Tax administrations around the world are losing valuable tax revenues due to an opaque shadow economy which by safe estimates is one-third of the world economy. Consumers, deliberately or passively, buy goods and services without bills or receipts which ends up helping the business avoid VAT.
“Consumers do not have any incentive to receive invoices or receipts from businesses, since they ordinarily do not claim input tax credit for VAT or report it as an expense for their income tax. Hence if business sellers offer customers prices lower than their competitors on the condition of cash payment, customers are very likely to accept that offer. In this case, it is very difficult for the authorities to detect and curb cash transactions, since sellers and buyers have no conflicting interests and provide no cross‐checks” said the World Bank in a research paper.
Latin American countries offer a 2-3% rebate or discount on using digital instruments for retail transactions. Mexico has mandated that payments above 2000 pesos (PKR 150,000) must be paid electronically or through a banking channel. Kazakhstan and Turkey have made it mandatory to have POS/Electronic Fiscal Devices at Retail or Service Centers.
For business-to-business payments, such as manufacturers paying vendors and service providers, distributors paying manufacturing suppliers, retailers paying wholesalers, distributors and businesses paying service providers (shipping, logistics, warehousing) the correlation of payments with invoice, bilateral contract, incorporation status of the company is of significant value to the tax authorities. The contextual information that flows in parallel to the payment is what makes the transaction meaningful to the regulator.
Digital Financial Service providers, help the regulator in making the consumer and business invoice-based payments accessible and pristine. There is a definitive and demonstrable inverse relationship between digital transactions and the size of the shadow economy. Documentation of the economy is a primitive concept and must be replaced by the digitization of the economy.
In the last 10 years, progressive regulatory initiatives by SBP have enabled an environment where Payment Service Providers, Electronic Money Institutions, Branchless Banking, and FinTech providers are in the process of providing innovative use cases for better financial inclusion, ease of payments, and ensuring consumer protection. Similarly, FBR has in the past provisioned third parties to act on its behalf as auditors, bonded carriage, bonded warehousing, track and trace of container movement and taxable commodities to ensure better tax transparency and ease of filing returns.
Regulators are recognizing that the state has a limited capacity in an ever-changing business environment, where traditional rules of regulatory supervision and audit are outdated, inefficient, and almost always corruptible. FBR (Inland Revenue and Customs) Intelligence and Audit processes are like driving forward while looking at the rear-view mirror. Advances in local software development capabilities enable an environment where Risk Management Systems and real-time data movement and monitoring allow early warning and detection.
A licensing regime built around e-Intermediaries by FBR can help the Board in transcending its technological and resource constraints by creating allies in the local tech industry. A country that exports more than USD 1Billion, cannot be hamstrung by the government’s in-sourced software development capacity.
PRAL, NITB, NTL, and PITB are great public institutions that have done a lot to bring core digital infrastructure for government organizations but their speed to market, lack of innovation, resource constraint, below-market pay scale, archaic management style, and poor customer support operations limits their ability to respond to the agility the regulator needs. They cannot push e-Governance on their own and need allies in the market.
Those allies can be found in the tech industry working in the digital financial services space. A coordinated effort between SBP, FBR, SRB, and PRA will create an enabling environment for the tech industry to help in regulatory supervision. This enabling environment needs to be further helped by adoption schemes that rely on Deterrence (penalize-criminalize tax avoidance/evasion or non-contextual payments), Encouragement (incentivize digital transactions such as reduction in sales tax in nonperforming tax segments), and Normative Building (awareness, engaging religious scholars on moral hazards of breaking the covenant with the state).
Meaningful public-private partnership can only bear fruit if it is symbiotic as opposed to the master-slave procurement or licensing mechanism. Digital utilities are acting on their own for their business and product growth and regulators need to instrumentalize their digital capture for supervisory support.