Thailand's cumbersome tax system has inhibited its growth of unicorn businesses. Photo: iStock

Thailand’s start-up scene is vibrant and youthful, full of energy and new ideas on how to develop the country using new technology.

But it’s lacking a unicorn, defined as a start-up valued at a billion US dollars, as a validation of the talent existing within the budding sector.

Amongst the ASEAN-5, the others being Indonesia, the Philippines, Malaysia and Singapore, all of which each have fostered their own unicorns, Thailand’s lack of one is striking.

Indonesia has four – two e-commerce marketplaces, Tokopedia and Bukalapak, a transport and logistics company, Go-Jek, and the travel booking platform, Traveloka.

The Philippines has the innovative Revolution Precrafted, which creates luxury pre-fabricated houses at lower cost than traditionally built homes.

Malaysia was the starting point for Grab, the transport and delivery service, now based in Singapore. And Singapore can lay claim to the headquarters of two e-commerce sites, Lazada and Shopee, as well as the co-headquarters of gaming company Razer, which is also based in San Francisco.

Online shopping site Lazada has taken Southeast Asia by storm. Photo: Facebook

So what is holding back Thailand’s start-up scene?

There are myriad market and regulatory reasons why start-ups might succeed or fail. But one hindrance often mentioned is Thailand’s archaic and burdensome tax system.

In 2018, the World Bank estimated that the average business in Thailand would need as long as 6.6 weeks of a 40-hour work week to file taxes, and require 21 separate filings.

This compares with Singapore, where it only takes on average 1.6 weeks to file taxes. Amongst OECD high-income countries, on average only 10.9 separate filings are needed.

‘The amount of paperwork we need to do to our tax filing is so high, it’s enough to make me regret setting up our business,” says Watt Iamsuri, co-founder of Pawductbox, a start-up which delivers toys and pet treats with an online subscription.

Pawductbox isn’t alone in its disregard for Thailand’s tax system. But they are in a minority of businesses who choose to file their taxes correctly.

The Electronic Transactions Development Agency, which conducts annual research into the e-commerce sector, estimated that there were more than 600,000 e-commerce businesses operating in Thailand in 2018.

A bak employee counts and stacks Thai baht notes. Photo: Facebook

However, just over 40,000 e-commerce businesses are registered with the Department for Business Development, suggesting that less than 7% of e-commerce businesses in operation in Thailand are registered business tax payers.

Many online businesses probably opt not to file taxes in order to save money, and not just to save time on the burdensome paperwork. Offline businesses, too, increasingly advertise on social media applications such as LINE, Instagram and Facebook, where regulation is loose and tax evasion is easy.

But illegal tax evasion has its own business costs. For one, it makes it more difficult for businesses to find legitimate partners, secure financing or scale up their businesses.

The government has made steps to ease the paperwork burden, reducing the time spent on filing. The Revenue Department has created an e-filing system, where businesses can file their taxes online.

But, much to the chagrin of the start-up community, the e-filing system still requires paper forms, both to upload onto the system and to store in hard copy.

“We’re an online business, but we have to rent a warehouse just to keep the paper copies of our receipts,’ says Rungvit Eurvivatsakul co-founder of e-commerce site 425 Degree, which sells accessories for electronic appliances. “This is crazy.”

The Thai government is doing what it can to move tax payments into the 21st century. In 2015, the Ministry of Finance launched the ‘National e-Payments Master Plan’, a four-stage plan to encourage the use of e-payments.

The end goal of the multi-year plan is to make the government’s payment system fully electronic – e-tax filing, e-tax payments, and e-social security benefits to be paid out by the government.

The Bank of Thailand has launched a nationwide e-payments system. Photo: Facebook

The National e-Payments Master Plan progressed well for a few years. In 2016, the Bank of Thailand launched a nationwide e-payments system, PromptPay, under the plan. PromptPay is an application which allows bank account holders to make free transfers on their mobile phones.

The system became hugely popular and was a boon for Thai e-commerce. No longer bound to the physical exchange of cash, retailers and customers could make transfers on their mobile phones with the click of a few buttons.

To encourage the use of the system, commercial banks handed out free display signs and money dolls for businesses to display their PromptPay QR codes in their stores.

But such enthusiasm for electronic payments may have already ground to a halt. In March of this year, an “e-Payments Tax Law” led by the Revenue Department, became effective.

Under the new law, financial institutions are required to hand over account details to the Revenue Department when financial accounts have more than 3,000 transactions in a year, or more than 400 transactions and 2 million (US$60,000) baht received in a year.

The law is a first step in monitoring the e-payments system, seeing who uses e-payments, and who is not tax compliant. The government intends that in future they will use the data gathered from this law to clamp down on illegal tax evasion.

This move has left e-commerce tax evaders – of which there are many – scrambling to find new ways to game the system. Far from progressing the plan to move Thailand’s payment system to the digital era, the ‘e-Payment Tax Law’ may well have stopped it dead in its tracks.

Walk around a shopping mall in Bangkok, and you will see evidence of the past popularity of the PromptPay system.

A Thai logs on Prompt Pay on a Bangkok Bank ATM. Photo: Twitter

Retail stores, particularly the smaller “mom and pop” stores, often have their QR codes from the PromptPay system on display. These are shown alongside the freebie display signs and money dolls handed out by commercial banks, as well as information on their Facebook, LINE and Instagram accounts.

However, ask the shopkeepers how they’d like to be paid, and they will ask for cash. With cash, shopkeepers can choose when to deposit money into their bank accounts, reduce the number of transactions their account receives and hence avoid detection under the e-Payment Tax Law.

Thailand’s addiction to the informal economy is widespread. In 2018, IMF economists estimated that Thailand’s informal economy is worth as much as 50% of GDP.

Compared with other ASEAN economies, Thailand’s informal economy is the largest as a proportion of GDP, with the likely exception of Myanmar’s deep and rich black markets.

In e-commerce, an industry which is easy to enter and exit, the proportion of those operating in the informal economy is higher than in other sectors.

The sector has great potential: ETDA estimates that it is growing as fast as 14% a year. Currently e-commerce sales make up less than 10% of total retail sales.

Ratchada Railway Night Market is seen during dusk in Bangkok, Thailand, February 8, 2018. Picture taken February 8, 2018. REUTERS/Athit Perawongmetha TPX IMAGES OF THE DAY
Aerial view of the Ratchada Railway Night Market in Bangkok. Many traditional Thai vendors have gravitated their businesses online. Photo: iStock/Getty Images

With a young, fast growing industry, the government has a chance to put it on a more solid footing by fostering the sector, and implementing regulations which encourage sustainable growth.

As the government makes changes to the tax system, e-retailers will be watching carefully. E-commerce is a sector where regulatory arbitrage can happen very easily. Retailers can easily hop from one system to another to find the place of lowest cost.

With an ambitious agenda such as the National e-Payments Master Plan, the government will need to clearly coordinate across its agencies as it develops and implements the scheme.

Thailand’s archaic tax system is creaking under the strains of the new economy and changes are clearly needed to spark local growth and keep pace with regional competitors.

Without regulatory coherence, different agencies will pull the e-commerce sector in different – and incoherent – directions.

In such a case, the government’s many agencies might act more ‘Frankenstein’ than unicorn-like. Made up of many different pieces, in incoherent ‘Frankenstein’ would lash out in different directions, killing potential unicorns in sight.

A business-friendly tax system and regulatory coherence amongst government agencies are critical to developing Thailand’s start-up ecosystem. The government needs to focus and proceed with these objectives in mind. Otherwise, Thailand may just end up killing its potential unicorns.

Pechnipa Dominique Lam is a researcher at the Thailand Development Research Institute (TDRI). The research for this article was sponsored by the Economic Research Institute for ASEAN and East Asia (ERIA), looking at e-commerce developments in Southeast Asia.

Join the Conversation


Leave a comment