EDITORIAL: There are multiple benefits of digitizing the economy, ranging from documentation to reducing cost of transaction. The State Bank of Pakistan (SBP) has been working on it since the Electronic Transactions Ordinance came into force. Later, the Payment System & Electronic Fund Transfer Act, 2007 forced the central bank to sharpen its focus on this area. The National Financial Inclusion Strategy (NFIS) introduced by government in 2015 was also a step aimed at enhancing usage of digital payments.
The mode of digital payment has been on the rise ever since the Easypaisa was launched about a decade ago. That is aimed at catering the market that was financially excluded at large. Payment System Operator/Payment System Providers (PSO/PSP) licences were issued in the last decade. These are the intermediaries to route, process, clear, switch and/or verify payment transactions. Such measures have opened up new avenues for larger financial inclusion across various segments of population and helped in increasing interoperability of payment systems. The SBP has also issued pilot Electronic Money Transfer (EMI) licences. There is now talk about digital banks. The latest development in this region is building of back-end plumbing infrastructure under ‘Raast’ to ensure interoperability. All these would have limited impact on digitization of the economy without having the right fiscal and non-fiscal incentives. The Point of Sales (PoS) machines’ penetration was around 50,000 in 2008. The number was not much different in 2020 from what it was in 2002 despite all the efforts on the policy side.
Last year, the SBP flipped the incentive structure of the spread between the card acquirer and the issuer. The major chunk of merchant discount rate (MDR) was for the issuer (card issuer bank) while the margin for POS machine acquirer was low. Last year, the SBP fixed the anomaly to enhance the margin of acquirer at the cost of issuer. However, the MDR is still hovering around 1.5 to 2.5 percent in Pakistan – much higher than other economies. Lowering the MDR is imperative for merchants to come on board.
In the last fiscal year, the Punjab government made an innovative move to lower the GST on services imposed on restaurants and beauty parlours at 5 percent for card transactions (credit and debit cards) as against 16 percent on cash transactions. Both the incentives for acquirer (by SBP) and demand from customers in Punjab for merchants to install PoS machine have resulted in growth in the PoS offtake within Punjab lately. This is just a start and a nudge from one provincial government. Others need to follow suit. Ironically, however, the federal government is charging federal excise duty (FED) on credit card transactions. That is simply absurd. On the one hand, the PTI government is pushing for documentation of the economy of which digital transactions are an important element, and on the other it is charging a penal tax on credit card transactions. FED is supposed to be applied for discouraging usage – just as it is kept high on tobacco and alcohol. There is absolutely no rationale for having FED on card transactions. The government must end this practice in the upcoming budget, if the desire is to boost digital transactions in an effective and meaningful manner.
Apart from that, the federal government and provincial governments should follow in footsteps of Punjab in incentivizing digital transactions in retail and supply-chain transactions. Tax collection, be it GST or income tax, is low in these segments. The need is to lower the tax rates for digital transactions to lure volumes to take this route. There are other benefits in terms of lowering cost of cash handling and transportation by SBP and banks. For the consumer, bank fee, float and other costs associated with cash would go down. It’s a win-win situation. All the government needs is to put in place the much-needed incentive structure.
Copyright Business Recorder, 2021