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EDITORIAL: The Tax Laws (Third) Amendment Ordinance was issued on Thursday 16 September with one particular clause compelling corporate taxpayers to switch to digital mode from account payee cheques, for all payments over 250,000 rupees (per account) in a year. Hitherto Account Payee Cheques (normally referred to as Crossed-Cheques) had been the FBR’s preferred mode for payment by taxpayers to settle their business transactions to discourage cash transactions. In fact companies are obliged under the income tax law to settle their payment obligations through account payee cheques, pay orders and drafts. There is however, no bar on settlement through digital mode either.

The provision in the instant amendment ordinance compelling companies to switch to digital payments and desist from settling payment obligations through account payee cheques under pain of penalty has hit the business circles like a bolt out of the blue. They are astounded that the Federal Board of Revenue (FBR) could even contemplate such a measure without prior consultation with trade and business and that FBR could be so ignorant of the way business is conducted in the country. Nearly all sales from industry/importers to wholesale markets and then to retailers are on credit that is secured against Post-Dated account payee cheques by the seller at each stage. If companies are debarred from making payments through cheques beyond the stipulated amount of rupees 250 thousand in a year, an amount that is peanuts in the context of the value of transactions and the ever-depreciating value of the rupee coupled with inflation, then it will trigger a collapse of business system of credit in the markets.

With the advent of digital technology an increasing amount of business transactions is now being made through the digital mode. The amendment is widely and plausibly seen as a blatant, albeit a severely flawed decision, to increase the revenue without taking account of its negative impact on business activity in the country and the resulting uproar, that should have been expected, led the Federal Board of Revenue (FBR) to issue a press statement two days later - on a Sunday - giving the corporate sector a grace period of 40 days to switch to the digital mode with effect from 1 November 2021.

Business Recorder contacted the Chairman FBR who stated that FBR has not suspended this provision nor issued any income tax circular in this regard (a circular or a suspension that would entail issuance of an SRO that cannot be issued in any case without Cabinet approval) and added that the FBR has the legal authority to grant a grace period to facilitate the corporate sector. The FBR rationale for this decision is to bring the ‘grey’ transactions prevalent in business chains into the tax net; however, ignored is the fact that while such transactions are associated with the parallel informal sector that is overwhelmingly non-corporate, whereas the corporate sector is by and large tax compliant and files its returns regularly and on time. Thus this measure reflects not only a lack of knowledge of the prevalent business model in this country but also reflects the tendency of the FBR to pursue strategies to the detriment of the corporate sector to achieve what it is unable to do in the non-corporate arena without realizing that such policies may render corporatization an unattractive proposition. One would hope that the Cabinet does take up this matter at its earliest as it is imperative that the compliant corporate sector must not be penalized just because the government is under pressure to raise revenue. Picking the low-hanging fruit instead of reforming the tax structure that remains unfair, inequitable and anomalous is, unfortunately, FBR’s approach to increasing revenues.

The third amendment ordinance has also raised the ire of traders who have threatened strike action from 29 September unless mitigating measures are not announced. The reference is to the new FBR power to discontinue gas and electricity connections and disabling mobile phones of those who are either not registered or if registered not integrated in terms of Section 3 (9A) with respect to sales tax. As per the President of All Pakistan Anjuman-i-Tajiraan Muhammad Naeem Mir, “traders reject the third amendment ordinance as it is complicated, adds to the penalties on retailers under point of sale system (inclusive of the discretionary powers of the FBR officials to register anyone under point of sale), and registration under the tax laws”. In addition, the imposition of additional advance tax at rates from between 5 to 35 percent on professionals using domestic rate of electricity and extra tax rates on industrial and commercial gas and electricity connections were also rejected by traders.

How ironic it is that three years into its tenure the PTI administration seems to be going the same route as its predecessors – focusing on generating revenue by picking low-hanging fruit that would have negative implications on business activity in the country rather than on restructuring the tax sector to ensure that revenue may decline during the first few years but in times to come the system would strengthen sufficiently to raise revenue through widening the tax net.

Copyright Business Recorder, 2021

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