Tax Evasion in Pakistan

Name_______ Muhammad Hamza Zahid

Roll No#______ 180070
Subject#_______ TAXATION
Instructor#______ Sir Tauseef Shaukat

Topic#_______ Tax EVASION In Pakistan

__ASSIGNMENT#03__

Tax Evasion in Pakistan (By Muhammad Hamza Zahid)

 Tax Evasion in Pakistan

Introduction:
Tax evasion is an operation in which a tax payer does not pay tax to the tax authorities. Tax
evasion is the main issue of Pakistan due to which Pakistan remain under a lot of trouble. Tax
Evasion is the main issue in result of collecting less revenue for Government. Tax evasion in
broad perception, any activity which is against the law originate delaying one’s tax liability
that is, if found may bring penalty or monetary fine to such person who is evader. This issue
is discussed at very small level because of because most of the researchers and economists
have utilitarian point of view. A person who is a tax evader always find reasons not to pay
taxes. A tax evader when evade tax it is just good and ethical when the evader or citizen have
surety about government is corrupt. FBR indicates that fewer the citizen of Pakistan pay
income taxes other countries with the same capita as Pakistan have 14% of tax revenue where
Pakistan income tax revenue is just 9% and it is also depend on the of the country’s debt
because 60% of taxes of Pakistan’s the federal board revenue spent on paying these
liabilities.
Now a day’s economy of Pakistan is performing poorly Tax evasion is the main
challenge facing by the economy and Federal Board of Revenue (FBR). Government is
avoiding in taking any harsh measurement in collecting taxes which would adversely effect
on the economy and business activities that are already at low point. The government should
need to focus to stop the gap between the existing systems to check the tax evasion. Tax
evasion also done at individual, sectorial and corporate level, less than 1% from all sector of
Pakistan pay taxes which is not according to their tax liabilities. Corruption, political
involvement in the tax system and a lack of trust in the government are considered causes of
tax evasion. These all tax evasion happened due to low tax morale and legal gaps that enables
high value individuals to hide their income. At the corporate level many firms represent their
income low for not paying high taxes at actual amount. The intensity of tax evasion in
Pakistan is high at all level including individual. In Pakistan the tax evasion rate is almost
50% which is unacceptable and alarming for the country’s government.

Reason of Tax Evasion & Remedies

 TRUST ISSUE WITH THE GOVERNMENT

REASON:
One of the reason for tax evasion is the citizen’s trust on government, lack of tax payer
believe in the country’s ability to tackle with the tax honestly and professionally to spend
their money, Probably it is the most important reasons of Pakistanis to evade taxes. Individual
have to trust in government because it have direct link with compliance behavior of the
citizen including their decision to comply with tax regulation. If the tax-payer have trust in
government and they perceive the government working in their interest they will go for tax
compliance if evasion is a better option, there is a positive relationship between the trust in
government and compliance behavior of taxpayer. Almost countries where citizen have less
trust in government there will be evasion. In Pakistan corruption is on rise, citizen of Pakistan

Tax Evasion in Pakistan (By Muhammad Hamza Zahid)

 Tax Evasion in Pakistan

don’t have much trust in government. Probably, it is the one of the cause for tax evasion.
Corrupt government increase the morale of taxpayer to evade taxes.
REMEDIES:
 Government have to build trust for the government organization in individual
taxpayers by providing the service in a more better way by providing facilities and by
working for the interest of taxpayer, so then the taxpayer should be realized about
action of government that utilization of tax of tax-payer have been done in an efficient
and effective manner.
 Government have to satisfy to potential taxpayers by giving them concession of
paying tax on time or by other sources. So these potential tax-payers morale should be
motivated by removing mistrust and rebuild trust in the society.

 POOR COMMUNICATION BY GOVERNMENT

REASON:
Poor communication by the government is another reason for potential tax-payer are
not motivated to pay up. In no way is it easy to part with one’s hard earned
money/income and the government is not clearly come forward to explain what high
rate of taxes will be beneficial and do for the country and how the lives of ordinary
citizens will get better by paying taxes at high rate or low rate. Law is not accurately
enforced and government is not communicating in a proper way with the individuals,
mostly tax-payer wants to know about why they are paying taxes in a heavy amount?
In regard of paying tax in large amount they all wanted to know what facilities
government have given to them. If the Government is charging high rate due to
inflation, government need to communicate all impacts of charging high rate of tax
and low rate of tax and its impacts on individuals taxpayers life. But in this regard,
government is not coming in front of taxpayer for clearing their queries to
government. According to survey Individual believe that due to lack of
communication of government about there is no benefit for taxpayer communicated
by the government.
REMEDIES:
 Government should need to intervene or communicate with the citizens and
share all the consequences of their steps of taking more tax from taxpayers
and through charging high taxation government should communicate how
taxpayer will be compensated.
 Every reason about keeping high tax rate or low tax rate should be
communicated by the concerning tax department (FBR) to all individuals or
taxpayers with its impact.

 ISSUE WITH TAX SYSTEM

REASON:

Tax Evasion in Pakistan (By Muhammad Hamza Zahid)

 Tax Evasion in Pakistan

A fair tax system is necessary, salaried people are generally thought to be easy targets
for tax collection and the state has thus failed to widen the tax ne. Several categories
of business get away without paying their due share of taxes because of their political
power while ordinary people where salaried people bring their monthly salary which
are extra burdened, some people thought that the main cause of need a fair tax system
is the restricted tax base system in Pakistan is dependence on the sector which is
exempted from the taxation. In the current tax system the tax authorities are not
empowered to enforce their power on the rich and the rich people and families who
run away by making use of their own political and economic power. Moreover these
rich people joined their hand with the system and enjoy the convince on public
money. There is no equitable and efficient tax system in Pakistan, and moreover,
political leadership of Pakistan have no alternative but focus on those points that meet
the ambitious goal of political agendas. There is no strictness from government on tax
evasion. There is ignorance in the tax system of Pakistan.
REMEDIES:
 Reforming the tax system and building the public trust in it is going to
be an uphill climb and treated everyone fairly.
 Tax authority need to use all taxes from taxpayers and used these all
taxes in an efficient manner.
 Need to introduce a system where check and balance to ensure this
step does not lead to further corruption.

 ISSUE WITH HIGHER TAX RATE

REASON:
Unfair and higher tax rates are the other causes for tax evasion, as a result of higher tax-
rates, regressive tax system, poor administration, corruption and huge costs of consent,
individuals satisfy themselves in underground activities and hence the government is
relieve of revenue generation. According to the survey, the most of the population (85%)
of Pakistan believe that most tax evader’s evolve in tax evasion due to the high tax rate
and whereas 2% disagree and 14% remains neutral. The higher rate of direct taxes lead to
underground economy as people go for informal undocumented transaction to avoid their
income being taxed by the authorities. Higher tax rate is also a major cause of tax
evasion. There is no concept of progressive taxation in Pakistan which means tax rate
increase with the increase in taxable amount. Higher rate discourage taxpayer to pay
taxes. High rate of tax increase the morale of tax evader to evade taxes. Government can
earn handsome tax revenues from the corporate sector, but unfortunately, corporation
don’t pay taxes according to their tax liabilities. One of main cause for corporate tax
evasion is high corporate tax rate. The middle class impacted the most due to high rate of
tax.
REMEDIES:

Tax Evasion in Pakistan (By Muhammad Hamza Zahid)

 Tax Evasion in Pakistan

 Government should need to introduce progressive taxation system, it

can be useful not only for personal taxes also for the whole system.
 Progressive taxation is enforce in an attempt to decrease the tax
commonness of people with less ability to pay.
 Or Tax rate should be low down so that each and every tax payer can
pay his/her taxes easily and conveniently.

 ISSUE WITH PENALITIES OF TAX EVADER

ISSUE:
Penalties and fines have shown to have a significant impact on tax compliance behavior A
survey from taxpayers indicates that the penalties for tax evader is enough, but these penalties
are not followed due to the irrational legislation in Pakistan. Laws are not followed according
to the ground realities. In the tax system the penalties are not followed on tax evader by the
authorities, taxpayer seem this as taxpaying system in Pakistan is too difficult to follow.
There is no threat and punishment followed on tax evader and non-payment of tax. Citizen
don’t show their responsibility to pay taxes. There is ignorance by authorities and officials of
penalties on tax evaders. Penalties for tax evader by the authorities and officials are very
complicated in Pakistan. Tax evader should be heavily fined because they demotivate tax
payer about paying taxes. There are many causes as double taxation for evading tax, but no
penalties followed for the high authorities and officials there is too much issue to follow
penalties with equality and justice.
REMEDIES:
 Authorities must need to work with justice and equality with all citizens
including officials and citizens.
 Heavy fine should be imposed on those officials who don’t take action against
tax evader.
 Introduce a system where direct penalties should be traced and imposed with
the linkage of NADRA data base and need to maintain all record against tax
evader.

References:-
1. https://www.arabnews.pk/node/1518521
2. https://nation.com.pk/14-Jun-2019/combating-tax-evasion
3. https://tribune.com.pk/story/2078553/6-tax-avoidance/
4. https://tribune.com.pk/story/1972960/6-corporate-tax-evasion-pakistan/
5. https://www.researchgate.net/publication/267378575_Reasons_of_Tax_Avoid
ance_and_Tax_Evasion_Reflections_from_Pakistan
6. https://tribune.com.pk/story/1972960/6-corporate-tax-evasion-pakistan/

Tax Evasion in Pakistan (By Muhammad Hamza Zahid)