The opinion piece originally appeared in the 2022 September Issue of New Business Age Magazine. Please read the original article here.
The shift towards online businesses has not been new in Nepal. The COVID-19 pandemic especially helped increase this movement while social media marketing had already been a common thing even before the pandemic. The pandemic has forced even traditional businesses to go online as they searched for new ways to reach consumers. Moreover, online businesses can be set up at a relatively low or no cost, and it is easier to market using social media. Therefore, online businesses became attractive to new entrepreneurs using social media to sell retail goods or services. Most of these new businesses, however, were not registered.
The problems in business registration are, however, not new. According to the latest available National Economic Census 2018, almost half the business establishments are unregistered. Two out of three businesses operated by a single person are not registered.
Then why are we seeing a large number of unregulated establishments, especially small-scale ones? There are various reasons. First, it is a strenuous task to register a business in Nepal. The World Bank ranks Nepal at 94th overall in its Doing Business Rankings in 2020, but 135th in starting a business and 151st in enforcing contracts. These are critical for small businesses.
Secondly, the government has not been able to offer substantial benefits (or impose costs) to warrant registering a business. Regular processes that need to be easy and fast, such as registering a business and paying taxes, come with cumbersome bureaucratic hassles without offering any particular benefits. Additionally, the government’s ability to impose contracts in case of any issues between contracting parties is slow. The people then see no reason to seek help from the government. On the flip side, most unregistered businesses do not face any consequences for not registering.
The third reason is that government regulation is slow to catch up, especially for online businesses. For example, when ride-sharing services like Tootle and Pathao started their services in Nepal, they had no exact regulations to operate under. Riders were arrested by the police as existing laws did not allow private vehicles to provide ride services. But, protests from consumers as well as service providers have forced the government to allow ride-sharing even in the absence of legal provision even though it has been more than five years since these services came into operation.
Even registered small businesses have been known to avoid paying taxes by showing a negative balance sheet. Customers have also contributed to the informal economy by not necessarily demanding VAT or PAN bills from the businesses. This has encouraged newly formed online businesses to operate without staying registered.
A glimpse of a genuinely free market economy in the country can, however, be seen. Albeit informal, the online market has been known to be relatively easier to purchase from, allowing consumers to compare prices across different sellers and choose one that suits them while paying relatively lower costs, all from the comfort of their homes. Sellers are compelled to sell better goods as setting up shops becomes easier through online mediums, and comments and ratings (reviews) in online mediums are viewed by a large number of potential future consumers. These act as incentives for sellers to improve customer service, sell better goods, try and create their niche, and perform better overall.
The government has remained a mute spectator, allowing sellers to provide goods cheaper to consumers while maximising profits. This type of informal arrangement is not covered by the government protection mechanisms for consumer safety. Of late, however, the government has tried to rectify this and drafted an E-commerce Bill intending to create, regulate, and facilitate online trade in Nepal. The first of its kind bill dedicated to e-commerce focuses on consumer protection. The question of allowing a truly free market without government intervention remains. The government needs to do more for both online businesses and consumers to remove the hassles in business registrations and taxes. While the E-commerce Bill is a step in the right direction, it has still not gone through the parliament.
The government’s slow and unresponsive nature, procedural challenges to reduce steps in business registration, and the high tax slabs will always hinder businesses from entering the formal fold of the economy. Questions of the role of government in only acting as an insurer of contracts rather than directly intervening in the market will also remain. Regardless of the arguments, the registration of businesses (online or otherwise) will help the government plan better and invest in easier access to resources for both sellers and consumers.