Documentation of Economic transactions in Pakistan

The nature of documentation of Pakistan’s economic environment can be classified into three broad segments as under:

1. Transactions undertaken by the documented sector which are also reflected in ‘tax information’1. For example, transactions of sale of goods by a company where proceeds are received through crossed cheques duly reported in tax records;

2. Transactions undertaken partly through a documented sector, directly or indirectly, but not reflected in tax information completely. This may reflect sale of goods by a manufacturer the proceeds for which are received through cheques. However, the sale of goods by the manufacturer, and the bank accounts are not reflected in the tax record of the manufacturer; and

3. Transactions undertaken in cash. These are not directly or indirectly reflected or routed through any government department; regulator or bank; insurance company, etc. This may be represented by sales for which receipts/payments are made through cash.

What is the proposed system?

Under the proposed system all relevant organisations of Pakistan, which are listed in Annexure A to this note, are required to provide real time access to their information and database for economic transactions. This has been explained in the following paragraphs.

Requirement and rationale

It is considered that on account of relevant legal requirement, it is difficult to maintain the whole system in cash as referred to in (3) above, however on account of weaknesses in the system there is very high level of tax non-compliance and a large number of economic transactions are undertaken in the manner as (2) above, being not recorded for tax purposes.

Keeping in view the above a very important and relevant step has been undertaken by introducing the concept of real time access to information and databases with certain relevant organisations.

This action, though late, is necessary for improving tax compliance in the country and identifying undisclosed assets created out of undeclared and untaxed income. The government is to be wholeheartedly complimented for this correct, bold and necessary step.

Unlike other developed and developing economies, in countries like Pakistan the level of economic transaction undertaken as (2) above is very high. This means that transactions routed through one or more government agencies, regulators or banks are not reflected in the tax records. For example, it is considered that out of the total bank account maintained in the commercial banks in Pakistan only around fifty (50) percent are reflected in the tax system of Pakistan.

Under the proposed structure an all-encompassing approach has been adopted. This means that not only banks have been covered but also the authority where assets are transferred. For example, a person may make a payment for a plot acquired in any housing authority may be wholly paid in cash; however, under the proposed system the transaction is expected to be identified as the housing authorities are also required to maintain a real time access to information and database of plot transfer

Statute and rules

The Federal Board of Revenue through a notification has proposed a new Chapter VIIIA and Rules 39E to 39L in the Income Tax Rules 2002.

Through SRO 1771(I)/2023 dated December 5, 2023 the Federal Government has prescribed one hundred and forty (145) organisations with which such arrangements are proposed. The list of these organisations is attached as Annexure A to this note.

The Federal Government has obtained the right for the same under Section 175A of the Income Tax Ordinance, 2001. Under these provisions the Federal Government has the power to make arrangements to obtain real-time access to information and databases from any agency as identified by the Federal Board of Revenue.

Proposed system in brief

Under the system the integrated organisation2 must integrate each and every data set relating to the economic transactions performed with the or reported to the said organisation by any person.

The term ‘economic transaction’ has been defined in the rules as under:

(a) “economic transaction” means a transaction for exchange or transfer of title or ownership of assets, goods or services involving economic value provided by one person to another person including but not limited to the transactions of:

(i) tangibles including all types of physical goods manufactured or produced, imported or exported;

(ii) intangibles including all types of services, rights, interests, or licences by whatever name called;

(iii) unilateral transfers including gifts, personal remittances and other transactions or unrequited transfers which do not involve any claim for repayment;

(iv) capital transfers including capital receipts and capital payments; any activity carried out by any person for sale and purchase of any asset, payment for any expenditure, deriving of any income, profits or any gain;

(v) any approval, authorization, permission, registration, access, concession granted for any purpose, and any financial transaction; and

(vii) any nature as notified by the Board for the purpose of these rules

‘Integrated organisation” means any agency, authority, institution or organisation mentioned in section 175A of the Ordinance and listed in rule 39L and shall include their attached departments, divisions, wings, institutes, sub-offices, autonomous bodies by whatever name called, which are required under these rules to be integrated for the purposes of the said section l75A; and

These organisations are required to maintain “real-time accessed data analysis repository (RADAR)” being a Common Transmission System or IT platform specifically designed, installed and integrated by the Board with the IT platform of the integrated organisation for the purposes of real-time access to information and database in compliance to section 175A of the Ordinance and rules made there under this Chapter. For the purposes of these rules, the integrated organisation shall establish and maintain an IT platform and shall provide digital information against a unique identifier in the mode, manner or form as specified by the Board through separate instructions on case to case basis or generally

This real time system is to be developed by January 15, 2024 and until real-time access to information and database is made available such information and data shall be provided periodically in such form, manner and by such date as may be specified by the Board through instructions on a case to case basis.

It is reiterated that there is no requirement of filing any information or database by these organisations to FBR. The system proposed is real time access to information and databases of that organisation’s economic transactions.

The information so furnished shall be deemed to be information collected by the Board for the purposes of laws administered by it.

This provision is in addition to information that is required to be provided by banks under Section 165A of the Ordinance.

All-encompassing rules

An attempt to capture economic transactions is brought to the RADAR of the FBR. Accordingly, under these rules integrated organisations include all commercial banks, DHAs, motor registration authorities, housing authorities, and insurance companies.

Effects and implications

This is a positive development towards documentation of the economy, especially relating to assets.

This effectively means that when these rules are implemented then all the commercial banks will be required to integrate the economic transactions undertaken by them for their clients with the FBR. Same is the case with housing authorities. This is a big step requiring serious consideration. It is considered that the Federal Government has already sought legal opinion on this matter from the respective forums.

The proposed system is closer to the provisions of Section 285BA of the Indian Income Tax Act, 1961 which requires an obligation to furnish a statement of financial transaction or reportable account. The definition of ‘financial transaction’ is almost similar to Pakistan’s economic transaction. For example, under Section 285BA a banking company or a cooperative bank is required to furnish information of:

(a) Payment made in cash for purchase of bank drafts or pay orders or banker’s cheque of an amount aggregating to Rs. 10 lakh or more in a financial year.

(b) Payments made in cash aggregating to Rs. 10 lakh or more during the financial year for purchase of prepaid instruments issued by Reserve Bank of India.

(c) Cash deposits or cash withdrawals (including through bearer’s cheque) aggregating to Rs. 50 lakh or more in a financial year, in or from one or more current account of a person.

Concerns and implementation issue

Following matters need to be addressed in relation to this positive step:

1. Whether or not provisions under Section 175A of the Ordinance will pass the test at the judicial examination, especially the matter of secrecy of personal information etc.;

2. Whether or not a direct real time access may lead to fishing enquiries and harassment by the taxation officers;

3. Whether or not real time access will also include the underlying information on the basis of which the entry has been made by the organization.

On the economic side, it is considered that the size of the cash economy may increase due to implementation of this system. This fear is however mitigated by the fact that in case of almost all the relevant assets the transaction is required to be routed or reflected in the records of an organisation.

Recommended course of action

In the light of the present environment and the trust gap between the taxpayers and tax administration, it is suggested that ‘Data-mining’3 jobs on the basis of real time access to information and databases are undertaken by PRAL4 or any other organisation and only those cases are referred to the taxation officer where serious issues are identified.

There is a need for consultation with the stakeholders mainly being Pakistan Banks’ Association and Pakistan Stock Exchange, etc.

Professional view on the matter

The Institute of Chartered Accountants of England and Wales have discussed the subject as under:

Finally, there is apprehension over the security of government-held fiscal data.

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Table
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S. No. Name of Organisations
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A. Federal Government and Semi-Autonomous Departments
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1. Accountant General Pakistan Revenues
2. Alternative Energy Development Board
3. Aviation Division
4. Board of Investment
5. Controller General of Accounts
6. Economic Affairs Division
7. Employees’ Old-Age Benefits Institution
8. Engineering Development Board
9. Export Processing Zones Authority
10. Federal Employees Benevolent and Group Insurance Fund
11. Finance Division,
12. Military Accountant General, Rawalpindi
13. Military Lands & Cantonment Headquarters, Rawalpindi
14. Ministry of Energy (Power Division)
15. Ministry of Foreign Affairs
16. Ministry of Maritime Affairs
17. Ministry of Commerce and Textile
18. National Logistics Cell (NLC)
19. National Transmission & Dispatch Company (NTDC)
20. Oil & Gas Development Company Limited (OGDCL)
21. Oil & Gas Regulatory Authority (OGRA)
22. Pakistan Agricultural Research Council
23. Pakistan Centre for Philanthropy (PCP)
24. Pakistan Council of Scientific and Industrial Research
25. Pakistan National Shipping Corporation
26. Pakistan Railway Headquarters, Lahore
27. Pakistan Software Export Board (PSEB)
28. Pakistan Telecommunication Authority (PTA)
29. Pakistan Water & Power Development Authority
30. Petroleum Division
31. Private Power and Infrastructure Board (PPIB)
32. Registrar of Ships & Superintendent of LightHouses
33. Securities & Exchange Commission of Pakistan (SECP)
34. State Bank of Pakistan (SBP)
35. Pakistan Medical and Dental Council (PMDC)/Pakistan
36. Medical Council, Medical Colleges and Dental Colleges
37. Capital Development Authority (CDA) Islamabad
38. Excise and Taxation Department, Islamabad
39. Pakistan Mercantile Exchange
40. Pakistan Engineering Council (PEC)
41. Higher Education Commission [HEC]
42. Frontier Works Organization (FWO)
43. Mari Petroleum Ltd.
44. Federal Investigation Agency (FIA) and Integrated 
Border Management System)
45. Evacuee Trust
46. Central Depository Company
47. Discount & Guarantee Houses
48. Federal Government Housing Authorities
49. Ministry of Industries and Production
50. Overseas Pakistani Foundation
51. Pakistan Council of Scientific and Industrial Research
52. Pakistan Stock Exchange
53. Pakistan National Accreditation Council (PNAC)
54. Section 42 Companies (SECP) and all NPOs & NGOs
55. Karachi Cotton Exchange
56. All Federal Government Departments and authorities not
specifically mentioned above
57. All entities as mentioned in clause (66) of the Part-I
of the Second Schedule to the Income Tax Ordinance, 2001 .
B. Provincial Government Departments
58. Accountant General, Balochistan
59. Accountant General, KPK
60. Accountant General, Punjab
61. Accountant General, Sindh
62. Board of Revenue, Balochistan
63. Board of Revenue, KPK
64. Board of Revenue, Punjab
65. Board of Revenue, Sindh
66. Sindh Revenue Board (SRB)
67. Punjab Revenue Authority (PRA)
68. Khyber Pakhtunkhwa Revenue Authority (KPRA)
69. Balochistan Revenue Authority (BI{A)
70. Directorate of Postal Accounts, Lahore
71. Finance Department, Balochistan
72. Finance Department, KPK
73. Finance Department, Punjab
74. Finance Department, Sindh
75. Provincial Mines & Mineral Development Departments
76. Provincial Sports Boards
77. Energy Department, Sindh
78. Social Security institutions
79. Provincial Building Control Authorities
80. Provincial Registration Departments
81. Provincial Development Authorities (LDA, KDA, HDA, etc.)
82. Industrial Development Board (IDB)
83. Forest Development Corporation (FDC) KP
84. Board of Intermediate & Secondary Education (BISE) as
Regulators of Private Education/School and Colleges
85. Provincial Cane Commissioners
86. Accounts/DDO Officers
87. All Provincial Departments and authorities not
specifically mentioned above
C. Financial Institutions
88. Asset Management/Mutual Funds Institutions
89. Commercial Banks
90. Microfinance Banks
91. Development Financial Institutions (DFIs)
92. Real Estate Investment Trusts (REITs)
93. Insurance Companies
94. National Investment Trust Limited
95. Pakistan Mortgage Refinance Company Limited
96. Pakistan Stock Exchange
97. Pension Funds (registered under Voluntary Pension System)
98. Provincial Excise and Taxation Departments (with respect
to information other than Motor Vehicle Registration)
99. Private pension funds and trusts (registered with FBR)
100. Provident Fund Institutions (those registered under
Provident Fund Act 1925)
101. House Finance Companies
102. Investment Banks
103. Micro-finance Banks (Easy Paisa, Jazz Cash etc.)
104. Modaraba companies
105. National Clearing Company of Pakistan Limited
106. NIFT & RTGS
107. Non-Banking Financial Companies (NBFCs) licensed by SBP
108. Payment Aggregators
109. Payment Service Providers (PSPs) & Payment 
Service Operators (PSOs)
110.   Remittance Gateways (SBP Licensed)
D Private/Others
111.  Aga Khan Development Network
112. Association of Builders and Developers (ABAD)
113. All Bahria Town Private Limited Companies
114. Cooperative Housing Societies
115. All Defense Housing Authorities (DHAs)
116. Air Force Housing Societies
117. Navy Housing Societies
118. China Overseas Ports holding Company
(Pakistan) Pvt. Ltd.,
119. Gwadar Free Zone Company (GFZC)
120. Habib Rafiq (Pvt.) Limited
121. Pakistan Film Producers Association
122. Pakistan Science Foundation
123. Pakistan Software Houses Association
for IT & ITES (P@sHA)
124. Shipping Companies
125. Zedem International (Pvt.) Limited
126. Imarat Group of Companies
127. Future Developments Holdings (Prt.) Limited
128. Emaar Pakistan
129. Al Ghurair Giga Pakistan (Pvt.) Limited
130. Lakhra Coal Development Company Sindh
131. Sindh Engro Coal Mining Company
132. Engro Power Generation Company
133. Pakistan Bar Council & Associations
134. Provincial & District Bar Associations
135. FPCCI, Provincial and Local Chamber of
Commerce and Industries
136. Capital Market (Brokerage houses)
137. Development Finance Institutions
138. Exchange Companies (SBP Licensed)
139. All Housing Societies not specifically
mentioned in this table
140. Infrastructure Service Providers (PTA Licensed)
141. All Pakistan Textile Manufacture Associations (APTMA)
142. Leasing companies
143. Local Loop License Holders (PTA Licensed)
144. Toll Plazas/Motorway (NHA gave contract to One Net etc.)
145. Venture capital companies
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“Tax administrations must control how they share and protect data, to build taxpayers’ confidence in the privacy and proper use of their data, and to avoid distrust that can lead to lower compliance with reporting and other tax obligations,” says Dr Jay Rosengard, lecturer in public policy at Harvard University. “Positive examples include the UK and South Africa, which only make the data available in ‘data laboratories’ – controlled environments that prevent potential leaks or misuse of taxpayer data.”

Granted, the UK government has outlined the risks in its Parliamentary Post 664 on public data sharing by saying:

“Privacy-enhancing technologies can mitigate the risk of privacy breaches, for example by using advanced data encryption.” However, it cautions that: “many experts note that it is difficult to predict and mitigate against future motivations or technologies that could violate privacy. Some privacy experts say that collection and sharing of public sector data, particularly personal data, should be minimised not increased.”

Governments will need to maintain strict safeguards to protect citizens and businesses from such risks. Especially as, on the horizon, there is the threat of quantum computers powerful enough to break public-key encryption. To maintain the security of, and public trust in, digitalised tax systems, authorities will need to invest in ever-more sophisticated technology to protect user data.

OECD position on the matter

OECD in their report relating to access of information by tax authorities, has observed as under:

“109. The results of the survey reveal that the vast majority of countries have substantial access to bank information for both domestic tax administration purposes and for purposes of exchange of information. However, some important impediments to effective access to bank information for tax purposes continue to exist. First, not all countries allow their tax authorities access to bank information for tax administration purposes, including exchange of information. Second, most, but not all, countries have adequate customer identification requirements for bank customers. Improvements could be made to ensure that accurate and reliable information is obtained and recorded by banks regarding the identity of their customers and in particular about the beneficial owners of bank accounts. Third, a potential barrier to exchange of bank information with treaty partners exists in countries that require a domestic tax interest to obtain and provide bank information to a treaty partner. Fourth, the requirement of reciprocity is also a barrier to exchange of information in some countries. The Committee agrees that at this stage, improvements in each of these areas should be pursued within the context of specific requests for information. The Committee will continue to work on improvements in automatic reporting and automatic exchange of information in connection with the study of the use of withholding taxes and/or exchange of information to enhance the taxation of cross-border interest flow

An example from United Kingdom

HMRC employs a number of methods to detect hidden economic activities. These cover analytical tools (Connect), analytical methods (such as dynamic benchmarking and predictive analytics), and the acquisition and exploitation of Big Data (mostly focused on address matching). All these tools and methods combined seek to reduce the size of the hidden economy in the UK.

HMRC operates a comprehensive data analytical model within their compliance approach to tackle the hidden economy in the UK. This model is designed to process and analyse vast volumes of data. It is made up of a number of analytical tools (Connect), analytical methods (Dynamic Benchmarking and Predictive Analytics), and the exploitation of Big Data (through Address Matching Techniques). Connect is the primary tool HMRC uses to tackle Undeclared Work (UDW). Up to 4,000 users have access to the tool, which is able to perform 13 million searches. Connect is made up of 22 billion lines of data, and 500 million documents. Around 250 data analysts at HMRC are specialised in the Connect tool.

The tool uses information from all HMRC data systems related to tax declarations for self-employed individuals, employees and employers, companies and business, property and land taxes, and indirect and consumption taxes and makes connections between the data to identify all data related to individuals and businesses. In this way HMRC is able to see a comprehensive picture of its taxpayers and the data, (HMRC and third party data) relating to them.

Recently, HMRC has been using the data within Connect to create maps of UDW, overlaying their data onto mapping software to provide a detailed visual map of UDW down to street and property level. They aim to use this approach to better target their compliance resources into risky locations. Dynamic Benchmarking is used to allow the data collected by HMRC in specific sectors of the UK economy to tell what the norm is with regards to tax revenues. This method serves to identify outliers to whom notification letters are sent. For instance, in certain sectors in the UK credit card transaction ratios can be used to identify outliers where the ratio between cash and credit card turnover is outside the norm. Predictive Analytics are used to identify the riskiest cases for intervention from VAT traders. The data taken from VAT population from: returns, debt information, trader characteristics and audit visit outcomes. The methods of analysis are mostly econometric multivariate models to predict those riskiest cases in need of targeted surveillance. Finally, the exploitation of Big Data is used by HMRC to trace down residential or commercial addresses at risk of undertaking undeclared economic activities. The process is largely automated as it handles large amounts of data.

Conclusion

This is a positive and necessary development in tax administration. Such steps are necessary for improving tax compliance. The government should properly implement the system in consultation with the stakeholder, avoiding information overload without having adequate capability for data mining.

It is to be noted that despite a comparative edge in documentation of information India does not operate such a system. It is accordingly very important that Pakistan should examine the implementation process from every angle.

Further, data mining be separated from actual tax assessment to reduce the possibility of harassment.

1. Tax information means declaration of income if any.

2. The organisation listed in the rules.

3. Data mining means derivation of results from the data available.

4. Pakistan Revenue Automation Limited.

Copyright Business Recorder, 2023