Digital mode of payments: FBR examining proposal to further extend deadline

ISLAMABAD: To facilitate the business community, the Federal Board of Revenue (FBR) is examining a proposal to further extend the time period beyond November 1, 2021 for the corporate sector to switch over to the digital mode of payments.

It is learnt that keeping in view practical difficulties of the corporate sector, the FBR can extend the grace period, which would expire on October 31. If the proposal is finalised, the FBR chairman would take the final decision in this regard.

The FBR would have to extend the date for the applicability of the digital mode of payments.

KTBA calls FBR's digital payments measure 'anti-business, contradictory'

The FBR had allowed the corporate taxpayers a grace period of 40 days to switch over to the digital mode of payments with effect from November 1, 2021 under Tax Laws (3rd Amendment) Ordinance, 2021.

Tax experts, representatives of chambers and corporate sector told Business Recorder that the FBR has to clarify the definition of the “digital mode”.

Business community is not clear that what payment comes within the purview of “digital mode”.

The corporate sector is not ready to switch over to the digital mode of payments from November 1, 2021 in the absence of definition of the “digital mode”.

Tax expert Dr Ikram ul Haq informed that the 90 percent business in Pakistan is carried out through credit, hence, digital mode will be a big hassle and costly.

He said that the Auditor General and other provincial authorities are not digital. The government departments cannot pay digitally.

The federal and provincial governments as payers are defined as companies under the Income Tax Ordinance, 2001.

These federal and provincial governments should adopt digital mode of payment and private sector at the later stage. He questioned, “what about government owned corporate bodies. Are they digitised to pay and receive payment in this mode?”

Recently, Senate Standing Committee on Finance has out rightly rejected mandatory condition of the corporate sector to make payments through digital payment mode.

The Pakistan Advertising Association (PAA) and the Pakistan Business Council (PBC) have already raised serious issues in the practical implementation of digital mode of payment, which would dismantle existing business practice of using valid banking instrument i.e. post-dated cheques.

They strongly recommended that a precise and concise definition of the term “digital means” needs to be provided by the FBR to avoid ambiguity and interpretational issues.

Shift to digital mode of payments: FPCCI urges FBR to defer policy immediately

The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has strongly recommended to the FBR to defer policy of switching over to the digital mode of payments for four months period, as it is not possible for the business community to adopt it from November 1, 2021.

The security of post-dated-cheques, used as a means to ensure payments due against sales on credit, would not be available after switching over to the digital mode of payments. Experts said that the amendment has been made without completely understanding the business realities, local market dynamics and business systems in place and the intricacies of the payment setup in the ecosystem for corporate transactions.

If the objective is to promote digitalisation in the banking sector, the taxpayers adopting the same may be provided a tax credit or some benefit rather than penalising the companies in following prevalent and acceptable modes of banking for which the SBP is the sole regulator.

Another important factor that needs careful consideration is prevalence of digital payment channels, though over Covid period an uptake is seen and digital channels are being increasingly used, however, there is still a long way from becoming a preferred and reliable payment method where high value corporate transactions happen. Over the years it is expected this channel will become a robust and trusted means of payment.

However, at this point of time there are gaps in this ordinance and if implemented in posthaste can have serious negative impact and confusion in the business, banking and corporate world.

The misconception that cross cheques create financial inefficiency due to clearing period of 1-3 days is also not accurate.

Automated clearing has brought about efficiency and recordkeeping in the payment system. Abruptly removing such an efficient and trusted payment process from the industry will have severe counterproductive impact to the economy. On face of it, cross cheques/open cheques may not carry the “purpose” of the payment or its relationship with the invoice.

After careful consideration we are confident that quick improvement in processing the details can be incorporated within the cheque clearing transaction. Even today cheque clearing remains well documented and auditable process and recorded by corporates against the invoices paid.

Experts added that the cheque clearing system has served as the backbone of Pakistan’s payment system and more so for the corporate payments. It is unwise for the financial ecosystem and the economy to remove the backbone without having an available alternative available which has been tested and acceptability by the market of that system has been ensured.

It would be far easier to bring quick improvement in the current cheque clearing system to address any concern than to create completely new systems from ground up to facilitate a new ordinance where the corporate also has to de-learn its existing practices and adoption of the new practice in the market has to embraced.

The amendment will irreparably damage the cheque clearing services in Pakistan impacting hundreds and thousands of families involved directly or indirectly in this service sector, they added.

According to the FBR, the new ordinance has restricted the scope of payments via traditional banking channels on account of expenditures exceeding PKR 250,000 to taxpayers other than companies.

Consequently, clause (la) in section 21 has been inserted in the Ordinance, whereby, it is now mandatory for companies to make payments on expenditures exceeding PKR 250,000 through digital mode only.

The purpose behind this legislative enactment is to encourage digital payments and discourage traditional mode of transactions by the corporate sector in the first phase. Currently grey transactions (hiding/suppressing sales invoices and un-reconciled payments through open/revolving cheque or cash) are highly prevalent in businessvalue chains.

Almost 99 percent of all business transactions are on cash/cheque.

Moreover, 3rd party payments are highly prevalent in organised and informal sector whereby, businesses do not use their own bank accounts when making payment for supplies and tell their own customers/transaction based informal-investors to make direct payments to the principle supplier.

This is highly prevalent in supply chains and has become an accepted norm. Likewise, cross cheques create financial inefficiency due to clearing period of 1-3 days. Similarly, cross cheques/open cheques do not carry the “purpose” of the payment or its relationship with the invoice.

Despite many attempts to increase documentation of supply chains such as WHT and further tax, the number of unregistered distributors and retailers remains high whereby, sales are suppressed and due income tax is completely avoided.

Copyright Business Recorder, 2021