Encouraging voluntary tax compliance
SELF-assessment is a vital element of tax policy and is employed by many countries to collect taxes as it is considered more efficient and cost-effective. Pakistan adopted universal self-assessment for all taxpayers in 2002-03 to ensure voluntary compliance.
Using the technique of ordinary least square regression and quarterly data for the period 2002-03 to 2012-13, a study found that a 1pc increase in voluntary payment increased income tax revenue by 0.36pc. On the other hand, a 1pc increase in withholding tax collection increased income tax revenue by 0.58pc. Likewise, a 1pc rise in collection on demand created through audits caused a 0.08pc increase in overall income tax revenue.
This indicates that after more than a decade of its introduction and implementation, voluntary tax compliance has not been much of a success and that the authorities are using supplementary measures like presumptive taxes, minimum tax schemes (turnover taxes) and audits to collect income tax revenue. These supplementary measures have distorted fiscal policy, with an adverse impact on the economy.
The trend of filing income tax returns over the years indicates the state of voluntary tax compliance. The number of income tax returns filed decreased from the historic high of 1.81m in 2006-07 to 1.29m in 2011-12, a drop of 28.7pc.
An important explanation for declining voluntary tax compliance is the unfair and unjust tax policy adopted over the years. A tax policy, that provides tax exemptions and concessions to certain sectors of the economy and taxpayers, creates an unequal tax burden and is therefore unjust and unfair. Other taxpayers have to share high tax burden to meet the tax revenue target. High tax burden has negative impact on voluntary tax compliance.
For example, income tax exemptions and concessions to the tune of Rs149bn were provided to independent power producers from 2009-10 to 2013-14 — equal to 20pc of the total income tax revenue collected during 2012-13. And these amounted to Rs342bn, or nearly 46pc of the total income tax revenue collected during 2012-13.
There is widespread tax evasion and tax avoidance. According to figures from the FBR’s latest tax directory, the top 1pc of companies accounted for 79pc of the corporate income tax, while the top 1pc of individuals contributed 29pc to the total personal income tax.
Tax audits and penalties are measures considered effective in controlling tax evasion. However, the correlation between tax audits and voluntary tax compliance is not clear. But the trend, based on income tax revenue data collected through voluntary tax compliance and audits, is in the opposite direction.
A lack of transparency and rampant corruption in the fiscal system are the other reasons for the low and declining voluntary tax compliance. The National Accountability Bureau of Pakistan has estimated daily corruption in Pakistan at up to Rs7bn. Making the governance system transparent and public service- oriented is important for improving compliance by taxpayers.
It is said that taxpayers tend to comply with tax rules if it is easier and cheaper for them to pay taxes.However, taxpayers have to spend a considerable time for tax compliance. According to a World Bank study (2013), Pakistan ranked 162nd out of 185 countries as it spent 560 hours on dealing with tax matters, against the global average of 267 hours.
On the other hand, taxpayers’ understanding of the tax system, laws and administration largely influences compliance behaviour. A high tax compliance cost discourages the practice. Likewise, tax education, tax morale, tax information etc. have a positive impact on tax compliance.
In order to increase voluntary compliance with the filing of tax returns and paying due taxes, there is a need for the authorities to provide a level playing field. Extending good tax services to taxpayers, while strengthening audit and enforcement, is essential to increase voluntary compliance. These services may include tax guidance, education, consultation etc. Though such services exist in the taxation system, there is a considerable scope for improvement.