DEPARTMENT OF COMMERCE AND FINANCE

GOVERNMENT COLLEGE UNIVERSITY

Kachahry Road, Lahore

 NAME: Qaisar Shahbaz (2369)

 CLASS: B.Com (Hons)

 SECTION: (A)

 SUBMITTED BY: Qaisar Shahbaz(2369)

 SUBMITTED TO: Mam Nosheen Rasool

 SUBJECT: Business Tax

 ASSIGNMENT: Tax avoidance and Tax evasion Implications

for Economy of Pakistan.

INTRODUCTION
 Economic development is essential factor for every country in the world and government services and public
infrastructure are also required for economic development. Lacking in public service provisions subverts the efforts to
increase people living standard especially in developing countries and slow down the economic growth. It has also
observed that governments of many developing countries have failed to provide adequate public services due to many
reasons. The most important of them is the lack of tax revenue. Tax revenue in a country serves as life blood for the
government: whereas; the ratio between average revenue and gross domestic product (GDP) in developed countries
was almost 35% in 2005. In developing countries, this ratio was almost 15%, while in third world countries tax revenue
ratio was 12% of gross domestic product. This gross domestic product (GDP) gap can be elucidated to some extent
through this fact that demand increases more for public services as compared to the increase of demand for income.
This phenomenon also shows that these countries are lacking in the ability to increase the tax revenue at required level
to provide the sufficient public services. The political and academic debates have raised many issues regarding
development aid and finance. Development aid and finance shows the ability of a country to finance the public sector
which may undermine due to tax evasion and avoidance. On the other hand, it is also perceived that both tax avoidance
and tax evasion are linked with shadow economy and Schneider and Enste (2000) reported that shadow economy is that
economy in which people do not show their real income and taxable income that they have earned through legal
activities including barter and monitory activities in order to avoid paying tax. Every patriotic citizen has a desire to
strengthen one's society. It is their public duty to make tax payment and they also try to fulfill their desires by making
tax payments to the government because taxes are the major sources of income for government and government use
this money to provide services to general public such as defense, public utilities, transportation, education, roads etc.
But tax avoidance and tax evasion are also exist and considered as major problems for the Pakistan that create
interruption in the working of government to provide the services to general public. Tax avoidance can be defined as the
activity of tax payers in which they try to find out different ways to lessen or eliminate his tax liability and do not show
their legal income without violating law, whereas, tax evasion can be described as the activity of taxpayers in which they
wayward and premeditated infringement of law for the purpose of escaping tax payments that has been indisputably
inflicted by the tax authority. These two evil spirits have generated a gap among probable and actual government
revenues. Government has protested against these two above mentioned evils for number of times but corporations
and all other persons whose income is taxable, they make use of the tax avoidance strategies to get away or curtail the
taxes or they willfully employ fake techniques with the support of the tax officials to evade the total tax. Amount of
taxes is essential in every economy for development. In case of Pakistan, some people individually as well as
corporations pay tax but most of the people and corporations are not paying tax to 218 relevant tax authority, although,
amount of tax will spend on citizens of Pakistan. Obviously, there must be some reasons for non-payment of tax.

 Tax avoidance
 Tax avoidance is another method of reducing tax liability by taking advantages of loopholes or weakness in the
law.
 It is also known as loopholes tax planning.
 Earlier tax avoidance was considered completely legitimate, but at present it may be illegitimate in certain
situations.
 Government makes amendments to stop such loopholes.

Example:
Where a person transfers to any other person income from an asset without transfer that asset, the income shall be
included in the total income of the transferor.

 Features
 Reduce tax liability by finding loopholes in the law.
 It is also legal but against the intention of law maker.
 It is not accepted in the eyes of law.
 Government makes amendments to stop such loopholes.
 Penalty May or may not be imposed.
 It leads to the generation of black money.

 Tax Evasion
It is a method of reducing tax liability in an illegal manner. It is unethical. It is clearly prohibited, because it is
fully illegal. Heavy penalty is imposed. It also leads to the generation of black money.

 SOME WAYS OF TAX EVASION

 Failing to pay the due
 Smuggling
 Inaccurate Financial statement
 Bribery
 Storing wealth outside the country

 Causes / Reasons of Tax Avoidance and Tax Evasion

 Absence of tax morality
 High tax rates
 Illiteracy of tax calculation
 Lack of adequate enforcement for default
 Lack of adequate tax incentives
 Non-existence of an equitable & efficient tax system
 No public enlightenment campaign
 Poor Relationship of Tax Payers & Authority
 Poverty
 Proliferation of taxes
 Complicated tax laws
 Corruption
 Lack of transparency in government spending
 Inflation
 Comparison between Tax Avoidance and Tax Evasion

BASIS OF COMPARISON TAX AVOIDANCE TAX EVASION

Meaning Reduce tax liability by finding Reducing tax liability in

loopholes in the law. dishonest manner.

Legality It is legal but against the intention of It is unethical

law maker

Example Clubbing of Income Increasing expenses by

showing fake bills

Acceptance It is not accepted in the eyes of law It is clearly prohibited, because

Government makes amendments to it is fully illegal
stop such loopholes.

Penalty May or May not Heavy penalty

Implications It leads to the generation of black It also leads to the generation

money of black money
  Effect of tax evasion on economy and gov't techniques to reduce
them

Companie Corporate %
s
Tax files
registered
For CIT

60000 25551 42.85

Represent only 0.8% of commercial and Industrial users

GST
Retailers %
registered
retailers

178190 1.4 million 12.72

Whereas approximately, there are 3.4 million commercial and industrial

electricity Users

Pakistan can double its tax revenues by concerted efforts to broaden tax bases, strengthening tax compliance,
eliminating distortionary tax expenditures, and rationalizing the tax system in an efficient and equitable manner, says a
latest study of the International Monetary Fund (IMF).

 Why they are evading tax?

Factors includes

 No strictness from government on tax evasion.

 Corrupt government discourage tax payer to pay tax
 Taxpaying system is very complicated in Pakistan.
 People don't take responsibility to pay tax.
 Laws are not based according to ground realities.
 Corruption of govt. encourage tax payer to evade taxes.
  Attitude of Public Regarding tax

 People don't pay taxes because they usually "Go with the flow".
 There is no benefit for tax payer from government.
 Tax rates are higher in Pakistan
 Tax evaders motivate tax payers not to pay taxes.

 Recommendation to reduce tax evasion and expand tax net

 Proper tax audit
 introduction of amnesty schemes and proper implementation
 Low tax rate as much as possible (application of canon of equity)
 Tax system should be easily understandable
 Strict policy against tax evaders
 Accountability of Gov't can eliminate

 CONCLUSION
 Tax Avoidance and Tax Evasion both are meant to reduce the tax liability ultimately, but what makes the
difference is that the former is justified in the eyes of law as it does not make any offence or breaks any law.
 However it is biased as the honest tax payers are not fools, but they can also make arrangements for
postponing unnecessary tax.

 If we talk about the latter, it is completely unjustified because it is a fraudulent activity, because it involves the
acts which are forbidden by law and hence it is punishable.
 Having been aware of the ill effects of tax evasion, it becomes each one of our responsibility to support the
government by complying with the tax procedures and pay taxes promptly.
 As it is rightly said that every drop of water makes an ocean, it can also be said that our small contribution
makes a huge difference in the growth of the economy. Instead of expecting for change to happen, let us be the
change agents who can bring in a drastic development by just fulfilling our responsibilities promptly.
 If each one of us speaks the same language, then there will be least or no scope for us to be exploited by any
institution or authority. So let us fulfil our duties first and claim our rights next.