The top global trend at the moment is continuous transaction control-CTC aiming to close VAT gaps, increase revenue and have more control over data. CTC regimes however, is not uniform everywhere. So far, Italy is the only country that is departing from the EU VAT Law to introduce mandatory e-Invoicing in domestic flows.
Hungary and Spain, instead, have adopted an e-Reporting approach in derogation from the European Council as it does not mandate e-invoicing. France, on the other hand, is lingering with intermittent postponement of e-Invoicing.
These movements cannot pass us by. FBR and the Provincial Revenue Authorities have to catch up with these movements. CTC landscape offers and analyses different scenarios involving new technologies and digitalization of business processes.
Is FBR ready for this game changer — “VAT in Digital Age” which includes CTC regime, the VAT treatment of the platform economy, and creation of a single national identification number? Could the Single Return Project be the ultimate answer? Mandatory digital standard audit file-SAF-T is closely linked with CTC paving way for a fully integrated and automated faceless audit.
FBR has to start work on that after which a Mass Audit could be digitally performed. Pre-filled or pre-populated returns are also being pursued vigorously paving the way for elimination of the middleman. This will bolster ease of doing business. Once FBR will have CTC regime in place, the idea of pre-populated or pre-filled returns will only be a couple of key strokes away.
In a digitally matured business world there lies a transformed wide spectrum of digital compliance like sustainability, security, compliance, control, resilience and automation. Tightening up digital security will be a challenge for FBR.
FBR — making tax digital and beyond—I
In the absence of any comprehensive data protection laws one would be inclined to think towards the smoky digitalization only for a part segment of the tax jurisdiction.
The credibility of the outfit will be at stake especially for those who handle the personal and sensitive data. Remember all non-encrypted digital data is susceptible to hacking and FBR has just tasted this recently. FBR has to establish itself as a credible organization and only through this reliability cap would they be in a position to provide an end to end encrypted e-Invoicing throughout the entire value chain.
So moving towards CTC and e-Invoicing is safer when you establish yourself as a reliable service provider. FBR in any case has to find the essential answer of market maturity which varies significantly from business to business and most countries are in some form of transitional period.
But all the arrows point in the same direction: towards faster digitalization and Pakistan may not stand out as an exception. At present, Pakistan is within the bracket of Laggard countries in terms of market maturity.
Before a full-throttle move towards e-Invoicing, FBR should seek businesses’ cooperation in preparing themselves for the electronic data interchange-EDI. A phased threshold based approach can be adopted like India did and the UK is doing in MTD -“Making Tax Digital”.
Disruptive next-generation technologies that are growing at a fast pace have been shifting the world towards new digital solutions. Government Legislation is the driving force behind it. First give credence to this by bringing out comprehensive data protection laws and then ask for the compliance. Profligacy of tax laws is no answer especially when you are a data-driven organization.
As a market driver the private sector is to be satisfied and taken on board. Tax obligations nurture best where there is a certainty of law. Uncertainty and fragmentation in tax laws are colossal problems.
The laws of future must be certain if FBR is to reap a full dividend for its digitalization drive. An increased use of relatively determined legal tools in law-making processes, and involving various actors instead of creating unnecessary shields allow making tax laws more dynamic, flexible, and adequate to changing realities of everyday life.
The new IR Code must contain an overarching futuristic vision encompassing the digital realities of the post-Pandemic new world order. The Chairman FBR should unveil his digital vision, at least for the coming decade.
The coming few years are likely to witness a phenomenal change in the tax landscape. Digitalization is an unstoppable force reshaping the businesses, finances and taxes alike. The taxman of today is not to look towards filing, he is to control the transaction and keep control over tax data instead of making faulty assessments mired by corrupt practices.
Tax administrations have to enact a variety of measures to get unparalleled visibility of business activity by tapping into these digitized business data streams. For example, in VAT, where the tax liability is assessed at point of the supply stream and where value is added for a service or a product. Tracking the entire chain of transactions would make it much easier to ensure accuracy and required compliance. It is a known fact that tax obligations are triggered by key events that need to be recorded securely and documented for reporting. Blockchain could be the answer.
As the blockchain becomes more prevalent, it is important to consider how blockchain might impact taxes specifically, including impacts of documentation. It is high time that FBR should move further towards e-Invoicing and blockchain documentation.
The move will be a harbinger of an end to tax fraud and corruption in the system because blockchain allows sensitive and valuable data to be transferred accurately and securely. But again the doubt: Is FBR ready to go for that? My vote is for them — yes they are.
(The writer is former Chairman Punjab Revenue Authority and a VAT expert)
Copyright Business Recorder, 2022