RBF: going digital
For the first time, the RBF keeps pace with the changes taking place in the tax landscape around the world. The question is: how sustainable will the move be? I have reason to believe that the new team is ready to accept the challenges of the transformation and is serious enough to experiment.
FBR has taken the first step in launching POS integration – albeit in a very rushed way. Incubation is lacking and the question of the adequacy of the current law remains unanswered. However, they overcame the initial hurdles and it is only a matter of time when the much sought-after digital tax system becomes entangled in the country’s fragile tax system.
The first step towards taxation has also been taken, but in a more methodical way. The vaunted “lack of political will” has given way to a “politics of economic sustainability”. Taxation, viewed from an international perspective, is used to describe the progressive development of legal regulations for the use of electronic record systems. This means that all cash register transactions must be fully recorded and stored securely.
The basic principles of taxation are the transparent recording of all sales data, as well as their protected storage to prevent manipulation, fight against the underground economy and report to tax authorities. Even though the basic principles are the same in all tax countries, each country has its own set of rules that must be followed.
The pandemic has given impetus to taxation, but perhaps in a different way. The real need for faceless trade has led to a faceless tax system. This year has proven to be a dizzying challenge for e-commerce and even more so for tax authorities in an ever-changing transaction-laden e-commerce world. Companies have changed their strategies, channels and business models in an effort to thrive in a world disrupted by Covid-19. The changing landscape has posed an even greater challenge to tax authorities around the world. It remains unclear how likely they are to respond to this elusive challenge.
“Make Tax Digital” is a worldwide call. But the question is: are companies ready for this? – especially in countries like Pakistan where basic digitization is still a distant dream. For tax compliance officers, the past year has been confusing to say the least. A startling 88% of the finance workforce has faced sales tax compliance issues, with most facing multiple challenges in transforming their corporate entities while keeping up with the times. current of digital tax compliance transformation.
The complexity of maintaining digital compliance is forcing businesses to think about new approaches. E-commerce can take place anywhere and anytime as people are shopping online more than ever. While online sales have been a growing source of revenue for businesses, it has posed a greater threat to tax authorities by opening up new avenues of evasion.
Is the RBF ready to take up this challenge? Apparently yes – but capacity constraints speak otherwise. They have to overhaul their collection machines in a completely new way. This gigantic transformation requires the replacement of a traditional tax collector with someone who is well equipped with AI and BI tools. Future tax compliance will revolve around compliance software. It is important that the compliance software stays up to date with the tax obligations of each jurisdiction. Any automation software should meet as many of the basic and functional needs of tax and finance professionals as possible. Ideally, automation is the key to tackling the biggest challenges of closing tax gaps, staying compliant, without sacrificing efficiency.
Several countries around the world are introducing Continuous Transaction Monitoring (CTC) in an effort to close their VAT loopholes, increase revenue and gain more control over their economic data. The FBR and the provincial tax authorities must catch up with this movement. The current CTC landscape offers and analyzes different scenarios involving new technologies and digitization of business processes. Is the FBR ready for this game-changing VAT in the digital age? The project includes the analysis of the CTC regime, the VAT treatment of the platform economy and the creation of a unique national identification number. Could the unique return project be the ultimate answer?
In the same vein, there is another major trend – the SAF-T project which is the ultimate preparation for a fully integrated and automated faceless audit. The mandatory digital standard audit file-SAF-T is closely related to the CTC. FBR needs to start working on this, after which a mass audit could be done digitally. Once the FBR has a CTC regime in place, the idea of pre-filled or pre-filled returns will not be difficult to implement.
Digitization takes us forward into the future. As markets and businesses mature digitally, tax authorities should also feel the effects of digitalization. Strengthening digital security will be a challenge for the FBR. The credibility of the outfit will be at stake, especially for those handling personal and sensitive data. Remember: all unencrypted digital data is susceptible to hacking and the FBR has just had a taste of it in the recent past.
The FBR must establish itself as a credible organization and only through this ceiling of reliability will it be able to provide end-to-end encrypted electronic billing throughout the distribution process. All arrows point in the same direction: towards faster digitization and Pakistan may not be an exception. At present, Pakistan is in the category of lagging countries in terms of market maturity. Before moving full throttle to electronic invoicing, the FBR should seek the cooperation of businesses to prepare for Electronic Data Interchange (EDI). A step-by-step approach based on thresholds is an answer to this delicate problem as India has done and the UK is doing. It is estimated that by 2035, approximately 550 billion electronic invoices will be generated each year.
A growing number of next-generation disruptive technologies have moved the world towards new digital solutions. RBF must remember that the driving force is legislation. First give credence to this by building comprehensive data protection laws, then demand compliance. Adequacy of changes to tax laws is not the answer because the private sector – as the engine of the market – must be accommodated and taken into account. Initially, they were the drivers of e-invoicing and today governments are increasingly driving this change. At the heart of it, the fight against tax evasion and the tax gap are the main accelerators for the digitization of the distribution of national invoices and tax reporting. At the same time, tax authorities also see the value of more efficient processes, clear communication and a reduced carbon footprint. Tax obligations develop best where there is legal certainty.
The laws of the future must be certain if the FBR is to reap a full dividend for its digitization campaign. The profusion of tax laws is not an answer, especially when you are data and technology driven. An increased use of relatively determined legal tools in legislative processes and the involvement of various actors instead of creating unnecessary shields make tax laws more dynamic, flexible and adapted to the changing realities of daily life. The new IR code must contain an overarching futuristic vision encompassing the digital realities of the new post-pandemic world order. The president of the FBR should give a numerical vision at least for the decade to come.
The next few years will likely see a phenomenal change in the tax landscape. Digitization is an unstoppable force reshaping business, finance and taxation around the world. What first appeared as a burgeoning trend towards automating internal offices and workflows has proven to be a solid foundation for a future in which external transactions are also highly automated and – if you know where to look – the data is abundant. Today’s tax practitioner should not look to reporting, they should control the transaction and keep control of tax data instead of making misguided assessments mired in corrupt practices.
Tax administrations need to adopt a variety of measures to achieve unparalleled visibility of business activity by leveraging these digitized business data streams – for example, in VAT, where tax payable is assessed at the point of the supply stream and where value is added for a service or product. Tracking the entire transaction chain would make it much easier to ensure accuracy and required compliance. It is a known fact that tax obligations are triggered by key events that must be securely recorded and documented for reporting.
Blockchain maintains a complete, zero-settlement chain of transactions, which makes it particularly attractive for tracking tax data. Real-time tax data is increasingly important as tax authorities around the world demand real-time information from companies in order to assess and substantiate their tax obligations. As blockchain becomes more widespread, it is important to consider its impact on VAT, and specifically sales and income taxes, including documentation impacts. It is high time for the FBR to move further towards electronic invoicing and blockchain documentation.
A possible consequence of moving to blockchain is that e-invoicing may require a digital fingerprint to be considered valid. This decision will be the harbinger of an end to tax evasion and corruption in the system, as blockchain allows sensitive and valuable data to be transferred accurately and securely. It will come as no surprise that in the near future, blockchain will be integrated into day-to-day business processes and considered for tax applications across the globe. But once again the doubt: is the FBR ready for this? My vote is that yes, they are.
The author is a former chairman of the Punjab Revenue Authority and a VAT expert.