined revenue in the United States for Thanksgiving, Black Friday and Cyber Monday. Those three days brought in a total of US$17.8 billion in sales, according to Adobe Insights.
Alibaba of course owns and operates Taobao and its luxury-goods cousin Tmall in China. But it also owns a controlling 83% stake in their Southeast Asian equivalent, Lazada. Although in urban China e-commerce is already a way of life, the industry is also growing quickly in Southeast Asia.
According to Google and Temasek, the region’s Internet economy has reached an inflection point. It is expected to surpass US$240 billion by 2025, which is US$40 billion more than previous estimates. Of that figure, e-commerce is expected to account for $102 billion in gross merchandise value.
Growth tempered by regulation?
Of course, all that growth was bound to attract government attention at some point.
In China, the government passed a comprehensive e-commerce law in August 2018. Taking effect on January 1, 2019, it brought with it new measures to crack down on the sale of counterfeit and copycat merchandise. The targets are both retail companies that take their goods online and online shopping sites themselves.
The law also introduced new policies to tax cross-border daigousales. That’s a rapidly expanding sector that began when Chinese residents in countries like Australia bought locally made products from premium brands, sending them back to their families and friends in China. Shopping tourists would also make trips specifically to buy high-end goods to bring back. The “Birkin bag” from Hermès is a favourite since the handbags start at US$10,000, and regularly sell for many multiples of that. The word daigou literally translates to “buy on behalf.”
The practice has since evolved into a customer-to-customer enterprise between strangers. Chinese shoppers go to daigou shopping sites to order foreign products, and have them shipped back home for a fee. Observers believe the law will effectively shut down the grey daigou industry, forcing sellers to move to official cross-border channels for sales.
The inclusion of non-traditional e-commerce platforms, though, is bound to hurt the operators of micro-shops. These tiny e-commerce sites pretty much run without regulatory oversight, and form a market that was worth C¥523 billion (US$74 billion) in 2017.
On the one hand, the law could reduce the incomes of many small-time online sellers. Many operate shops as part-time jobs, selling goods that interest them such as gadgets, cosmetics or health and beauty products. By contrast, large online shopping sites like Alibaba and JD.com are better-equipped to handle the new law because they have already met many of its requirements. In fact, Swatch CEO Nick Hayek controversially said that Alibaba was doing a better job at removing fake items on its sites than Amazon.com.
On the other hand, the law also protects consumers by providing controls such as business licenses for sellers. For years, shoppers were at a disadvantage if they had problems with the product they purchased, since sellers have no physical store and do not have to offer warranty policies bound by legislation.
Southeast Asia to follow suit?
In Southeast Asia, e-commerce remains largely unregulated. But this could all change as the industry grows. Governments are highly likely to step in, mainly so they can collect taxes.
Singapore, home to Lazada, the region’s largest e-commerce platform, hinted in its annual budget in November 2017 that it was considering taxes on e-commerce sales. A Bloomberg survey of 12 economists arrived at the same conclusion, predicting a new tax for online vendors in the near future.
Malaysia is also reportedly weighing a similar tax. In 2017, the then-customs head Datuk Seri Subromaniam Tholasy said the government was considering amendments to its tax laws, specifically the Goods and Services Tax, to tax foreign companies offering digital services such as online selling in Malaysia. No such amendment has yet occurred, however.
How to tax e-commerce sensibly
While taxes are an inherent part of doing business, governments must also impose them without causing turbulence in the online-retail industry. On paper, forcing online merchants to sell via official e-commerce channels looks good. But this has to be done without creating a high barrier to entry for aspiring sellers. For example, lowering the tax threshold would immediately lead to higher compliance costs, hurting small-time sellers who aren’t ready for a general sales tax.
If regulations restrict e-commerce platforms, this would likely lead to an exodus of people who prefer to sell on Instagram and Facebook. Transactions on social media would be even harder to tax, as these can be done through personal profiles and private messages.Governments would be well advised to follow Indonesia’s example. While the government has announced that it is drafting new rules to impose VAT on online goods and services by offshore companies, the country’s tax office also said it would wait before recovering taxes from retail sellers on Indonesian online shopping sites. Instead, the government is opting to groom the ecosystem and wait for the industry to grow. By playing the long game, governments stand to collect larger taxes from a more mature industry in the future.