FBR: embracing the digital

For the first time, the FBR is keeping pace with the changes taking place on the tax landscape around the world. The question is: how far will the move be sustainable? I have reasons to believe that the new outfit is all set to accept the challenges of transformation and is serious enough to experiment.

The FBR has taken the first step in launching POS integration – though in a very hurried manner. Incubation is lacking and the question of the adequacy of the present law is yet to be answered. However, they have overcome the initial hurdles and now it is a matter of time when the much wanted digital tax system is enmeshed in the fragile tax system of the country.

The first step towards fiscalisation has also been taken but in a more methodical way. The much trumpeted ‘lack of political will’ has given way to ’politics of economic sustainability’. Fiscalisation when viewed in the international perspective is used to describe the progressive development of legal regulations for the use of electronic recording systems. This means that all the transactions of a till must be completely recorded and stored securely.

The basic principles of fiscalisation are the seamless recording of all sales data, as well as their protected storage to prevent manipulation, fight the grey economy, and report to the tax authorities. Even though the basic principles are the same in all fiscal countries, every country has its own set of rules that must be adhered to.

The pandemic has provided impetus to fiscalisation but maybe in a different way. The actual need for faceless trade has led to a faceless tax system. This year has proven a dizzying challenge for e-commerce and more so to the tax authorities in an ever-changing transaction laden e-commerce world. Businesses have shifted strategies, channels, and business models in an effort to thrive in a world changed by Covid-19. The changed landscape has posed an even bigger challenge to tax authorities around the world. It is still not clear how they are likely to respond to this elusive challenge.

‘Make Tax Digital’ is a call around the globe. But the question is: Are businesses ready for that? – especially in countries like Pakistan where basic digitisation is still a distant dream. For those responsible for tax compliance, the past year has been confusing at best. A startling 88 percent of the financial workforce has faced challenges with sales tax compliance, with most facing multiple challenges of transforming their corporate entities alongside keeping abreast with transformation in digital tax compliance.

The complexity of maintaining digital compliance is forcing businesses to think through new approaches. E-commerce can take place anywhere and anytime as people are now buying online more than ever before. While e-commerce sales have been an increasing source of revenue for businesses, this has posed a bigger threat for revenue authorities by opening up new avenues for evasion.

Is the FBR ready to accept this challenge? Apparently yes – but capacity constraints speak otherwise. They have to overhaul their collection machinery 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 tax obligations for each jurisdiction. Any automation software has to address the greatest number of foundational and functional needs of tax and financial professionals alike. Ideally, automation provides the key to addressing the biggest challenges of bridging the tax gaps, staying compliant, without sacrificing efficiency.

Several countries around the globe are introducing continuous transaction control –CTC – aiming to close their VAT gaps, increase revenue and have more control over their economic data. The FBR and provincial revenue authorities have to catch up with this movement. The current CTC landscape offers and analyses different scenarios involving new technologies and digitalisation 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 creation of a single national identification number. Could the Single Return Project be the ultimate answer?

Akin to this is another top trend- the SAF-T project which is the ultimate preparation for a fully integrated and automated faceless audit. Mandatory digital standard audit file-SAF-T is closely linked with CTC. FBR has to start work on that after which a mass audit could be digitally performed. Once the FBR has a CTC regime in place, the idea of pre-populated or pre-filled returns will not be hard to implement.

Digitalisation is moving us towards the future. As markets and businesses mature digitally, tax authorities should also feel the pinch of digitalisation. Tightening up digital security will be a challenge for the FBR. The credibility of the outfit will be at stake, especially for those who handle personal and sensitive data. Remember: all non-encrypted digital data is susceptible to hacking and the FBR has just tasted this in the recent past.

The FBR has to establish itself as a credible organisation and only through this reliability cap will it be in a position to provide end-to-end encrypted e-invoicing throughout the distribution process. All the arrows point in the same direction: towards faster digitalization and Pakistan may not stand out as an exception. At present, Pakistan is within the bracket of laggard countries in terms of market maturity. Before a full-throttle move towards e-invoicing, the FBR should seek businesses’ cooperation in preparing themselves for electronic data interchange (EDI). A phased threshold-based approach is one answer to this ticklish problem like India did and the UK is doing. It is estimated that by the year 2035 around 550 billion e-invoices will be generated annually.

A rapidly growing number of disruptive next-generation technologies have been shifting the world towards new digital solutions. The FBR should remember that the driving force is legislation. First give credence to this by bringing out comprehensive data protection laws and then ask for compliance. Adequacy of amendments in tax laws is not the answer as the private sector – as a market driver – is to be satisfied and taken on board. Initially, they were the drivers of e-invoicing and now governments are increasingly driving this change. At the heart of it, confronting tax evasion and the tax gap are the prominent accelerators for digitalising domestic invoice distribution and tax reporting. At the same time, tax authorities are also seeing value from more efficient processes, clear communication and a lower carbon footprint. Tax obligations nurture best where there is certainty of law.

The laws of the future must be certain if the FBR is to reap a full dividend for its digitalisation drive. Profligacy of tax laws is no answer, especially when you are data-driven and technology-focused. An increased use of relatively determined legal tools in law-making processes, and involving various actors instead of creating unnecessary shields allow making tax laws more dynamic, flexible, and adequate to the changing realities of everyday life. The new IR Code must contain an overarching futuristic vision encompassing the digital realities of the post-pandemic new world order. The chairman of the FBR should give a digital vision at least for the coming decade.

The coming few years are likely to witness a phenomenal change in the tax landscape. Digitalisation is an unstoppable force reshaping the businesses, finances and taxes around the world. What appeared first as a fledgling trend towards internal office and workflow automation has proved a firm foundation to a future in which external transactions are also highly automated and – if you know where to look – data is plentiful. The tax man/woman of today is not to look towards filing, s/he is to control the transaction and keep control over tax data instead of making faulty assessments mired with corrupt practices.

Tax administrations have to enact a variety of measures to get unparalleled visibility of business activity by tapping into these digitised business data streams – for example, in VAT, where the tax liability is assessed at the point of the supply stream and where value is added for a service or a product. Tracking the entire chain of transactions 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 need to be recorded securely and documented for reporting.

Blockchain maintains a complete, temper free chain of transactions which makes it particularly appealing for tracking tax data. Real-time tax data is increasingly important as tax authorities the world over are demanding real-time information from businesses in order to assess and support their tax liabilities. As blockchain becomes more prevalent, it is important to consider how it might impact VAT, and sales and income Taxes specifically, including impacts of documentation. It is high time the FBR moved further towards e-invoicing and blockchain documentation.

A possible consequence of moving to blockchain is that e-invoicing may require a digital footprint to be considered valid. The move will be a harbinger of an end to tax fraud and corruption in the system because blockchain allows sensitive and valuable data to be transferred accurately and securely. It will not be surprising that in the near future blockchain is embedded in day-to-day business processes and considered for tax applications across the world. But again the doubt: is the FBR ready for that? My vote is that yes they are.

The writer is a former chairman of the Punjab Revenue Authority and a VAT expert.