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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 develop
mentactivities 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 morale
Taxpayers 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 the
willingness 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 payers 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 Banks 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 profession
alslike 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 centersa
nd 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 budget
2010-11 precludes cigarette, bidi, chanachur, juice, energy drink and M.S products from cottagei
ndustries 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 practi
cesthan 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 ofomis
sion 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 well
formulated. 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 booktr
ansactions 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 tax
administration. . It is recommended to the NBR to ensure efficiency, transparency and
accountability in the revenue board to help boost tax collection.