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    Tax Evasion in Pakistan: Causes and Consequences

    October 18, 2022

October 18, 2022

Tax Evasion in Pakistan: Causes and Consequences

Usually, not only citizens but also officials of several federal departments do not report a considerable number of economic activities to the government or the Federal Board of Revenue. 

This makes these activities exclusive in the tax net. Activities such as smuggling, black marketing, corruption, narcotics, and, most importantly, tax evasion make up the black economy. The black economy is sometimes also known as the underground economy. It causes severe damage to not only the country’s economy but also its reputation. The term “black economy” has been introduced to classify these malicious acts. 

Tax evasion is the most common and not very talked-about among these other malicious activities. This is because of many contributing factors. Tax evasion is the name of taking illegal actions that may result in an unfair assessment of taxes. 

These actions include altering your wealth statements, records of tax payments, etc. People do it by using your money and influence and bribing officials to do it. Every act contributing to tax evasion is illegal, such as bribery. The black economy establishes itself when there are plenty of illegal acts such as smuggling, corruption, and tax evasion. 

The Root of Tax Evasion

All of this leads to high tax rates, a poor economy, recession, very high poverty, and an unemployment rate. And it results in an unfriendly public attitude toward the government. These causes and consequences contribute to each other and become the cause of increased illegal activities. Thus, this cycle continues and expands until or unless the government takes strict action and brings the doers under the shadow of the law. 

This tremendous amount of tax evasion and other illegal activities results in a huge loss to the economy and a significant decrease in government revenue. Due to lower federal revenue, the government cannot provide the facilities it initially aimed for. This means fewer public schools, hospitals, and facilities for public transport. 

Usually, self-employed people or those who own and operate a business are involved in tax evasion. It is because people employed by other departments already have the income tax deducted from their salaries at the initial stage. 

Introduction

When the rule of law in a country isn’t as strict as it should be, several illegal activities and crimes start taking place behind the curtains. This whole orchestration of illegal acts involves various unlawful acts, among which tax evasion, tax avoidance, and tax fraud are also present. 

Tax evasion is the most common among these problems, yet it is not addressed much. This increases tax evasion, resulting in great damage to a country’s economy and its citizens. In this article, we will explain everything about tax evasion that you need to know. Let’s get to the point. 

What is Tax Evasion? 

Tax evasion is an illegal attempt to avoid taxes by different means. It is an act where a taxpayer attempts to alter their tax records and misrepresent their total income. 

This underreporting of their income to the tax authorities exempts them from taxes somewhat. But in turn, lessens the government’s revenue, affects the economy, and causes many other problems. 

What are the examples of Tax Evasion? 

There are several examples of tax evasion. Underreporting your income is the most income. Many tax evaders try to underreport their income to the tax authorities. They do this to not fall under the category of paying taxes. 

Other people, especially public figures and politicians, use their influence on officials to alter their tax filings. Many people try to hide the interest they receive in the sales of their goods and services. 

The most common example of tax evasion among Pakistani elites is hiding their income, assets, etc., in offshore bank accounts. This results in an illegal exemption to paying taxes to their government. 

Common Causes of Tax Evasion in Pakistan

There are many causes of tax evasion in Pakistan. The most common one is a lack of education. Pakistan’s literacy rate falls somewhere at 60%. This means a large percentage is unaware of the taxes liable upon them and the effects their evasion would have on the country overall. 

The second cause is high inflation. While inflation can be due to other causes, tax evasion is one of them. Consequently, tax evasion and inflation result in each other. The structure of a country’s tax system also has a huge say as a factor contributing to tax evasion. Tax laws in Pakistan need to be applied and reformed by the government when needed. 

The anarchic distribution of power among different government officials and public figures also makes it easier for them to evade tax. There is significant tax pressure in Pakistan. It means the tax rates on some services are very high. Thus, some citizens attempt to evade it. 

Consequences of Tax Evasion on Pakistan

Unlawful activities such as tax evasion bring new challenges to the country. It, itself, gives birth to a lot of crimes in society, especially bribery and lying. Tax evasion very negatively affects the total revenue generated by the government. Due to less government revenue, the country can easily be plunged into economic crises. 

Lower federal revenue means fewer facilities for the public. This affects the building of new public schools and hospitals and the working of the ones already established. The country’s defense budget is affected, and similar problems arise. Tax evasion is a very regressive act. 

It helps the rich get richer by evading taxes. On the other hand, the poor and middle-class people who don’t have any influence or money to alter their tax records are made liable to pay more taxes.

Tax evasion paves the way for bribery, oligarchy, lying, regression, and many more uncivilized acts. This may become the new norm, and the country as a society would crumble. 

What can you do to prevent Tax Evasion? 

Being a citizen of Pakistan, several responsibilities fall upon you. To live in a country, you must be a responsible citizen and loyal to it. This loyalty and sense of responsibility can be proved by playing a role in your country’s overall moral development. 

As a citizen of Pakistan, you are responsible for reporting any illegal activity you witness to the respective authorities. Tax evasion is also one of these. It should be clear to you that you should not involve yourself in tax evasion or any related crime. Not only this, but you are also responsible for educating your friends, fellows, and family about tax-related crimes. It would help if you educated them about tax evasion and the consequences of these tax crimes. 

If you still witness such activities, report them to the respective authorities, especially the FBR. By asking and suggesting the government introduce better tax reforms, you can help prevent tax evasion in Pakistan. 

Is there a penalty for Tax Evasion in Pakistan? 

Tax evasion is a crime not only in Pakistan but also internationally. Other countries have passed several tax laws that forbid tax evasion and force strict penalties in case people evade tax. Similar is the case in Pakistan, but the only difference is that the authorities here do not enforce the penalties. People can easily escape their penalties by bribing the officials in every department. 

According to the Sales Tax Act of 1990, any individual who attempts to alter their tax records or evade tax is liable for a prison sentence of up to five years. Similarly, according to section 82, any individual who is wilfully involved in tax fraud or tax scam is liable to pay a minimum of 1000 rupees up to 200 percent of the tax he intended to evade. 

Another law binds tax evaders to pay a penalty of rupees 5000. Although there are dozens of such laws, tax evasion remains a major problem. Because these laws are often not applied, or when applied, it’s usually the poor people who don’t have any influence or money to bribe the officials. 

Conclusion

In conclusion, to every detail, we have explained tax evasion, its causes, and its consequences. We hope you carefully went through the article and understood the damaging effects it can have on one’s country. 

Tax evasion is a big black mark not only in the tax system but also in the economic history of a country. A lot of people do not discuss its negative impact. People often avoid talking about it since they may also be targeted by the term “tax evasion“.

We hope that you can now look further into this dark part of our tax system. Moreover, as a responsible citizen of Pakistan, you should help eradicate it by creating awareness.