Definition of tax evasion

Tax evasion may be defined either as the understatement or concealment of taxable object or as the failure to pay tax in time either by the assessee or his agent. So it is illegal. In case of tax evasion, tax liability is reduced or tax is not paid at all. Tax evasion means illegally hiding income or concealing the particulars of income or concealing particular source of income or manipulating account so as to inflate expenditure and other outgoings with a view to illegally reduce the burden of taxation. Hence ,tax evasion is illegal.

Definition of tax avoidance

Tax avoidance is the minimization of tax liability by the tax-payer or his agent by efficient tax planning. It is possible by fully complying with the tax laws and meeting tax liabilities. Thus tax avoidance takes the advantages of the loopholes in the existing fiscal laws. The avoider is just smart taxpayer who exploits loopholes in the tax laws (and related laws) to reduce tax liability.

Effects of tax evasion and tax avoidance in economic development

Tax Evasion and Avoidance has a great impact in economic development. The effects of tax evasion and tax avoidance in economic development are as follows:· Tax revenue is used to build the infrastructure, to invest in social security programs, in various poverty elevation programs. But due to tax evasion and tax avoidance above the developmentactivities are hampered.· Tax evasion and tax avoidance hamper the social welfare. It obliges the government to borrow loan that affects the economic development.· Economic growth is co-related with budget. It is natural that higher government`s income support to do large budget and large budget helps to accelerate economic development of a country. But due to tax evasion and tax avoidance a lot amount of revenue is not collected. As a result the government has to shortcut the budget.· In capitalist and mixed economy private sector is supposed to play vital role in investment and development. But sometimes direct investment by the governments is necessary. Due to tax evasion and tax avoidance the government cannot supply the expected fund for investment.· The government has to take various plans for economic development. But lack of fund the plan cannot be implemented. If the people would not evade tax, the government could implement the plans.

Due to tax evasion and tax avoidance the government cannot ensure the employment opportunity. Because the government needs fund to create employment opportunity.· It also hampers structural development such as roads, bridges, transportation, industrial development etc.· Social security cannot be provided fully by the government due to lack of fund. Tax evasion and tax avoidance is the main obstacle to create sufficient fund.

If tax rules are not sufficient to check the tax evasion and avoidance, it may lead to the development of a culture of evasion. So a vicious cycle of tax evasion may take place.· Tax evaded incomes are used for conspicuous consumption in the form of buying luxurious goods. As a result honest tax payers find various methods of tax evasion and tax avoidance. So the stability of the society will be endangered. Such illegal money is also transferred abroad weakening the economy of the country.· Due to tax evasion and tax avoidance a huge amount of tax revenue is lost. As a result the government cannot provide basic needs for mass people.· Development expenses fall due to tax evasion and tax avoidance. It affects the distribution function of wealth of the government and adversely affects the economic development of a country.· From the above discussion it is clear to us that tax evasion and tax avoidance affect the economic development of a country severely. Because a large part of the government income is collected by tax revenue.

Reasons for tax evasion and tax avoidance

There are various reasons for tax evasion and tax avoidance. In order to develop methods and instruments for fighting tax evasion and avoidance, it is very much important to establish a broad understanding of the different reasons underlying these problems. These reasons can be divided in two categories. The first category comprises factors that negatively affect taxpayers‟compliance with tax legislation. These factors can be subsumed either contributing to a low willingness to pay taxes (low tax morale) or to high costs to comply with tax laws. The second category contains reasons for the low ability of tax administration and fiscal courts to enforce tax liabilities. These factors can be summarized as resulting from insufficiencies in the administration and collection of taxes as well as weak capacity in auditing and monitoring tax payments which limit the possibility to detect and prosecute violators.

  

Low level of tax compliance

Low tax moraleTaxpayers‟ willingness to pay taxes differs widely across the world. It cannot be viewed as simply depending on the tax burden. Rather, empirical research indicates that tax payers throughout the world pay more taxes than can be explained by even the highest feasible levels of auditing, penalties and risk-aversion .These high levels of tax compliance result from the tax morale of society that fosters self-enforcement of tax compliance. Tax morale is, however, not easy to establish. Especially countries without a deep-rooted culture and habit of paying taxes find it difficult to establish tax morale. This “willingness to pay” of the taxpayer is influenced by the following factors: 

Low quality of the service in return for taxes

In general, citizens expect some kind of service or benefit in return for the taxes paid. If the government fails to provide basic public goods and services or provides them insufficiently, citizens may not be willing to pay taxes and tax evasion and avoidance will be the consequence

Tax system and perception of fairness

Some studies suggest that high tax rates foster evasion. The intuition is that high tax rate increase the tax burden and, hence, lower the disposable income of the taxpayer. However, the level of the tax rate may not be the only factor influencing peoples decision about paying taxes. In fact, the structure of the overall tax system has an impact as well. If, for example, the tax rate on corporate profits is relatively low, but individuals are facing a high tax rate on their personal income, they may perceive their personal tax burden as unfair and choose to declare only a part of their income. Similarly, large companies can often more easily take advantage of tax loopholes, thereby contributing to the perceived unfairness of the system. Tax rates and the overall structure of the tax system, therefore, have a significant effect on the disposition to evade and avoid taxes.

Low transparency and accountability of public institutions

 Lack of transparency and accountability in the use of public funds contributes to public distrust both with respect to the tax system as well as the government. This, in turn, increases thewillingness to evade taxes.

  

High level of corruption

 If due to high levels of corruption, citizens cannot be certain whether their paid taxes are used to finance public goods and services their willingness to pay suffers and it becomes more likely that they evade their tax liabilities. A tax-payer might consider evading taxes if the cost of bribing a tax auditor is lower than the potential benefit from tax evasion.

Lack of rule of law and weak fiscal jurisdiction Strong fiscal courts are essential to protect tax payer’s rights and safeguard them from arbitrariness. If the legal system does not operate in accordance with the rule of law, citizens have to fear arbitrariness, discrimination, unequal attendance in court, etc. The lack of rule of law reduces transparency of public action and fosters distrust among citizens. As a result, citizens may not be willing to finance the state through taxes, and decide to evade these liabilities.

High compliance costs

 High compliance costs, that are the costs the taxpayer has to bear to gather the necessary information, fill out tax forms etc, can be an additional reason for tax evasion and avoidance.The World Bank’s 2008 World Development Indicator for “time to prepare and pay taxes”shows huge differences between countries. This situation led businesses to worry more about the administrative burden than about the actual tax burden. In such a situation it can be assumed that compliance costs are very high and the probability of the taxpayer complying with such a great variety of taxes low. Above all it is the paperwork that has to be mastered to comply with tax legislation which is deterring firms from paying their taxes appropriately.

Weak enforcement of tax laws

While the preceding section discussed the sources for low voluntary compliance and high regulatory costs of tax compliance, the current section turns to challenges in the enforcement of tax laws. There exist several circumstances that restrain tax administrations from performing their functions properly thereby increasing the possibility of tax evasion. Shortfalls in tax collection procedures as well as weak capacities of tax administrations to detect and prosecute tax violators are both factors that contribute to a low enforcement of tax legislation.

Insufficiencies in tax collection

Regarding tax collection, like many developing countries Bangladesh also faces difficulties with respect to important premises for a well functioning tax administration, especially with respect to identifying and administering those citizens and firms that are liable to tax payments. Problems of insufficient capacity may also occur due to the organizational set up of the tax administration

Strategies against tax evasion and tax avoidance:

1.Social awareness program:

Create awareness among the people and motivate the wealthy section of the society to pay taxes. Apart from the NBR, it must be ensured that the tax payers should be free from various complications and harassments in tax offices while coming to pay taxes. The NBR in alignment with the government concerned department can initiate motivational campaign in raising consciousness explaining how regular payment of taxes serves the country and ensures justice in the society. This can be done not only by appropriate NBR personnel, educational campaigns and by seeking support and co-operation from professionalslike chartered accountants, tax lawyers, etc. A strong fiscal and financial discipline in all the government departments, agencies or enterprises may increase its legitimacy. People must encourage regional and other types of co-operation among tax administrators to reduce the extent of tax evasion by individuals, domestic and transnational corporations. This may be achieved by arranging frequent meeting, seminars, education program for taxpayers, exchanging information, etc.

2. Broad band tax net:

 A wide base and a low rate structure would maximize the tax revenue. Presumptive tax on professionals such as accountants, lawyers, doctors, engineering and management consultants, university teachers may be brought to the tax net. Assessments on coaching center, private university, English medium schools, and private educational institutions for professional development are still at large from tax net. The fiscal (2011-12) budget failed to bring them in tax notice. Special turnover tax (not VAT) may be imposed on coaching centersand private educational institutions including university and English medium schools. Certain tax administration measures, such as selectively increasing the audit frequency and audit thoroughness for upper bracket tax payers and for hard to catch individuals, firms or professionals such as doctors, lawyers, etc., use of cross checking procedures in line with other social or economic indicators of the assesses may be used to re-fix the presumptive tax pointed out earlier.

3. Special watch-dog for excise and turnover taxes:

 It presumes that the business houses and industrial firms are engaged in tax evasion in a significant scale. The success of government machinery for revenue collection is largely relied on administering the gamut involves in collection process, NBR policies and the honesty of the taxpayers. The national budget2010-11 precludes cigarette, bidi, chanachur, juice, energy drink and M.S products from cottageindustries facilities is an appreciable step but policy formulation is not enough to plug the loopholes of the perpetrators movements

4. Reengineering custom duty net:

 Halting evasion of tax by means of under invoicing, proper valuation of should be placed at most important custom centers of the country. The present custom net is too poor to fish many cross borders trade. Tax evasion by multinational companies through transfer pricing is a global phenomenon. Revenue people in many countries including USA, India have been given special power and training to examine extensively the transfer pricing mechanism of those companies. In this country too, there is possibility of tax underreporting through this mechanism.

5. Simplified Income Tax system:

 The present income tax system is too complicated to understand. Chartered accountants, tax lawyers and related professionals often allegedly are abusing this complexity. Their dubious roles as middle man help underreporting many income tax cases. People are likely to go for self

assessments are discouraged by the difficult system. The problem is more acute in a poor economy like ours with high illiteracy and poor recordkeeping and accounting habits. The demands placed on administration- very poorly staffed with poor pay and inadequate logistics support have probably resulted in greater dishonest practicesthan would have been the case otherwise. However, the current fiscal policy has proposed to introduce e-tax filing11, e-tax calculator on NBR web etc.

6. Penalty and Reward:

 Appropriate design of a penalty rate structure also appears to be anti-evasive and anti-avoidance. The rate of penalty should be progressively higher with the amount of tax evaded and must also reflect the current market conditions. At present, the provision of penalty in the statute books is one sided. The tax payers only to be penalized for an act ofomission or default but there is no corresponding provision to penalize dishonest, inefficient or unjust tax officials. Moreover, there is no reward for them who pays taxes regularly and on time. Highest taxpayers or tax payers above a specified bracket are proposed to be awarded with a tax card providing civilian VIP status in all state programs.

7. Standardization of public utility price:

The policy of taxation and user charges for services provided by nationalized state enterprises, i.e., PDB, WASA, DESA, etc., should be wellformulated. The latter when based on standard marginal pricing would collect more revenue and would generate less resistance by the tax payers. The result may be low income tax rate and lesser tax evasion.

8. Updating Anti-evasion Provisions in the ITO, 1984:

 Income Tax Ordinance 1984 was equipped supposedly adequate legible provisions to tackle concurrent tax underreporting-evasion and avoidance, and penal provision for purported taxpayers. Section 19 deals with unexplained investment, Section 115 for detecting concealment, Section 123-124 deal with imposing penalty for tax evasion and chapter XXI for offences and prosecution. Special provisions are incorporated in Section 93, 104 and 106 for escaped income assessment or non-filing tax return; and Sections 117-119empower NBR officials to raid, search, seize and retain the concealments of bullion or valuables required to be disclosed under the ITO, 1984. But long standing these provisions cannot be befitting of all time or age. For example, new cyber tax laws to booktransactions through e-banking, e-commerce, and web-capital market etc. is a demand of time. The ITO 1984 offers a variety of exemptions and incentives and their continuation and misuse erode the tax base.

Conclusion:

The revenue of government has been greatly affected due to the current tax system which gives room for loopholes, the corrupt tax officials, the lack of adequate data and many more have worsened the situation. A reduction in tax rate is not an optimum solution to the problem, simply because some people would still attempt to evade or avoid taxes no matter the rates of taxes. Great care must be taken in drafting the tax laws, since some of the opportunities for tax evasion and avoidance arise from the poor drafting thereof. Moreover, once the laws are passed, prompt rules, regulations or circulars must be issued by the authorities requiring minimum compliance costs. Administrative producers for the resolution of disputes and controversies must be made clear and must be settled quickly. The existing tax structure should be tailored to the attainable efficiency in tax administration. While preparing annual budget, this point deserved special attention to keep government expenditure within tax collection efficiency of tax officials. Otherwise, arbitrary targets to collect tax revenue when imposed make them running wildly to fulfill the target which ultimately destroys theirs and tax payers‟ confidence in taxadministration. . It is recommended to the NBR to ensure efficiency, transparency and accountability in the revenue board to help boost tax collection.