EA Report
ISLAMABAD — Federal Board of Revenue (FBR) has given grace period up to November 1, 2021 to the corporate taxpayers for switching over to the digital mode of payments under Tax Laws (3rd Amendment) Ordinance, 2021.
FBR has also approached the State Bank of Pakistan (SBP) to issue necessary instructions to operationalize this provision of law, as well as, encourage the banking sector to facilitate the corporate businesses to accomplish digitization within the given time period, FBR release issued on Sunday to clarify the relevant clauses of the Tax Laws (3rd Amendment) Ordinance says.
Officials said That FBR would convene a meeting with the State Bank of Pakistan (SBP) on Tuesday to work on modalities.
The FBR vide the Tax Laws (3rd Amendment) Ordinance, 2021, (the New Ordinance) has introduced significant changes to the Income Tax ordinance, 2001 with a view to documentation of the economy, capture the supply chains, and broaden the tax base.
Government introduced seven new measures for broadening the tax base through the Tax Laws (Third Amendment) Ordinance, 2021.
The new Ordinance has restricted the scope of payments via traditional banking channels on account of expenditures exceeding Rs.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 Rs.250, 000/- through digital mode only.
Under new Section 114B of the Income Tax Ordinance 2001, the Board shall have the powers to issue income tax general order in respect of persons who are not appearing on the ATL but are liable to file return under the provisions of this Ordinance. The income tax general order may entail consequences for the persons mentioned therein: Disabling of mobile phones or mobile phone SIMs; discontinuance of electricity connection; and discontinuance of gas connection.
However, expenditures on account of utility bills, freight charges, travel fair, and payment of taxes and fines would continue to be admissible either paid in cash or traditional banking instruments. 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.
The board or the commissioner having jurisdiction over the person mentioned in the income tax general order may order restoration of mobile phones, mobile phone SMS and connections of electricity and gas, in cases where he is satisfied that the return has been filed; or person was not liable to file return under the provisions of this Ordinance.
Explaining the rationale behind the said provision, the FBR said that it is pertinent to mention that currently grey transactions (hiding/suppressing sales invoices and un-reconciled payments through open/revolving cheque or cash) are highly prevalent in business value chains. Almost 99% of all business transactions are on cash/cheque. Moreover, 3rd party payments are highly prevalent in organized 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 principal supplier.
According to the Tax Laws (Third Amendment) Ordinance, 2021, in case of the online market place facilitating the sale of third-party goods, the liability to withhold tax on taxable supplies of such party at the rates specified in the Eleventh Schedule to this Act, shall be on the operator of such market
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, FBR maintained.
However, owing to lack of digital readiness by some corporate taxpayers immediately, FBR is considering to allow the corporate taxpayers a grace period of 40 days to switch over to the digital mode of payments w.e.f. November 1, 2021.
In the intervening period they may use the traditional banking transaction methods including cross cheques, cross bank drafts, cross pay orders, or any other crossed banking instrument showing transfer of amount from the business bank account of the taxpayer in addition to digital mode of payment as long as those are compliant with the law.
Meanwhile, FBR also engaged SBP to issue necessary instructions to operationalize this important provision of law as well as encourage the banking sector to facilitate the corporate businesses to accomplish digitization within the stipulated timeframe, FBR added.
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