In the last few years, FBR’s focus (on the face of it) has been shifting towards digitization of the economy, including the supply chain digitization. The reform was initiated under the PTI government and later the PDM pushed it to the back burner. Now, the caretakers seemingly are serious again. This is evident by recent efforts by the FMCG industry to introduce digital invoicing and licensing integration.
However, FBR is attempting to hurry the process, and industry experts fear that this could backfire. One cannot undermine the importance of digitization of supply chain and its linkages with documentation of the economy and expanding the tax base. Turkey has done it very successfully, and the FBR committee is inspired by its trajectory. The point is to secure digital invoicing across the value chain, not only for the retailers.
In this regard, FBR has decided to advise amendments to the law to facilitate more licensed integrators in the system which shall pull digital invoicing across the supply chain, including in companies’ ERP systems, retailers, and POS machines, etc. The idea is to end the phenomenon of flying invoices, fake invoices, sales suppression, and fake input output claims.
All this would result in transparency and result in better income and sales assessment. This model is working well in Turkey – as the country has not only documented the economy and expanded the tax base but has also created a vibrant license integrator sector. Lately, India has also successfully digitized the retail invoicing system.
The PTI government was moving in this direction, but then PDM’s focus was on track and trace system. Track and trace is essential for production monitoring while digital invoicing is for revenue reporting. Both are essential and should talk to each other for better sales tax reporting, which is abysmally low in Pakistan, as 75 percent of sales tax is being reported by 359 entities and 95 percent is being collected by less than 5,000 entities whereas tens of millions business entities are operating in Pakistan.
There are huge gaps in value chains digitization, and these must be carefully filled in a phased manner to avoid disruptions and hiccups. Haste could be counterproductive.
There are numerous challenges in current FMCG digital Invoicing and licensing Integration – both invectives (carrot) and punitive (stick) measures are missing. There are no penalties for licensed integrators which potentially can result in those becoming complicit in revenue suppression. Then there are no incentives for registered entities, such as a 2-year audit amnesty, reduced sales tax, and tax credit adjustments on integration costs.
The rules for licensed integrator are too generic which may lead to the emergence of small firms without proven capabilities becoming licensed integrators. The regime lacks specificity in evaluating the capabilities of licensed integrators. These can potentially collaborate with unscrupulous operators in the flying/fake invoice industry.
Then there are issues related to individual integration as compared to hosted service. The issue is that the current integration mandates one-by-one integration for each registered entity which is to increase implementation costs. This could lead to inefficiency in integration processes. A better idea is to propose a hosted service model for centralized integration, reducing implementation burdens and enhancing licensee monetization.
The issue is that the 150Q notification applies to the entire supply chain simultaneously.It is better to do so in a phased manner -starting with manufacturers for the initial two years before extending to wholesalers and distributors.
Then there are questions on the technical capability of PRAL which is evident by poor Tier 1 integration experiences. The need is to assess and address technical shortcomings to ensure robustness and reliability in the integration process.
There is need to have capacity building for Directorate of Digital Initiatives which is currently missing. The technical and data analysis teams are missing while operating protocols are absent which are essential for coordination with field formations for effective utilization of captured data in sales tax audits.
The pricing of licensed integrators is market-determined which might create room for collusion between integrator and taxpayer. There is no technical assistance from private sector experts in program design, technical design, and governance mechanisms. FBR should collaborate with industry professionals for better program development and implementation.
It appears FBR is being pushed around by the IMF and SIFC to implement it fast. It’s good to have a resolve, but such reforms cannot be implemented successfully hurriedly. This can have serious blowbacks. Today, FMCG and big distributors are with FBR to implement it. However, if the cracks appear, the market would respond, and this would give room to non-documentation mafia to sabotage the whole reform process altogether.
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