M.

A Political Sciences
Subject: Major Issues of Pakistan

Assignment: The Culture of Tax evasion in Pakistan

Name: Salman Hanif

Roll #: 1253

Semester: 1st
The Culture of Tax evasion in Pakistan
1. Abstract
2. Introduction
3. Factors behind the Tax Evasion Culture
a. Mass illiteracy
b. Complex tax codes and procedures
c. Rampant corruption and growing mistrust of masses in the tax
collecting institutions
d. Lack of a strong political will
4. Effects of the Tax Evasion Culture
a. High tax rates, economic stagnation and inflation
b. Enhanced class gap and economic disparity in a society
c. fiscal deficit and foreign loans
d. Lack of the provision of basic amenities
5. The Way Forward
a. Tax literacy
b. Simplification of tax codes and procedures
c. Enforcement and litigation mechanisms
d. De-politicization of the FBR,
e. Political leaders and other public figures
f. Incentivized tax amnesty policies for tax payers
g. Revival of the public trust in the government institutions
6. Conclusion
1. Abstract:

Every citizen is legally bound to pay tax to the government to enable to meet its
expenditures to discharge its obligations regarding defense, education, public
health, law and justice, infrastructure etc. In most of the countries, tax revenue
is a major source of government income. Taxes also play a very important role
in the economic development of a country. Tax evasion is concerned with all
unlawful activities which are adopted by the taxpayers in order to escape from
the payment of tax.

2. Introduction:

Former American Supreme Court Justice Oliver Wendell Holmes once said,
“Taxes are the price we pay for a civilized society”. Indeed, without an
effective and efficient system of taxation, the creation of a civilized and
developed society seems a pipe dream. History is abound with references and
evident of the fact that culture of taxation evolved significantly as empires grew
and civilizations structured. Europe’s entire history rests upon a long struggle
between the Church and state over the collection of tax. Taxes have always
been a fundamental source of revenue. Since taxes are the supreme source of
revenue for any country, these are the prices citizens pay to a government for
the sake of free provision of basic amenities of life. (times 2019) The efficient
functioning of a taxation system lies in its maximum collection of taxes. If taxes
are not paid regularly, the economic progress will be in doldrums.
Unfortunately, it is the height of plight that Pakistan has one of the weakest
taxation systems in the world. Only 0.3 percent of its people pay their direct tax.
At present, its tax-to-GDP ratio is only 13 percent, which is below average level
of 40 percent. (Aslam 2011) This meagre situation of tax collection is all due to
the prevailing culture of tax evasion in Pakistan. Both the governed and the
governors seem equally obsessed with the idea of a “tax-free society”. Mass
illiteracy, growing corruption, lack of political will and weak implementation of
tax laws are the major contributors to the tax evasion culture in Pakistan. This
regressive culture of tax evasion is a serious threat to the economic prosperity
of the country. Moreover, it will curtail the government’s efforts for provision
of basic facilities. Fiscal deficit will become the fate of our economy. Further, it
can widen the class gap, and enhance economic disparity in the society.

Tax literacy and simplification of the tax codes are the only viable options to
get rid of this deep-rooted problem. Revamping of the FBR, implementation of
the laws and revival of the public trust in public sector are the way forward. In a
nut shell, since Pakistan has a weak taxation system due to the culture of tax
evasion, the key to economic progress of the country lies in its promotion of
tax-paying culture rather than tax-evasion.

3. Factors behind the Tax Evasion Culture

 Mass illiteracy:

As every problem has a cause, mass illiteracy is one of the major causes
promoting the culture of tax-evasion in Pakistan. Most of the Pakistani
population is illiterate. They are unaware of the significance of tax money.
Therefore, they are not habitual of paying it voluntarily. The countries with
high literacy rate, like Germany, Denmark, and France etc. are blessed with
high tax-to-GDP ratio in the world. (Zaidi 2005) Unluckily, Pakistan’s literacy
rate is considered among the lowest in the world. Therefore, illiterate citizens of
Pakistan are unaware of their basic duties of paying tax voluntarily.

 Complex tax codes and procedures:

In the same way, complex codes and procedures are also providing an
encouraging ground to the evaders. The tax codes are too complex to be
followed by common people. Further, the procedure of online filing of tax
returns is much intricate. To follow this intricate procedure, the expertise of
technical staff and lawyers are indispensable. So the citizens usually avoid
paying their taxes due to its difficult procedure. (Saeed 2004)

 Rampant corruption and growing mistrust of masses in the tax

collecting institutions

In addition to this, rampant corruption in the public sector discourages the

taxpayer to pay tax. People become suspicious of the fact that their money
would be spent on public welfare. They have the apprehension that their money
would be spent on the official tours of the corrupt officials. Resultantly, the
growing mistrust of the masses in the tax collecting institutions provide a
breeding ground to tax evaders.

Similarly, the absence of tax police is another cause of rising culture of tax
evasion. As culprits of tax evasion remain unpunished, they take leverage to
evade more and more. Especially the areas with weak administration experience
more tax evasion. Baluchistan, KPK, and rural Sindh and Punjab are the
pertinent examples.
 Lack of a strong political will

Likewise, the lack of a strong political will is another hurdle in the way of tax-
culture. It is rightly said “where there is a will, there is a way.” Unfortunately,
our parliament does not have any such kind of will to resolve the issue. If gold
gets rust, what shell the iron do. If our leaders do not pay their taxes, what could
be expected from the common people.

4. Effects of the Tax Evasion Culture

 High tax rates, economic stagnation and inflation

The culture of tax evasion is very harmful for a society. It has long lasting
effects. There are multifarious effects of the tax-evasion culture in Pakistan.
Tax-evasion incurs high tax rates, especially of indirect taxes. (Pakistan
2014)The greater the tax-evasion, the higher the indirect tax rates. A sudden
hike in patrol and diesel prices is due to the addition of indirect taxes. Further,
General Sales Tax remains always high in Pakistan because of rising tax-
evasion.

 Enhanced class gap and economic disparity in a society

In the same way, it enhances class gap and economic disparity. The poor pay
more taxes in the form of indirect taxes. Whereas the rich have to pay less as
they do not pay their share in the form direct taxes. Consequently, the rich get
richer, and the poor become poorer. According to a recent survey report, only
0.3 percent of people pay direct taxes; it is the lowest level in the world.

So, it divides a society into classes and widens the gap between the rich and
poor. This situation leads the country chaos, poverty and disunity.

 Fiscal deficit and foreign loans

Besides it, the culture of tax evasion results in fiscal deficit. Pakistan’s
economy has been experiencing fiscal deficit since its inception due to its very
narrow tax-base. Though Pakistan has a huge potential of tax-revenue up to Rs.
8 trillion, due to prevalent tax-evasion only Rs. 3 trillion is being collected.
According to M Ali Kamal’s research titled Fresh Assessment of the
Underground Economy and Tax-evasion, “if there were no tax-evasion, budget
imbalances could have been zero.” Consequently, to fill this budget deficit the
country has to pursue the IMF’s financial assistance as a bailout package. The
economy finally fell prey to debt trap. Pakistan’s debt-to-GDP ratio to rise over
78 percent. (Rana 2019) It will keep rising until the tax-evasion culture is
controlled.

 Lack of the provision of basic amenities

The most negative effect of tax-evasion is observed in the realm of public sector
services. The provision of free education and health, which are promised by the
stat in the constitution, remains and unfulfilled task. The quality of these
facilities is compromised due to the conditions imposed by the IMF in the form
Structural Adjustment Programs. It further aggravates to the problem. Hence,
the provision of basic facilities is badly affected by tax-evasion. There exists an
opposing view. They are of the view that the evasion can also leads to economic
growth. They present another side of the picture. There are two perspectives of
their argument. As tax-evasion enhances disposable income, it results in
massive stock of capital in private sector that will ultimately lead towards
economic growth. Secondly the tax-money is wasted due to corruption and
other leakages or spent in non-productive projects. Thus, they consider tax-
evasion as morally justified. To counter these arguments, it might be enough to
say that tax evasion badly effects basic needs of the masses. So, the culture of
tax-evasion needs to be eliminated.

5. The Way Forward

 Tax literacy

The only way forward is to take the suggested measures that can promote the
tax-paying culture. Firstly, tax-literacy is the best practicable solution to this
problem. Since tax-evasion has become a culture, education is the only way
through which a counter culture can be established. Tax literacy inculcates a
sense if responsibility in the masses. It is best practiced in the UK, Germany,
and in many other European countries. It will introduce people with the
significance of tax. Teachers, academia and media need to be engaged for the
socialization of the masses. Awareness is the first step taken towards tax-paying
culture.
 Simplification of tax codes and procedures

The government must simplify tax codes and procedures so that people could
easily follow the procedure. The online website of the FBR must be user
friendly. Moreover, the FATE (facilitation and Tax Education) wing of the FBR
should be operationalized. Thirdly, enforcement and litigation mechanisms
must be strengthened. The government must establish a Tax Police for
enforcement purposes. Separate tax courts should also be formed. A proper
litigation mechanism is required to ensure tax paying culture in the place of tax
evasion.

 De-politicization of the FBR,

There is a dire need to minimize political influence in the functioning of the

FBR. The institution must be strengthened and empowered. Contrary to this, the
federal government needs to ensure accountability and a proper system of
checks and balances within the institution to eliminate malpractices of the
officials. It is rightly said, “power corrupts and absolute power corrupts
absolutely”. So the FBR must be made a balanced, effective and modern
institution.

 Political leaders and other public figures

Political leaders and economically strong business tycoons must share their
stake for the sake of national interest. They must set a precedent to pay their
taxes voluntarily. They should be the shining stars in the tax paying culture of
Pakistan. Since they are the role models for the nation, they can be emulated by
the followers. So their act of paying tax voluntarily can help promote tax paying
culture.

 Incentivized tax amnesty policies for tax payers

The taxpayer should be incentivized through launching of amnesty schemes.

The FBR must reward the regular taxpayers. Though there is a huge criticism of
amnesty schemes, they can be utilized provide that an honest and strong will is
present. (Rehman 2018)

In the developed nations, tax amnesty schemes are workable programs. Hence,
it can be launched in Pakistan.

6. Conclusion:

The revival of public trust in the government and its institutions is inevitable for
the elimination of tax evasion. The government can regain public trust by
providing them with free and universal education and health facilities.
Reduction in indirect taxes can be proved fruitful in this regard. Thus, there is a
dire need to revive the public trust in the public institutions.
References
Aslam, Muhammad. 2011. "Pakistan Economy in Retrospect: 1947-2010." Lahore: Ferozsuns.

Pakistan, State Bank of. 2014. "Annual Report 2013-2014, State of Economy."

Rana, Shabaz. 2019. "Pakistan's Debt to GDP Ratio." October 16.

Rehman, Atiq Ur. 2018. "Tax Amnesty Scheme in FBR; Good or Bad." June 28.

Saeed, K.A. 2004. "The Economy of Pakistan." Karachi: Oxford University Press.

Times, daily. 2019. "tax culture in pakistan." daily times, july 19.

Zaidi, S. Akbar. 2005. Issues in Pakistan's Economy. karachi: Oxford Press.