Sri Lankan government wants to regulate e-commerce
File picture of start-up HIRE1
It was announced recently that the Sri Lankan government wants to introduce regulations for the local e-commerce industry. Sri Lanka is a country that relies on exporting various goods and services to generate income. Among this income is what we as a country have managed to propagate through the Information and Communication Technology (ICT) sector. According to the Central Bank’s 2015 annual report, IT related activities have seen a significant growth of 21.1 per cent in 2015, compared to just 9.3 per cent the year before. Statistically our country has managed to double its growth in terms of IT and the infrastructure required to facilitate it.
With the ever-growing developments that are happening around us, it is safe to assume that this growth is set to increase in the years to come. A significant portion of this growth can be accredited to e-commerce which has managed to change the entire way on how the economics of the country work. This whole revolution has managed to produce an ever-growing number of websites and mobile apps to enter into the market, essentially engaging in commercial transactions. This is not something which is only happening in Sri Lanka but across the world. These new entrants to the market have fundamentally changed how people transact. In short, they’ve disrupted the market.
So what’s the Sri Lankan government trying to do?
Recently, Finance Minister Ravi Karunanayake revealed that the government is planning to regulate businesses operating in the e-commerce sector. Essentially, the government wants these businesses to operate under the accounts of banks which are locally based. This is in light of the whole process where Sri Lanka is trying to come up with more flexible foreign exchange laws under the Exchange Control Act.
Minister Karunanayake also stated that the Tourist Hotels Association of Sri Lanka (THASL) has requested such regulations to be imposed considering the fact that budget hotel booking apps like AirBnB have entered the Sri Lankan market. With THASL representing many of the high-end hotels in Sri Lanka, it’s not too surprising that such a request was made. He made these statements at the 9th ‘Ease of Doing Business Forum’ organised by the Ministry of Finance.
What the Sri Lankan e-commerce industry thinks of it
ReadMe reached out to entrepreneurs operating in the e-commerce space to gather their idea as to what they thought about this news. We found that there is a mix of opinions amongst the local e-commerce companies regarding the issue. Not too surprising since the Minister only made a vague statement, without an action plan on how the regulations will be implemented. Some like Sachira Fernando, CEO of NicNac, were against the Sri Lankan government introducing e-commerce regulations. Speaking to ReadMe, he said,
The government should first come up with proper technologies which support local e-commerce entities such as PayPal, easy to integrate and secure payment gateways, which we don’t have at the moment.” This point was also echoed by Dhanika Perera, CEO of Bhasha and PayHere. He told ReadMe that that one of the main reasons why earnings from Sri Lankan e-commerce businesses go abroad is due to a lack of proper payment method available locally. This is why Dhanika says, he founded PayHere.
Sachira went onto state that the government should first pursue initiatives supporting the growth of e-commerce businesses. By bringing in legislation, to regulate them, it might take the industry backward. This is because it’s already a challenge to start an e-commerce business in Sri Lanka. To have it grow and expand into global markets is an even greater challenge. If the government doesn’t pursue initiatives to support these businesses before bringing in legislation, they could leave to more supportive startup ecosystems abroad.
“For AirBnB stopping operations in Sri Lanka is nothing. They will close down and they won’t care. Who is losing from it? Close to 7000 families who make a living by renting out their spare room. The sharing economy should be motivated, not put down like this,” he said. Sachira also pointed out that companies like AirBnB and even Uber actually promote entrepreneurship in Sri Lanka. If you rent a spare room or decide to use your car to give people Uber rides, then by definition, you’d be an entrepreneur. Should the legislation be poorly written, then it’s more likely that these local entrepreneurs would suffer, rather than the foreign companies.
We recently saw this happen in Dubai when the government regulations against Uber and other ride sharing services went into overdrive. Upon further analysis of these foreign e-commerce businesses, one could also argue that they face intense local competition. An example would be Uber, which faces competition from PickMe. To capture even a decent share of the market, they have to spend considerable amounts of money in Sri Lanka. These costs won’t be recovered overnight. Until they do, it’s unlikely these companies will see any great profits.
Meanwhile, it’s the local entrepreneurs building their jobs and earning money with these services that truly win. This is the disruption in the e-commerce industry that the sharing economy has created. As Shakya Lahiru Pathmalal – CEO of Takas says, speaking to ReadMe, “Disruption is a very good thing in the 21st century. It is how economies grow and how jobs are created.” As such, the legislation needs to be well thought out by the Sri Lankan government. If not it would stifle innovation.
The above point was also echoed by Kumar Melvani, CEO of MyDeal.lk when he too spoke with ReadMe. However, Kumar’s opinion differed from the previous entrepreneurs.
He believes that the Sri Lankan government trying to regulate the e-commerce industry might be a good thing. Why? Because this could potentially pave the way for consumer finance safety and other measures coming into place. However, Kumar went on to say that the government is only listening to one side of the story. That side is those of existing large scale corporations. The other side of the story, the side of the local e-commerce businesses has been ignored so far. Until the government does so, no form of legislation would be effective. If at all, it would be detrimental to the e-commerce industry.
Another titan in the e-commerce industry that share’s Kumar’s thoughts, is Dulith Herath – CEO and founder of Kapruka. He too believed that the government needs to listen more closely and get input from e-commerce businesses. This is why some of the local e-commerce businesses are looking at forming a collective organisation. According to Dulith, the purpose of this organisation would be to give the e-commerce industry of Sri Lanka a collective voice when it comes to matters such as this.
Dulith went on to state that he wasn’t against the Sri Lankan government introducing regulation to the e-commerce industry.
In fact, he welcomed it. This was because e-commerce businesses in Sri Lanka are currently registered as retailers. With the introduction of new legislation by the Sri Lankan government, it’s believed that e-commerce businesses will get proper recognition in the legal sphere. Additionally, Dulith disagreed with the sentiments Sachira shared with us. According to Dulith, it’s actually very easy for anyone to come to Sri Lanka and start an e-commerce business. Once the business is set up and has captured a significant share of the market, there’s nothing technically stopping them from taking all the profits they earn abroad. Whereas, in other industries, this is not the case.
For example, in the tourism industry, no foreign business can build a hotel in Sri Lanka without following certain strict regulations. The e-commerce industry doesn’t enjoy such protections. To ensure that local e-commerce businesses stand a fighting chance and have a level playing field, Dulith believes that regulation will be necessary. However, Dulith also agreed with the sentiments shared by Lahiru. He stated that the government should be cautious when drafting the legislation.
The biggest challenge the government could face would be with taxes. For e-commerce businesses, it might make sense to charge a smaller tax from them. But this would be a short-lived solution. It wouldn’t be long before the owners of brick-and-mortar shops decide to vent their frustration at the government. As such, it’d be best for the government to take a page from the US: charge a flat tax on both e-commerce sales as well as those from brick-and-mortar shops.
So what’s next?
Irrespective of where you stand on the Sri Lankan government regulating e-commerce, one thing is clear. The government must open a dialogue and listen to the needs of local e-commerce businesses. If the government fails to do so, then it’s likely that this legislation would end in disaster. Not only would the government run into a series of complicated problems but it could also stifle innovation. As a result, the legislation could be very detrimental to the entire industry.
Not only for larger well-known names like Kapruka, MyDeal.lk, Takas and NicNac but also the many local entrepreneurs using services like AirBnB. Should that happen, the local e-commerce industry will be significantly held back from growing.
As such, if the Sri Lankan government is serious about regulating e-commerce in Sri Lanka, we hope they’ll reach out to the local industry soon. If not, we might see many entrepreneurs close shop and some even leave Sri Lanka.