Digital mode of payment

Muhammad Awais

An amendment was introduced to the Income Tax Ordinance, 2001 (ITO) in September 2021, vide presidential ordinance by the now ousted government that requires corporate businesses to make payments of expenses through digital means, barring a few exceptions.

The term ‘digital means’ was defined in the Supplementary Finance Act, passed in January 2022, to include online portals, online interbank fund transfer services, card payments using POS terminals, Over the Counter (OTC) digital payment services and facilities, QR codes, mobile devices, ATMs, Kiosks and any other digital payment enabled devices. Where payments of expenses are not made through digital means, such expenses will be disallowed for income tax purposes, resulting in a higher tax cost for the businesses.

Prior to this amendment, all businesses, including companies, were required to make payments of expenses through banking channels that included crossed cheques, bank drafts, pay orders and any other banking instrument, evidencing the transfer of amounts from the business bank account of a payer. Within the banking space, therefore, the options were manifold and payments of expenses through digital means by companies were not mandatory.

Owing to the practical impediments that arose in the wake of previous government’s bulldozing through of the amendment and following reservations made by the concerned stakeholders, it was no surprise that the government had to extend the deadline for four consecutive months.

However, Federal Board of Revenue (FBR) was, subsequently, empowered to notify the date for operations of the foregoing amendment, which is pending to date. Due to poor drafting of law, it appears that, in the absence of notification by FBR, corporate businesses may not be required to make payments through banking channels at all.

It is evident that the decision of introducing the amendment was a hurried one, made without any deliberation on its consequences, or prior solicitation of input from its targeted stakeholders; a prudent mind would certainly question the need for such a hasty decision (particularly when there was no apparent push from the IMF on this count). As per the press release of the FBR, the amendment, among others, has been introduced with a ‘view to documentation of the economy, [to] capture the supply chains, and broaden the tax base,’ and to ‘encourage digital payments and discourage traditional mode of transactions by the corporate sector in the first phase.’

It is interesting to note that the FBR bases its case for digital payments on the increasing prevalence of third party payments in both the organized and informal sectors, with businesses choosing not to use their own bank accounts for business transactions.

However, the FBR has failed to substantiate how all these facts justify the call for further restrictions on the corporate sector, which is, arguably, the most compliant business sector in the country, and particularly when a whole range of conditions and restrictions aimed at increasing documentation of the economy, already apply to payments in this sector, including the requirement for the use of banking channels.

The FBR also argues that a financial inefficiency is created when payments are made through crossed cheques as it can take one to three days for the clearance of the cheque. But what the FBR fails to recognize is that this clearing period allows businesses, in particular those operating in the corporate sector, to plan their working capital requirements without incurring any additional financial costs.

Similarly, businesses use post-dated cross cheques to assure their suppliers of payments without bearing any additional finance costs in the form of payment securities.

Another important factor, seemingly overlooked while introducing the amendment, is the lack of confidence that small vendors and businesses have in online modes of banking. Vendors usually display a reluctance in sharing their bank details for payments, due to their skeptical view of internet banking platforms on account of lack of security (such as data breach in recent times at some of the leading banks of Pakistan).

In contrast, countries like India and the UK, where small vendors and businesses exhibit more confidence in the internet banking infrastructure, and which also have larger corporate sectors, have not imposed any requirement compelling businesses to adopt digital modes of payment. This is also despite a more accelerated shift to digital technologies and platforms in these countries.

Above all, the FBR itself admits that despite several attempts for enhancing the documentation of supply chains, such as through withholding tax and further tax (additional sales tax), the number of unregistered distributors and retailers remains high. Surprisingly, both these measures were also imposed on registered taxpayers while having more focus on corporate sector, meaning that an already compliant sector has had to bear additional costs for the State’s objective of broadening the tax base, which is actually the FBR’s job.

On that account, the compulsory restriction and regulation of payments through digital means also encroaches upon the fundamental right of companies to engage in free trade and business. In any progressive economy, companies exercise their free will in conducting their business activities, within the parameters prescribed by law of course.

However, in no progressive economy is a business entity’s activities, in the normal course of its business, micro-managed by the state. While the state may regulate business activities to prevent, as an example, the formation of cartels or monopolies or to ensure the general welfare of the masses where it deems necessary, it cannot indulge in arbitrary acts of high handedness that thwart the fundamental rights of a businessperson or entity. Considering also that several other such measures have proved futile in the past, the compulsion of digital payments is likely to further dent the confidence of existing and new investors.

Considering such impediments, Pakistani businessmen and investors prefer to invest in non-routine and informal business activities like real estate projects, where they can keep themselves out of stringent regulatory regimes and earn more profits. It is a dire need that taxation policies are formulated by independent bodies comprising of political leadership, the business community and tax professionals and whereby the role of the FBR is restricted to the extent of implementation of tax laws.

In a nutshell, people steering the tax policy need to be mindful of their past decisions, and their impact when planning for the future. Instead of forcing registered persons, particularly those in a compliant sector, to become the unwilling torch bearers of the drive to document the economy, fair and innovative solutions need to be explored that promote confidence of the unregistered and informal sector in the tax machinery to get themselves registered.
There is no denying that moving businesses towards digital payments will eventually significantly reduce the costs for the banking sector, but the hasty enforcement of such a measure may result in additional costs for businesses including increased transaction costs, credit payments, working capital constraints, etc. A prudent mind is left pondering whether introducing this amendment was aimed at benefiting the banking sector at the expense of the registered and most compliant base of the tax net.–Business Recorder