ISLAMABAD:With Pakistan’s informal economy now estimated at $140 billion, Prime Minister Shehbaz Sharif must decide whether to encourage digital payments through tax incentives or discourage cash transactions by imposing penalties, especially on government and utility-related payments.A multi-sector expert committee recently submitted a proposal to the Prime Minister, outlining a dual approach — “carrot and stick” — to push Pakistan toward a cashless economy.The proposed incentives would include lowering sales tax and petroleum levies for digital payments. On the other hand, the penalty-based strategy involves raising the cost of cash payments for services such as fuel and utility bills. The upcoming federal budget, to be presented by Finance Minister Muhammad Aurangzeb on June 10, will reveal the government’s direction.Committee members highlighted that previous attempts to penalize non-filers through higher taxes have largely failed, and it’s now up to the government to choose a new strategy.Key Recommendations:1. Enforce Digital Payment AcceptanceMandate all retail outlets to accept payments via RAAST QR codes.Local authorities should ensure compliance and penalize inactive merchants.The goal: 1 million active QR codes within a year.Experts emphasized that QR-based solutions are more scalable than card-based payments, with Pakistan having just 2 million credit cards and 50,000 card machines, versus 5 million retail outlets.2. Tax Incentives for Digital PaymentsSales tax on digital transactions should be reduced from 18% to 5%.Offer a three-year audit exemption for businesses using digital payments.Remove customs duties on digital payment equipment.The committee believes such steps could double digital transaction volumes in six months.3. Penalty Mechanisms for Cash PaymentsImpose surcharges on cash-based payments to the government.Cap cash-on-delivery (COD) transactions and remove tax incentives on COD.Increase fuel prices by Rs3 per litre (1%) for cash payments — a move aimed at discouraging physical currency use among the 70% motorcycle-owning population.4. Digitize Government DisbursementsTransition all government payments, including to BISP beneficiaries and contractors, to digital platforms.Roll out RAAST QR codes at all government payment sites within six months.Introduce digital wallets for disbursements, potentially bringing 20 million people into the banking system within 18 months.The committee estimates that penalizing cash usage could reduce cash in circulation by 2% of GDP, or roughly Rs2.6 trillion. However, a major hurdle emerged when the Federal Board of Revenue (FBR) resisted the idea of reducing tax rates, citing likely IMF opposition. Surprisingly, the IMF clarified it had no objections, leaving the matter in the FBR’s hands.
