The Federal Board of Revenue (FBR) is considering allowing the corporate taxpayers a grace period of 40 days to switch over to the digital mode of payments w.e.f. November 1, 2021 under Tax Laws (3rd Amendment) Ordinance, 2021.
This has been stated in a press release issued by FBR to clarify the relevant clauses of Tax Laws (3rd Amendment) Ordinance.
The Federal Board of Revenue 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.
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. 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.
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 principle supplier. 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.
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.
In the meantime, FBR is also engaging 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.