Tax Evasion in Pakistan (Small Business Sector)

Tax Evasion in Pakistan (Small Business Sector)

INTRODUCTION
The development of any nation depends on the amount of revenue generated by the government for the provision of basic services to the nation. One major source of generating this revenue is taxation.
According to Azubike (2009) tax is a major source of government revenue all over the world, including Nigeria.
Income Tax Act of 1922: prevalent in undivided India was adopted by the Government of Pakistan as its Income Tax Law. Income Tax Ordinance, 1979 was the first law on Income Tax which was promulgated in Pakistan from 1 July 1979 by Government of Pakistan. To update the tax laws and bring country's law in accordance with international standards, Income Tax Ordinance 2001 was promulgated on 13 September 2001, which became effective from 1 July 2002. These rules 2002 were promulgated by FBR on 1 July 2002 in exercise of powers granted under section 237 of the Ordinance
Tax is a fee charged ("levied") by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to finance themselves largely through taxes.
If the base of Taxation in Pakistan is not rectified and Individual’s with high incomes are not subjected to Taxation then it’s a threat to Pakistan’s economy. The economy runs on the taxation and for long term survival involvement of FBR in Tax corruption should have to be solved.

Problem statement
Taxation in Pakistan is a complex system of more than 70 unique taxes administered by at least 37 agencies of the Government of Pakistan
According to the International Development Committee, Pakistan had a lower-than-average tax take. Only 0.57% of Pakistanis or 768,000 people out of a population of 190 million approximately pay income tax according to previous studies.
Collecting taxes from small business has proved herculean tax. Because mostly people would rather evade tax than paying it. In Pakistan and other countries, the level of small business tax evasion is quite high.

Objectives:
 To determine the reasons of tax evasion in small business sector of Pakistan.
 To determine the relative importance of different reasons of tax evasion in small business sector of Pakistan.

Research Question:
 What are the determinants of tax evasion in small business sector of Pakistan?
 What is the relative importance of each determinant of tax evasion in small business sector of Pakistan?
LITERATURE REVIEW
Review of literature states different reasons for tax evasion which include. Emeka Okoronyankulu (April 25, 2011) mobilizing domestic resources, in particular, taxation is key to unlocking the resources required for public investment and infrastructure growth. But collecting taxes from citizens have proved herculean tax because the average person would rather evade tax than paying it. In Nigeria and other African countries, the level of tax evasion is quite high. As result, African countries collect little or nothing from taxes.
Bruno Chiarini, Elisabetta Marzano, and Friedrich Schneider (Tax Rates and Tax Evasion April 2008) the tax burden is one of the most commonly cited determinants of tax evasion and, in general, of the underground economy12. The overall tax burden is a key feature for working and producing in the hidden sector and for concealing income and wealth. To assess an empirical relationship with the hidden phenomenon under investigation, we first analyze the univariate characteristics of the series. Chiarini et al (2008) the evidence available for Italy tells a story of increasing fiscal pressure, though with a declining pattern in recent years, and high volatility of tax evasion. What is remarkable in this time-varying framework is the stable gap between the apparent and the effective tax rates, suggesting that tax payers suffer a stable over-burden of fiscal pressure because of tax evasion………… Michael Wenzel (2002) Tax evasion is the illegal evasion of taxes by individuals, corporations and trusts. Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions. Tax evasion is an activity commonly associated with the informal economy. One measure of the extent of tax evasion (the "tax gap") is the amount of unreported income, which is the difference between the amount of income that should be reported to the tax authorities and the actual amount reported.
In contrast, tax avoidance is the legal use of tax laws to reduce one's tax burden. Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to subvert a state's tax system, although such classification of tax avoidance is not indisputable, given that avoidance is lawful, within self-creating systems
According to Shahnawaz Akhter (June 16,2013)The Federal Board of Revenue (FBR) will announce the procedure for grant of rewards to informers and tax officials where information shared by them leads to recovery of evaded taxes.
Cigarette sector : Performance-based incentives needed to stop tax evasion (July 27, 2013 )Staff Report mention Rewards increase motivation for raids and seizures, which are necessary steps for improved enforcement and increased tax collection. A performance based reward system also reduces chances that tax officers will fall for venal offers of tax-evaders. In many other countries such reward systems have successfully helped in curbing illicit trade in cigarettes. Chances that tax officers will fall for venal offers of tax-evaders. In many other countries such reward systems have successfully helped in curbing illicit trade in cigarettes
DANIEL LEBLANC (Mar. 21. 2013) Snitches will get commissions of as much as 15 per cent if they can help the Canada Revenue Agency (CRA) bust large international tax-evasion cases and recoup unpaid funds.The new reward system, laid out in Ottawa’s 2013 budget with further details expected in the coming months, will bring Canada in line with major countries such as the United States, Germany and the United Kingdom. Last year, the Internal Revenue Service paid a reward of $104-million (U.S.) to a former UBS banker after collecting $5-billion in back taxes from Swiss banks.
According to the Federal Board of Revenue (FBR) an official statement here on (June 27, 2013)
Three officers of the Regional Income Tax Office Peshawar were honored with Meritorious Services Reward for showing excellent performance in financial year 2012-2013.
USAID Launches First Tax Awareness Program for Youth in El Salvador
(March 20, 2013) The heart of the campaign is a training facility that will reach 1,500 students and offer awareness about fiscal matters to the public, including taxation, public spending and investment, and government accountability. To be more engaging and capture the youths’ attention, the facility features an interactive walk-through exhibit with information about the history of taxes in El Salvador, the government’s role in public investment and its impact on economic growth, a dramatic look at what the country’s stance without tax revenue in the “Hall of Evasion,” and a room to reflect on youths’ role as citizens and future taxpayers.
According to (Shilpa Parkhi, PhD, Taxation awareness of MBA students - Role of professionals) the fundamental knowledge of taxes is inevitable for any person staying in the country and contributing in the business world. The assistance from the experts or consultants can be sought at the later stage where one understands whom to approach and for what. One of the question in the questionnaire was to gauge the awareness amongst the students about forthcoming tax i.e. GST; hardly twenty percent students were aware about it while eighty percent could were not to bridge the gap between what is expected and what exactly is known the training workshops are recommended. The structure of the workshop can be a two days training with basic and intermediate level of knowledge. The specific objective of the workshop is to create awareness about taxes in the country in business perspective. KEVIN HORRIGAN (September 26, 2010) mentioned in his study we could learn a thing or two from Pakistan. It's not having big arguments over extending tax cuts for the rich. That's because most of the rich people in Pakistan don't pay taxes. The poor don't like it, but the rich don't care. Why is that? Because Pakistan's Parliament is full of rich people, and whatever they say goes. They’ve cut out the middlemen. Here, the rich people have to buy up members of Congress one by one and then convince them not to raise taxes on them, or at least not return taxes to the level they were in 2001. Pakistan solves that by electing only rich people to Parliament. It’s beautiful, or as we say in Urdu, khoobsoorat.It's not like Pakistan doesn't have a tax system. In fact, it has lots of tax systems. At least 37 government agencies levy more than 70 separate taxes on various goods and services. It’s just that most people don't pay much attention to them. The people who pay attention to the tax system find it so riddled with exemptions that they can safely reduce their legal tax obligation to close to zero
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Steven D Oppenheim (The taxation of trusts in the United States)
Who is taxable and how that is determined is quite complicated. It is helpful to keep the following in mind. A grantor trust is not taxed as a trust. The owner generally the grantor – is taxed directly as if the trust did not exist. A non-grantor trust is taxed much like an individual, but is allowed a deduction for amounts distributed to beneficiaries as the beneficiaries are taxable on distributions.
Shahram Haq Publicity levy: Shopkeepers get notices for signboards tax ( June 30, 2011) The City District Government of Lahore (CDGL) has started issuing notices to shop owners for its newly introduced tax on sign boards.The Parks and Horticulture Authority (PHA) has been collecting a charge on boards installed above the roof level.Ahad Khan Cheema, the district coordination officer, said that the new tax was signed into law on June 14. He said all kinds of sign boards at the shops were included in the tax net. He said collection will start from September 2010. Cheema said the city government looks forward to collecting a huge amount under the heed. The DCO said that the town administrations will collect the tax and pay it into the CDGL’s account. The PHA will, meanwhile, continue to collect its fees on other commercial sign boards, he added. Meanwhile, some shop owners complained on Wednesday that the TMA was demanding bribes for offering them exemption from these taxes. Dr Muddassir, who has a private clinic in Allama Iqbal Town, said that he had just received a tax notice last week. A couple of days later, he said, he was approached by a TMA official who offered to withdraw the tax notice if he was paid half the liability.
“The officer told me I may have to pay three years’ arrears if I declined his offer. According to the notice, I had to pay Rs10,000 for a year,” he said. The officer kept calling him for three days reminding him of the offer which he said he refused.
He said many shopkeepers, may have been tricked by the corrupt officers into bribing them for exemption from the arrears that were never applicable to them.
Abdul Razzaaq, the Gulberg Town finance officer, said he was not aware of any officers asking for a bribe. “We have not received any complaint so far,” he said.
“If a complaint is received, departmental action will definitely follow.”
He said that there was always a possibility of some officers miscalculating the size of the boards or tax liability. The tax is charged on monthly basis but can be paid annually, he said.

Hypothesis of the study:
Hypotheses are intelligent guesses regarding the problem that may answer what the results are likely to be. They are those tentative statements or conjectures meant to provide a guide for data gathering. Based on the literature review, the following hypothees are derived.
H1: Peoples trust on government affect tax collection.
H0: Peoples trust on government does not affect tax collection.
H1: Reward to FBR employees affects tax collection.
H0: Reward to FBR employees does not affect tax collection.
H1: People’s awareness about tax will affect tax collection. H0: People’s awareness about tax will not affect tax collection

Figure 1: schematic diagram of the Determinants of Tax Evasion in Pakistan (Small Business Sector)

Methodology
This research will use a qualitative research design employing interview as a data collection technique. Total fifteen interviews of different retailers will be conducted in different regions of Rawalpindi and Islamabad. More specifically, the semi-structured interview will be used due to the reason that it helps the researcher to ask the relevant questions while at the same time also add the evolving questions during the interview. The data collected will be analyzed using qualitative data analysis techniques.