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EDITORIAL: The government’s and State Bank of Pakistan’s (SBP’s) efforts to digitize money transactions to enable documentation of the economy and to create efficiencies in the payment system are commendable. A carrot-and-stick approach is being employed. The efforts to connect the Tier-1 retailers’ transactions to the FBR (Federal Board of Revenue) system through back-end POS (Point of Sales) machines in real-time is already paying dividends in terms of better sales recording, and to assess the true income of retailers and in turn, their suppliers. The scope should be expanded beyond Tier-1 retailers. The FBR has been empowered through an ordinance to implement a discontinuation of utilities and mobile phone connections. This can potentially bring many in the tax ambit through filing returns but in reality could create a lot of practical problems in instances where such businesses are tenants and not owners of the premises. Change of billing in the name of the tenants as against in the name of property owners has its own set of legal issues as at present utility companies hold the property owner liable for payment of bills and therefore if a utility service is disconnected due to non-payment of bill; the property itself is held to be delinquent and utility service will not be provided to that property irrespective of the name of the customer/subscriber. Concurrently, promotion of digital payment systems by SBP – through the issuance of full-fledged Electronic Money Institution (EMI) licences and implementation of RAAST—is making digital transactions seamless and interoperable. However, the issue of filing nil or negligible returns by more than half of the filers will not be resolved without assessing their income accurately. That is why expansion of POS machines beyond Tier-1 retailers is imperative. But there are many businesses operating in the value chain who are not retailer and POS machine solution is not workable for them.

The estimated supply chain transactions are about Rs 15 trillion while the documentation in the FBR is a mere Rs 4 trillion. Over two-thirds of economic transactions by businesses and retailers are not paying taxes or their incomes are not properly assessed by the FBR for tax purposes. FBR is proposing the use of digital means to bring them under the tax ambit. Under the new ordinance, FBR has restricted companies to make payments beyond Rs 250,000 annually under a single account through any means other than digital for making that expense deductible. This essentially will make post-dated cheques or any other paper-based payment system non-deductible expense for businesses. This amendment is probably not well-thought through by the FBR. The intentions might be pious but this can be destructive, as it may challenge the overall existing businesses payment and sales system. The businesses usually buy on credit from suppliers and pay by post-dated cheques to secure credit. This allows them time to make payments after selling those goods or services to the retailers or to the next vendor in the supply chain. Contract enforcement in the country is weak and if someone fails to comply with agreed credit terms in a business transaction, the legal course of action to resolve the issue is painstakingly long, and no one trusts it. The post-dated cheque mechanism works perfectly for the parties to transactions.

However, the problem the government’s tax machinery is facing is worth pondering too. The question is how to bring around two-thirds of businesses transaction in the tax ambit. It is nearly impossible to track and record paper-based instruments to tackle the problem. However, technology has made this possible to run and use big data effectively if the data is in a digital form. However, forcing all the transactions digitally in an abrupt manner could be counterproductive. The FBR and SBP are cognizant of this fact, and that is why implementation of this provision of the Ordinance has been delayed by 40 days. The idea is that businesses should start using digital channels. Although, there are data aggregators, fintech solution providers and banks offering their services in this realm but the lack of an alternative to post-dated cheques to secure sales on credit in the markets is a major stumbling block for the market towards adopting the FBR-stipulated digital payment system. The FBR is, therefore, required to consider amending this provision so as to introduce a hybrid system of paper and electronic/digital process that would satisfy its own intent with regard to catch transactions that escape the tax net. This can perhaps be achieved through collaboration between the commercial banks and the national cheque clearing house — National Institutional Facilitation Technologies (NIFT) — under the aegis of the central bank that would ensure provision of information regarding the name of the bank and branch where a payee deposited the cheque along with the account number and account name to the (payer) company that issued the cheque. The payer company would provide this information about the payee to the FBR in the Tax Withholding returns filed by the company on payments made by it through cheques. This would ensure that the market practice of sale and purchase on credit secured through post-dated cheques remains operational and the FBR is able to get the information that it needs to broaden the tax base, nab the tax evaders and unearth undeclared business accounts.

Copyright Business Recorder, 2021

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