- Measure makes post-dated cheques or any other paper-based payment system a non-deductible expense for businesses
Pakistan’s latest measure in its push to adopt digital payments has drawn criticism from the business community that says a “culture change” cannot be implemented overnight, stressing that a phase-wise implementation would be more sustainable.
The reaction comes after the Federal Board of Revenue (FBR) quietly proposed the use of digital means to bring corporates further under the tax ambit, restricting them to make payments beyond Rs250,000 annually under a single account through any means other than digital in order to make the expense deductible.
The measure essentially makes all post-dated cheques or any other paper-based payment system a non-deductible expense for businesses.
Multiple members of the business and trading community Business Recorder reached out to said that the amendment, which has currently been put off till November, challenges the current transaction culture prevalent in the country.
“We understand that the FBR wants to include retailers/traders in the tax net, but we (corporate entities) are already in it,” one official, wishing not to be named, told Business Recorder. “We usually buy on credit, and the paper instrument is our guarantee of payment.
“How can we ask all our suppliers to make us a digital payment on the spot? This requires a complete overhaul of the system. More than that, it puts at risk the entire supply-chain system where payments are generally promised, but not made until the cycle of delivery/contractual obligations are completed. The post-dated cheque and all such instruments are used as a guarantee.”
For the past several years, Pakistan has been looking at ways to increase documentation of the economy. While it has taken a carrot-and-stick approach in its push to document, some measures have been more successful than others.
Many believe the measures have targeted those already in the tax net.
The latest measure doesn’t single out individuals or those outside the tax net. It only targets companies that are already part of the system and paying their due taxes. They do not have the habit of using open cheques
“Its an easy place to start (for them),” said another official. “The supply-chain system works on reputation. Some cheques that are unnamed change several hands before they’re finally entered (into the banking system). This income goes unnoticed.
“There is a need to stop this practice. Unfortunately, the latest measure doesn’t single out individuals or those outside the tax net. It only targets companies that are already part of the system and paying their due taxes. They do not have the habit of using open cheques.”
Meanwhile, experts say the mechanism of post-dated cheques also counters weak contract enforcement in the country. “No one trusts the system. It is necessary to have this (post-dated cheque system).”
In a letter, a copy of which is available with Business Recorder, addressed to Finance Minister Shaukat Tarin, former FBR chairman Shabbar Zaidi said that such provisions are required more in the non-corporate sectors.
“Even in company cases there is a huge credit market where post-dated cheques are used interalia being an instrument of security,” reads the letter.
“Elimination of this market practice is not considered appropriate at this stage.”
Another expert suggested that collaboration between the commercial banks and the national cheque clearing house under the aegis of the central bank would ensure provision of information regarding the payment, fulfilling the FBR’s need to have access to the money trail.