17 Ways to Tax Evasion in Pakistan

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, or 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.

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.”

Concern by the House of Commons

The taxpayer ratio is extremely low in Pakistan

Tax evasion vehicles

Failure of the government to promote tax culture

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.

Originally published at https://www.ssaazs.com.