EDITORIAL: Undocumented economy or cash economy is big in Pakistan. According to the Collins English Dictionary, cash economy means “an economic system, or part of one, in which financial transactions are carried out in cash rather than via direct debit, standing order, bank transfer, or credit card.” It is important to note that ever since the documentation drive began in the country the informal cash economy is becoming even bigger. The regime of withholding taxes by the previous government and intent of grabbing them by the incumbent in its first year pushed the businesses further into informal economy. The present government therefore must display carrots that attract businesses, not sticks that dissuade them. In this budget, the new Finance Minister, Shaukat Tarin, has shown a desire towards retail Point Of Sale (POS) cash register system across 500,000 retail shops which would be connected to Federal Board of Revenue (FBR). That is an ambitious target and may not result in immediate revenue generation as stipulated in the budget. Digitizing and documenting the economy should be the top priority of government. The federal government alone cannot enforce documentation in letter and spirit without having other tax collection agencies and institutions on board as businesspersons fear that total taxation and compliance costs would increase disproportionately as compared to the carrots FBR is offering. That is why it has to be a collective and synchronized effort with full participation of all the provinces.
The other limitation is that the government is only targeting the retail side. Here the ‘universe’ is to be confined to Tier-1 retailers and wholesalers-cum-retailers. Currently, the government is covering textile and leather retail shops. This was efficiently implemented by Lahore-based businessman-politician Haroon Akhtar during the previous government’s last year. The cash registers of these stores are linked to FBR. Now new rules are in the offing, and after that grocery stores would also come into the ambit. The term ‘Point of Sales (POS)’ is different from ‘financial POS’ where credit cards are swiped. FBR is referring to an electronic sales register – already existing in most of Tier-1 retailers. FBR is aiming to attach an adapter to these registers which will electronically integrate the data with FBR. Textile and leather retailers are already connected. FBR plans to reach out to other sectors as well. The number of such retailers may be no more than 100,000. FBR can digitally connect all their transactions neatly. For reaching the number of 500,000, FBR must tap other segments. And the bigger gain could be by achieving FBR’s integration into integrated ERP (or other software) central systems of chains of stores through third party. This way, FBR can connect various vendors, wholesalers, and suppliers to a chain of stores.
Not only will this enhance the tax visibility of FBR and reduce the margin of error, it will also help the tax machinery identify false claims by wholesalers and suppliers. For businesses, the overall cost of compliance can be significantly lowered provided the FBR’s system integration effort also covers other tax and collection agencies. That is why having provinces on board is imperative and that would be a juicy carrot for businesses. Then connecting these to integrated systems of MNCs (multinational companies) and bigger local manufacturers is important. Companies like Unilever and P&G have integrated systems where they are mapping products at retailing levels. But the outreach is limited to 70,000-80,000 retail outlets and most of these would soon be connected to FBR through electronic devices. Afterwards, all FBR would need is to cross-check these data sets from the returns filed by distributors to identify gaps and collect them.
The bottleneck would come at the level of wholesalers where MNCs stop tracking products. It is a black hole and supply is mostly to Tier-2 retailers. Here, the informal manufacturers and suppliers come in to play too where end to end supply chain is unregistered and unstructured. The government should approach this problem by offering formal cheaper financing and easier compliance incentives for SME manufacturers/suppliers to get registered and become part of the FBR ingratiation chain. In case of imported goods, the new law on smuggling will come in handy. All the products consumed in Pakistan through formal channels have customized packing and their retail values are being recorded at import stage. The stage is set. The challenge is to catch the elephant in the room – wholesalers and distributors. Without reaching this segment, potential gains from retail point of sales machines are limited. And incentive to documentation is dependent on coordination with other provincial and federal bodies to ensure all are on the same page. If businesses have comfort of not being harassed by other agencies, they may like to document themselves to lower the cost of compliance. Last but not least, documenting the economy is critical to setting economic direction of the country.
Copyright Business Recorder, 2021