Tax evasion definition
Nonpayment of tax as a result of failure to file a return without reasonable cause, or underpayment of tax as a result of submitting an incorrect return due to gross negligence or fraud, or omission, understatement of income, or the deduction of an inadmissible or fictitious expenditure, or loss are all examples of tax evasion. Because countries are unable to control it, tax evasion has become a pandemic. As a result, tax evasion has harmed governments’ ability to improve the living standards of their citizens and allocate a budget for public expenditure, and it has become a disease for the country’s economy, costing an estimated 20% of income tax revenue.
Tax evasion is a major source of concern
In Pakistan, the underground economy and tax evasion have been a major source of concern. The persistently
low tax base, low tax elasticity, and buoyancy, as well as the resulting growing fiscal deficit, are causes for concern. The size of the underground economy and tax evasion in Pakistan has recently attracted the attention of
not only economists, but also sociologists, political leaders, policymakers, nongovernmental organizations, and the press.
According to PIDE, Pakistan’s premier research institute, the underground economy as a percentage of GDP was 26 percent in the 1970s, 37 percent in the 1980s, and 42 percent in the 1990s. During the 1970s, the annual average tax evasion was around Rs. 5 billion, rising to Rs. 25 billion and Rs. 88 billion in the 1980s and 1990s, respectively, resulting in a compound annual growth rate of 15.42 percent [(88/5) (1/20) -1]. That equates to roughly Rs 6,500 billion in tax evasion in 2020, or more twice Pakistan’s fiscal deficit of Rs 3.403 trillion (Rs3403 billion) in 2020-21. They would be in a much better position if they could collect Rs 6,500 in tax evasion.
However, according to another PIDE study, the rate of growth in the underground economy after 1991 was greater than the rate of growth in the formal economy, which was a major concern. However, the rate of increase in the underground economy and tax evasion has been negative for the last four years, which is a positive sign, owing to the low level of economic (formal and informal) activity and documentation.
National culture and tax evasion
Geert Hofstede identified four dimensions of cultural values in his truly innovative study of cultural differences across modern nations: individualism-collectivism, power distance, uncertainty avoidance, and masculinity-femininity. Hofstede later added a fifth dimension called dynamic Confucianism, or long-term orientation, in collaboration with researcher Michael Bond. People in individualistic societies are expected to care only for themselves and their immediate families, according to Hofstede’s research, whereas people in collectivist cultures see themselves as members of larger groups, including extended family members, and are expected to take responsibility for caring for one another.
The relationship between national culture and tax evasion behavior has been studied by researchers. Collectivist societies, such as those found in Pakistan, Panama, and Korea, favor rigid social frameworks, emotional attachment to “the organization,” and strong faith in group decisions. Loyalty to the group takes precedence over efficiency. These “Family” connections in selection practices may encourage corruption. “A network of friends and family members may form long-term bonds that facilitate unusual or illegal transactions.” Public officials may be
tempted to accept bribes in exchange for favors for members of their own social group. Because a collectivist society lacks a single standard, one would expect perceptions of corruption to be higher.”
17 Ways to Tax Evasion in Pakistan
1) Our honorable legislators, who write the nation’s tax laws, are exempt from the major sources of their own income. They are unconcerned about paying whatever they are obligated to pay. In this regard, the most recent income tax directory of taxpayers is painfully revealing. The rulers lack the moral authority and political will to enforce tax compliance in such an environment. Tax evaders believe it is morally acceptable to follow the rulers’ lead.
2) Essentially, all tax evasion stems from personal greed, which is a universal component of human nature. Whether the person in question is a trader, an industrialist, a professional, or a company director, and regardless of how his manipulations are carried out, the primary motivation is personal gain or material advantage for the individual or his family.
3) The secrecy surrounding personal finances, as well as the department’s virtual inability to determine true income, are enabling factors for tax evasion. The income tax department is woefully underequipped to determine assesses true earnings. At the time of assessment, income tax officials frequently increase reported incomes arbitrarily. The majority of assesses who expect such an increase are forced to underreport their earnings. Only a few men of honor report their true earnings on their tax returns. When their earnings are arbitrarily increased at the time of assessment, they, too, begin to underreport earnings.
4) Huge sums of black money and drug lords’ large cash hoards have exacerbated the problem by fostering large-scale illegal business activity, monstrous corruption, a decline in values, and the erosion of governmental authority, all of which lead to non-compliance.
5) Tax evaders, particularly the wealthy and powerful, have no accountability or fear of punishment. The absence of deterrent punishment encourages widespread tax evasion, even among small businesses.
6) Tax evasion is both a cause and an effect of a lack of documentation in the economy due to a general preference for cash transactions. Cheques are disliked by businessmen, who prefer not to accept or make payments by them. Investigation of tax evasion becomes extremely difficult in the absence of such documentary evidence.
7) Excessive greed, dishonest practices, and endless lust for worldly comforts and pleasures resulting from the erosion of moral values and the dominance of materialistic culture. Tax evasion provides the means to fulfill this desire.
8) Despite periodic reductions in tax rates, tax evasion continues unabated. The reason appears to be that the government’s demand for more and more revenue from a small number of assesses causes tax officials to squeeze them more and more as collection targets get higher and higher. As a result, harassed taxpayers are compelled to engage in various forms of tax evasion.
9) Tax loopholes, inconsistencies, uncertainty, and confusion are created by the complexity of the tax system, tax structure, and tax laws, which are subject to frequent changes, promoting tax avoidance and evasion.
10) Tax evasion occurs when certain economic sectors and regions are exempt from paying income tax. Agriculture, for example, can be used as a convenient cover for untaxed earnings and investments. As an explanation for assets created with black money, agriculturist and tribal loans are offered.
11) Poor public services, such as hospitals without medicines, schools without furniture, power outages, broken roads, law, and order breakdowns, overcrowded and overcrowded railway trains, dead phones, and other similar misfortunes, breed contempt for the government and its tax collection efforts. When taxpayers see their taxes being used to provide privileges and perks to the wealthy and powerful, their resistance to taxation grows, as does their desire to avoid paying taxes.
12) Corruption and tax evasion thrive in an environment of uncontrolled inflation and high living costs, low government salaries, and unrestricted discretionary powers of tax officers.
13) Another reason for low tax compliance could be a lack of literacy among taxpayers who are unaware of their civic responsibilities and incapable of keeping accurate records.
14) In the country, there is a strong anti-tax sentiment. Compliance has become the exception rather than the rule when it comes to tax evasion. Tax evasion has no social stigma attached to it. In fact, not paying any tax has become a privilege reserved for the wealthy. Furthermore, they interfere with tax administration in order to assist others in evading taxes.
15) “Easy virtue” tax officials frequently play a negative role. Rather than apprehending tax evaders, they assist them in escaping after reaching a “compromise” for mutual benefit. Tax consultants are frequently involved in this unholy alliance. Tax returns are frequently scrutinized in a superficial and hurried manner in order to uncover tax evasion. In fact, after the ‘compromise,’ there is little incentive to do so.
16) Repeated tax amnesties equate to a tax evasion premium. Honest taxpayers are outraged to see tax evaders receive successive amnesties after reaping the benefits of repeated tax evasion. They, too, are tempted to follow in their footsteps.
17) When a taxpayer takes advantage of tax loopholes to reduce his taxes, he lowers the overall level of tax morality. In the fight against tax evasion, some of the country’s best lawyers, accountants, and tax consultants are involved. And tax evasion increases as those with few opportunities to practice tax avoidance and see others using legal methods to reduce their tax liability are tempted to use illegal methods to achieve the same result.
Concern by the House of Commons
The House of Commons International Development Committee (The International Development Committee is a select committee of the House of Commons in the United Kingdom Parliament.) has urged the Department for International Development (DfID) to focus more closely on supporting rule of law and anti-corruption efforts in a report. “However, the committee is concerned that in Pakistan, woefully inadequate tax revenue is raised to fully fund improvements in the quality of life for the poor. We cannot expect people in the United Kingdom to pay taxes to improve education and health in Pakistan if the Pakistani elite does not pay meaningful income taxes.”
Pakistan is ranked 139th out of 176 countries on Transparency International’s corruption perceptions index, with weak auditing and budgeting procedures.
The taxpayer ratio is extremely low in Pakistan
Development experts have emphasized the importance of domestic resource mobilization – the collection of taxes – at a time when global aid levels are declining. According to the report, taxation in Pakistan has remained at or around 10% of GDP for the past decade. In countries with similar per capita incomes, tax collection rates range from 14 percent to 15 percent of GDP. Pakistan has the lowest VAT efficiency in the world at 25%.
According to the Pakistani federal board of revenue, only 0.57 percent of Pakistanis – or 768,000 people – paid income tax last year, with only 270,000 paying in each of the previous three years. For at least 25 years, no one has been prosecuted for tax fraud.
Tax evasion vehicles
Ipsos, a global market research and consulting firm, issued a report warning that Pakistan is suffering greatly as a result of tax evasion, which not only harms overall development but also leads to inflation. The study identified five key sectors where tax evasion is most prevalent: the tea industry, the illicit cigarettes trade, the tyre and auto lubricants industry, the pharmaceutical industry, and the real estate sector. By addressing these issues, the federal government can nearly quadruple its education budget or cover roughly 80% of the total national development program.
According to the findings of a France-based market research firm, tax evasion in the auto lubricants and tyres sector is estimated at Rs90 billion, followed by the tobacco industry at Rs75-80 billion, the real estate sector at Rs55-65 billion, pharmaceutical at Rs45 billion, and tax evasion in the tea sector at Rs45 billion.
Failure of the government to promote tax culture
On and off, the Pakistani government announces tax amnesty by inviting investments in job-creating schemes. Amnesty schemes, as well as a lack of stringent punishments, are among the reasons for successive governments’ inability to combat corruption and tax evasion. The country has a large amount of back money.
People who pay taxes on a regular basis are dissatisfied with the fiscal policies. They believe that taxes are not being used properly. This discourages people, and they do not pay taxes as a result. The country’s fiscal policy imposes high taxes on the people. However, most of the time, people who pay taxes are still deprived of basic necessities due to the negligence of government officials. Second, the country’s fiscal policy lacks strict penalties for non-taxpayers. If it is changed to include harsh punishment, there will undoubtedly be an increase in tax revenue.
There is an urgent need to restructure Pakistan’s civil service; instead of a quota system, civil servants should be selected solely on merit. Decades of mismanagement, political scheming, and corruption have rendered Pakistan’s civil service incapable of providing effective governance and basic public services. The country’s 2.4 million civil servants are widely perceived by the public as unresponsive and corrupt, and bureaucratic procedures as cumbersome and exploitative. Bureaucratic dysfunction and a lack of capacity undermine governance, allowing the military to undermine the democratic transition and extremists to destabilize the state. The civilian government should prioritize reforms that will make this critical institution leaner, more effective, and more accountable.