Home News Small Tax Base and High Incidence of Noncompliance Contribute to Enormous Tax Evasion

Small Tax Base and High Incidence of Noncompliance Contribute to Enormous Tax Evasion

Small Tax Base and High Incidence of Noncompliance Contribute to Enormous Tax Evasion

According to the Federal Board of Revenue (FBR) sources, one of the main factors behind tax evasion is the large informal sector which accounts for a significant portion of economic activity but is largely unregulated and untaxed.

Many small businesses and self-employed individuals do not report their income or pay taxes, either because they are unaware of their tax obligations or because they believe that the risk of detection is low, they added.

In addition to the informal sector, said the sources, there are significant issues with tax administration and enforcement.

The tax authority, i.e. the FBR lacks capacity on the one hand and is full of corruption on the other, which has undermined its ability to collect taxes effectively. Moreover, there is a widespread perception among taxpayers that the tax system is unfair and that the government does not use tax revenues effectively.

Tax evasion refers to the illegal or unethical act of not reporting income or assets to tax authorities or deliberately misrepresenting the amount of taxes owed to reduce one’s tax liability.

This can take many forms, such as underreporting income, claiming false deductions, hiding assets in offshore accounts, or failing to file tax returns. Tax evasion is considered a severe crime in most countries and those who engage in it can face fines, penalties, and even imprisonment.

The consequences can be particularly severe for high-net-worth individuals and businesses, who may face not only legal sanctions but also reputational damage and loss to business opportunities.

Meanwhile, some tax experts have pointed out that tax evasion is a widespread problem in South Asia. It is estimated that the region loses billions of dollars in revenue each year due to tax evasion, which contributes to funding gaps for essential public services and infrastructure.

The government has taken measures to increase tax revenues, including through reforms to the tax administration and the introduction of a digital tax system. However, progress has been slow, and tax evasion remains a significant challenge.

To address these challenges, the government of Pakistan has implemented various measures to increase tax compliance and revenue.

These include reforms to the tax administration, such as introducing a single tax identification number and establishing a specialized unit to investigate tax fraud. The government has also introduced a digital tax system, which aims to increase transparency and reduce the opportunities for tax evasion.

Despite these efforts, said tax practitioners, tax evasion remains a significant challenge in Pakistan and there is a need for further reforms and improvements to the tax system and administration. This will require a sustained effort by the government as well as cooperation and compliance from taxpayers and businesses.