Benefits of digitizing documents

The puzzle of documentation is not getting solved. The cash (or more broadly the informal) economy is growing despite government efforts to put curbs on it. Evidently, the government has to change its strategy. Sticks offered in the past five years or so are simply not working – the currency in circulation to broad money ratio is moving up, and in absolute terms, since July 2015, the cash in hands is up by Rs3.6 trillion (2.5 times) to reach Rs6.4 trillion.

That is too high a number. It is counterintuitive to see that increase when the digital means of transactions are increasingly available. There is a cost to handle, store and transport cash which is borne by the SBP and banks; but there is no cost incurred by buyers and sellers. Digital payment solutions are provided by private parties, and it’s neither free for buyers nor sellers. This lopsided incentive structure has to be corrected.

All the efforts by various governments and public institutions should have a core objective to incentivize digital transactions. This can be done by lowering tax rates on digital transactions. This can be done by making business to business (B2B) transactions mandatory digital beyond a certain threshold. The government needs to provide subsidy for digital payments. In the long run, it will save cost on cash handling.

In the past few years, documentation was approached from the angle of filers and non-filers, and making private players as withholding agents. This is effectively making direct taxes as indirect – its regressive in nature. There are complications in this WHT regime; businesses moved away from formal sector to avoid costs and headaches associated with these.

One argument is presented to abolish the Rs5,000 bill. It has merits; but abrupt demonetization can do more damage than good. There are learnings from the Indian case. The government and SBP can slowly work on reducing the Rs5,000 note in circulation and the SBP can stop issuing new notes. SBP can make it mandatory for banks to not give any Rs5,000 note on cash withdrawals, including ATMs. In this manner, slowly, the Rs5,000 note circulations will be thinned.

The government has managed to swiftly move Rs40,000 prize bonds out from transactions after making it necessary for people to register and has stopped issuing new bonds. A similar treatment is warranted for Rs25,000 prize bonds. The government can set up a timeframe of a few years to take Rs5,000 notes out of the system.

Meanwhile, simultaneous work is required on digital onboarding – especially in the B2B domain. That was not possible five years ago. Today the digital infrastructure is more ready. There are a number of fin-tech service providers and aggregators looking for a grab.

Concerted efforts are required from all the regulatory stakeholders to work on this. The key is to bring the payment transactions value chain from importer/supplier to manufacturer to distributor to retailer/wholesaler to consumer on the digital platform. The market size is estimated at $125 billion and there are four layers of these transactions. Today, most of these transactions are paper based – through cash or cheques/pay orders. A third party cheque is almost in a form of cash. It rotates.

The challenge is to make this chain documented by moving away from cash. There are changes required in the Sales Tax Act both by the federal and provincial tax authorities. The invoicing beyond a certain threshold should be digitized. Russia did it. Once it’s done, there is no need of monthly mandatory filing of third schedule.

However, that cannot be done in isolation. There are different federating bodies dealing with the value chain. FBR issues the NTN number. SECP is responsible for registering these firms while the SBP gathers information on the banking channel payments. All these governing bodies need to sit down together to make this transition possible. There should be a unified system where all the data can communicate and be contextualized.

The key is to contextualize the payments and other information associated with. Today, nobody in banks knows why the payment is made from one entity to the other. Raast can make this possible. Both financial and non-financial information can move on its rails. The key is: form a contextual layer over a corresponding payment.

There has to be incentives for digital payments. One inherent advantage is easier reporting for businesses. API-based system can enable tax authorities to gather real time information on transactions. This will reduce reporting time.

Lowering tax rates is a powerful tool. Tax rates in Pakistan are high and there is less compliance. Lowering the rates for digital transactions will bring marginal evader into the net. The Punjab Revenue Authority (PRA) move to lower the GST on restaurants is yielding good results. There is better compliance. The proportion of card transaction has increased from 30-40 percent to over 50 percent. The Punjab government is thinking to expand this incentive to other sectors.

FBR has to take the lead on it for doing this in supply chain transactions. The payment market is estimated at Rs6 trillion. This is growing because of sticks. Give them targeted carrots as well.

Copyright Business Recorder, 2021