Retail sector: Growth Potential and constraints

Retail sector is considered as a driving force in any economy which stimulates economic
activities through backward and forward linkages. Retail in Pakistan contributes about 34% in
the services sector and employs around 16% of the labor force. It is the second largest employer
after agriculture and third largest sector in the economy. Additionally retail business is also
responsible for maximum skill development and value addition in the country. In the fiscal year
2018-19 retail sector contributed 18.9% of GDP with a tax share of 2.3% in the revenue, albeit
lower than its existing potential. A calculated estimate by Planet Retail, a global retail
forecasting firm, shows that the current retail market size is worth $152 billion in Pakistan with a
potential growth rate of 8% per annum. Under Sales Tax Act, 1990, and Income Tax Ordinance,
2001, Federal government has provided relief to retailers through a proposed scheme. Under the
proposed scheme those who file monthly returns on regular basis have to pay income tax rate of
1% of total turnover while customers will only pay 4% sales tax. Based on these rates FBR can
collect more than $5billion tax revenue from the estimated existing potential of retail sector.
However, in FY 2019-20 FBR collected Rs 1596 billion as sales tax with a total tax collection of
Rs 3998 billion. The above figures represent a vast deficit of revenue collection from retail
relative to its potential implying a nonresponsive behavior of government towards this sector.

Major part of the retail in Pakistan is informal and the penetration of organized sector is
estimated between 5-10%. An important reason for less than required growth pace of retail sector
is the existence of unorganized sector which hampers the adoption of innovative technology and
discouraging competition. Despite the dominance of informal sector, retailing format in Pakistan
is transforming the commercial landscape through the practice of global retail standards. Income
and household size are two core determinants of purchasing decision among the households.
Research studies show that Families with small size in large cities of Pakistan prefer to shop in
supermarkets while household with large family sizes like to shop at general stores. In addition
to that for many families in Pakistan shopping at large shopping malls and hyperstar markets is
similar to family outing. These changing trends in buying choices of consumers have led to the
emergence of modern retail outlets like departmental stores, chain stores, discount stores,
convenient stores, and hyperstar markets in the urban centers of Pakistan. The expansion of
modern retail outlets is an encouraging sign for the economic health of the country which can
result in creating job opportunities and attracting foreign retail businesses and hence the
dissemination of modern management practices among the local retailers.

Another growth feature of modern retail business is linked to the expansion of ecommerce
around the globe although Pakistan lags behind in this area but the trend is changing. The data
revealed by Pakistan Telecommunication Authority in July 2019 show an increased number of
online users with 72 million broadband subscribers and 70 million 3G/4G subscribers. State
Bank of Pakistan annual report 2017-18 illustrates a significant rise of local and international e-
commerce merchants growing by 93.7% to reach Rs. 40.1 billion in 2018. Interestingly, these
figures exclude post-paid cash on delivery payments which constitute 60% of the total value of
e-retail in Pakistan. According to an SBP estimate Pakistan can add $38billion in its GDP and
create 4 million jobs by increasing the use of digital financial services until 2025. An increase in
B2C and C2C e-business has been observed in recent years in Pakistan with a rise in e-commerce
portal like Daraz.pk and Yayvo.com is an indication of the development in consumer taste for
online transaction. Moreover, the use of social media has rapidly developed by both customers
and most of the retail outlets which further enhances the notion that e-commerce is taking off in
Pakistan.

It is worth mentioning that domestic retailers are trying to scale up their operations and create an
international demand for their products. Seven Pakistani brands were nominated for the first time
for the World Retail Awards in 2013 held in Paris and three of them were shortlisted. In addition
to that in 2017 some Pakistani retail businesses which included Gold Pearl Cosmetics, softwood
Textiles, Mehran Food etc. participated in Southern African International Trade Exhibitions in
order to motivate the demand for Pakistani retail products. With increased demand and
diversified choices, consumers in Pakistan have shown a great interest in new and international
brands in mega cities of Pakistan. And this has resulted in a large number of foreign retail brands
entering into the country as well as the birth of domestic modern retail outlets like Al Madina
Discount Store, Chase Up, Pioneer and so on. This trend will further intensify competition
between local and foreign retailers ensuing in the transformation of Kiryana stores and retard the
growth of informal sector in future.

Despite the existing growth potential in the organized retail sector, there are serious constraints
facing retailers in Pakistan especially from the tax machinery. Tax regime is totally skewed in
favor of informal sector thereby promoting its growth and making it tough for formal sector to
scale up and diversify. Complex procedures for tax compliance and the intimidation by tax
authorities to organized retailers make it hard for them to work by the book who are already
bearing the brunt for informal sector. Furthermore inconsistent tax regime exacerbates the
conditions for retailers to expand their businesses and move forward according to the planned
future strategies. Retailers claim that tax regime changes every six months to cater for the
increased demand for revenue while the development of retail businesses need at least
consistency of 3-4 years in tax regime.

Retail in Pakistan is still want of experienced, qualified, and trained manpower which has
hindered the rapid progress of retail industry and the adoption of modern management practices.
The sector has not received proper amount of attention from the officials or else it could have
contributed much more in the economy. There is an urgent need of a retail institution comprising
of relevant stakeholders patronized by government to trace the full potential of this sector and
work for the settlement of pressing issues confronting the sector. Under this framework the
management and manpower of retail sector must be trained by quality institutions and
experienced professionals. The stakeholders should also contemplate on the gradual
documentation of unorganized sector with the help of incentive-based policies and low-rate tax
schemes. The existing organized retailers should be encouraged and supported with convenient
and affordable tax policies so as to build the confidence of informal retailers on the tax
machinery.

The inaccessible financial market for retailers is a serious issue to be considered. Retailers in
Pakistan find it very difficult to garner sufficient credit for their businesses from financial market
and consequently they find it a futile effort to get listed on the stock exchange. Currently the
wave of pandemic has also hit the retail sector and for this reason Chain store Association of
Pakistan (CAP) has requested federal government to extend liquidity support to retailers for the
payment of salaries to their workers. Given the importance of this sector officials should help out
retail sector in this critical situation and devise a mechanism to make it easy for retailers to get
credit without any obstacles from the financial market.

Last but not least data analytics is the mainstay of retail growth and future planning process.
Without data in hand strategic future planning is impossible while the sustainability and
resilience to future shocks would be hard to tackle. Availability of data is an effective tool to
attract foreign investment along with the collection of sufficient revenue for government to
meets its fiscal needs. Concerned stakeholders must collaborate to design a system for the
collection and sharing of important data which can also help to promote e-commerce business in
the country.