By Dhananath Fernando
Originally appeared on the Morning
Time to modernise e-commerce taxation
Delays in delivery and regulatory confusion around e-commerce platforms have become a pressing concern for consumers and small businesses across Sri Lanka. As parcels pile up at Customs and prices surge unexpectedly, it is time to take a step back and understand the root of the problem – and the economics behind it – before rushing to find solutions.
Many wonder how e-commerce platforms like Temu, AliExpress, and eBay offer such a vast variety of goods at prices far below those in local retail shops. The answer lies in a concept known as ‘long tail economics,’ popularised by Chris Anderson in 2004.
Unlike traditional retail models that rely on selling large quantities of a few popular products, long tail economics thrive by offering a wide range of niche items in small volumes. Digital platforms are well suited for this, as they don’t bear the physical storage and shelf-space constraints that burden brick-and-mortar stores.
In conventional retail, stocking niche items is often unprofitable; they take up space and sell slowly. But online marketplaces can list millions of such products without significant overheads. Their costs are further reduced by economies of scale in shipping, especially when handling a large number of small parcels.
Until recently, Sri Lanka allowed such parcels to enter under a simplified flat-rate tariff system – typically around Rs. 850 per parcel – based on weight rather than the Harmonised System (HS) code. For low-weight or low-value items, some tariffs were not imposed at all.
This system made cross-border e-commerce accessible and affordable, and in doing so, empowered many Sri Lankan entrepreneurs and gave consumers access to a wider variety of goods at lower prices.
However, it also led to concerns. The simplified system was being exploited by some to bring in commercial-scale shipments disguised as personal use, thereby bypassing higher taxes. Customs officials and industry stakeholders raised questions about revenue loss and the legality of weight-based tariffs under the Customs Ordinance.
As a result, authorities moved to tighten the rules: now, all parcels must be declared by HS code and taxed accordingly, regardless of weight.
The unintended consequence? Long delays at Customs, consumer frustration, rising costs, and uncertainty for both consumers and e-commerce platforms. The system, simply put, is not ready to handle such granular processing at high volumes.
So what is the way forward?
The answer isn’t to block e-commerce; it’s to build a smarter system.
Create a legal framework for vendor tax collection
Globally, many countries have adopted a vendor collection model, where e-commerce platforms collect taxes at the point of sale and remit them to the authorities. But in Sri Lanka, this isn’t legally possible yet. First, the Government must establish a clear legal mechanism for platforms to collect tariffs and remit them to Customs or the Inland Revenue Department.
In implementing a vendor collection model, Sri Lanka can also introduce a minimum threshold, requiring only platforms that handle a certain number of parcels per month to participate in the scheme. This ensures that the system is manageable and initially applies to larger platforms with sufficient volume and technical capacity, avoiding undue burden on small or infrequent operators.
Integrate Customs tariff systems via API
Even if legally allowed, platforms must be able to accurately determine the applicable tariff at the time of purchase. That is where Application Programming Interface (API) integration becomes essential.
Most e-commerce platforms already tag products with HS codes. If Sri Lanka Customs’ Automated System for Customs Data (ASYCUDA) system is integrated with these platforms via API, tariff rates can be automatically calculated during checkout.
The buyer would then see the full landed price, including taxes, before paying. The platform would act as a collection agent and remit the amount to Customs, minimising leakage and increasing transparency.
Simplify and rationalise tariffs
At the heart of the issue lies another critical challenge: Sri Lanka’s tariff structure is overly complex. We apply Customs duty, PAL, CESS, and VAT, often with wildly varying rates depending on product specifications.
For example, tissue paper and wet wipes carry different rates, and the difference is even starker between wet wipes with fragrance and those without. This complexity makes compliance difficult and systems integration nearly impossible.
A long-term solution would be to rationalise and simplify tariffs, bringing rates down and harmonising classifications. Simpler tariffs would mean lower prices for consumers, less room for manipulation, and more efficient revenue collection. In fact, a digital tax model could bring in more transparent revenue over time.
Let the consumer decide
Some argue that e-commerce platforms threaten local manufacturers or offer low-quality goods. But quality is a judgement for the consumer to make. If an item is poor in quality, buyers won’t return to it.
Attempts to block platforms in the name of protectionism will hurt entrepreneurs who use these platforms and rob consumers of choice. A better approach is to let competition and transparency decide what thrives in the market.
The real issue isn’t e-commerce; it’s outdated regulation. With the right legal and technological framework, Sri Lanka can embrace global trade, empower local businesses, and ensure fairness in taxation. It’s time to stop punishing what works and modernise the system that supports it.