No matter wherever you may reside in the world, through keen observation you may realize that you are surrounded by laws and if it weren’t for these formulated laws, the world would have been in utter chaos. In this article, however, our focus will be on one of the public laws – Tax laws. You might have heard the phrase “Pay your Taxes on time” or “Don’t forget to file Tax Return” (if you have not yet then you probably will during your lifetime) and you may have wondered why you have to pay these taxes and that too, especially before a certain date or period. Well, taxes are, in simple words, a means of financing public expenditure, and the act of the taxpayer paying the correct amount of taxes each year while declaring their correct income is defined as Tax Compliance – one of the Tax laws.
Tax Compliance is essential to keep the system running for all masses and support many programs and services that may further improve individuals’ lives. So, the public infrastructure that people use every day, the welfare programs being carried out, or even the children being able to go to school and receive proper education is nothing but a result of paying the right taxes. This is why all nations need to find a loophole for the pattern of tax noncompliance whenever observed or detected.
Despite it being a noteworthy law, some people fail to meet their tax obligations or otherwise known as Tax Noncompliance. There are many reasons for this: taxes become high as compared with the cost of living, lack of knowledge about the tax laws, the complexity of tax laws, Tax Evasion (the illegal non-payment or underpayment of tax), and weak tax system.
In developing countries such as Pakistan, the state authorities are facing difficulty in achieving tax compliance. While the number of people required to pay taxes is great, the people paying the taxes comprise a small proportion of that. What happens is that people who should have to pay lesser taxes are paying high amounts of taxes (like employees). In contrast, people who have to pay high amounts of taxes either don’t pay taxes or pay very little (like businessmen, firms, and corporations) which overall decreases the tax revenue collection. Also, the taxation system is complex which makes it even harder for Taxpayers and Tax Officials to understand and further create opportunities for Tax Avoidance or Tax Evasion. The unfamiliarity of processes of books keeping, tax calculations, and preparation of tax returns also results in tax evasion. Moreover, people hesitate to get registered with the tax collecting agency and try to escape from the tax net (through legal or illegal means) due to a lack of education & knowledge of bookkeeping. What can be done is to hire qualified & trained accountants or tax lawyers but that just builds up costs (also known as Compliance Costs) that need to be paid by the taxpayer which may lead the taxpayer to evade taxes. Some other reasons include tax amnesty schemes, which are popular among policymakers, or corruption due to which earnings of withholding tax on wages and salaries are dropped. Not to mention, supportive tax treatment to limited interest groups creates an opportunity for tax evasion, corruption, and substantial economic distortions.
On the contrary, there are solutions for every problem created. Just like Robert H. Schuller once quoted “Problems are not stopping signs, they are guidelines”. If a careful analysis is done of the patterns and their outcomes of the current and past situations then suitable measures can be taken accordingly. Some of these may include:
- Working on the taxation system to make it easier (since overly complicated tax systems are associated with high tax evasion).
- Run campaigns for circulating knowledge about tax laws so that the general public can be educated about their obligations.
- An organized team that could regularly check and further take action against illegal activities involved.
- Strict penalties or courses of action against those who participate in the act of tax avoidance or tax evasion.
- The introduction of new technology and analytical tools to upgrade the tax administration.
Several more adequate measures can be taken to ensure that the masses comply with their tax obligations. After all, such measures not only remind individuals of their tax obligations but helps the country with its economy and further promote economic growth.
References:
- https://jfin-swufe.springeropen.com/articles/10.1186/s40854-021-00234-4
- https://subnational.doingbusiness.org/en/data/exploretopics/paying-taxes/why-matters
- https://www.oecd.org/tax/administration/33818656.pdf
- https://www.mbaknol.com/business-taxation/five-reasons-that-contribute-to-non-compliance-with-tax-laws/
- https://www.eajournals.org/wp-content/uploads/The-Determinants-of-Tax-Evasion-in-Pakistan-A-Case-Study-of-Southern-Punjab.pdf
