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ACKNOWLEDGEMENT

We would start by thanking our Almighty Allah who granted us the sense to acquire knowledge, wisdom to know the difference and without His mercy & help we would not have gotten the intellect to complete this report.

First of all we really appreciate the exertion of best teacher Prof. Umar Zaka who helped us on every turn in this effort. We also greatly acknowledge our families who supported and helped us even when we were engaged with this project.

We have a synonymous feeling that this project really is the summation of all the theoretical and practical work s and we really have a thorough understanding of the mechanics of our project.

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Table of contents page no #

Abstract Introduction Objective of study Theoretical frame work Research methodology Data analysis and results Conclusion

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Why people of Pakistan do not pay tax?

Abstract:
This research aims at measuring the reasons why people of Pakistan do not pay tax. A sample of 100 salaried and non salaried was selected from the listed with the Lahore Chamber of Commerce. Responses were analyzed in SPSS and results showed that people have weak tax awareness with respect to the structure and working of existing tax system along with lesser understanding of Govt. spending programs. A poor tax communication link among citizens and Federal Board of Revenue which is creating misunderstanding on tax system. Formal education in Pakistan does not play a role in creating tax awareness among people. Unexpectedly, a majority of businessman rely on mass media opinion makers to get information on new tax laws.

Introduction:
Pakistan is facing multiple economic challenges ranging from extreme poverty to fiscal deficit. Govt. is struggling hard to collect the revenue required for effective delivery of public services to people. At present, tax to GDP ratio is below 10% which is very low as compared to Asian countries like Sri Lanka 13%, Indonesia 15%, Malaysia 14%, Thailand 17% and South Korea 16%. In 2008, Pakistan requested International Monetary Fund (IMF) to provide financial support to meet its external obligations. IMF agreed to provide $11.3 billion on the condition that Pakistan has to correct its fiscal imbalances by collecting more revenue through taxes specially levying Value Added Tax (VAT) or its Pakistani version Reformed General Sales Tax (RGST). On the other hand, various groups of citizens are resisting the move of imposing more taxes on them. Among them is trader community who is calling for strikes and shutter down in various cities in protest against levy of more taxes particularly RGST. There seemed to be a clear lack of awareness among trader community about purpose of levying taxes. This lack of awareness about the logic of levying taxes is

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4 studied under the concept of fiscal illusion in economics. They are not only misinformed about state expenses but they are also uncertain about true cost of perceived free public services to them. Fiscal illusion is a concept developed by Puviani (1903) and later described in detail by Buchanan (1967). Fiscal illusion refers to systematic misperception about economic parameters that can alter the fiscal choices of the electorate. Tax illusion, a term derived from the literature of fiscal illusion, shows the wrong understanding of people of tax system resulting in either underestimating the costs of public services provided to the people by Govt. or overestimation of revenue burden placed on them. Objectives of Study: 1. To determine the factors on which people do not pay tax 2. tax awareness in the community 3. To know the factors responsible for cultivating anti-tax attitudes 4. To find out the channels that can be used to increase tax awareness 5. To highlight the acceptability of existing tax system

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5 Theoretical Framework: Diagrammatically, I am presenting my study model as following:

Independent Variables

Dependent Variable

Existing Tax System Channels of Tax

Knowledge of tax proceeds

People of Pakistan

Education Level

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6 Research Methodology:

This study was conducted by taking a sample of 100 citizens of Lahore city. Area sampling technique was used to collect data from the eight different geographically dispersed markets of Lahore. A questionnaire was designed to get the required responses. This questionnaire was designed to get the responses from citizens in comprehensive way. Data was then analyzed in bar charts representation form.

Data Analysis and Results:

Tax Questionnaire
i. ii. Are you aware about tax? Yes No

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i. ii.

Are you satisfied with tax system of Pakistan? Yes No

Are you known about the procedures of filling return? Yes No

i. ii.

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Are institutional channel of tax communication working effectively? i. ii. Yes No

i.

Are you satisfied with education syllabus about tax in Pakistan? Yes

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ii.

No

i. ii.

Are you having anti.tax attitude? Yes No

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Are you satisfied with govt role about tax in Pakistan? i. ii. Yes No

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Are we having taxpaying culture? i. ii. Yes No

Are you having tax utilization knowledge? i. ii. Yes No

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Are you relying on mass media to get information on new tax laws? i. ii. Yes No

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Conclusion:

After analyzing the data gathered through questionnaire we can conclude that:

1. There is lower level of tax awareness among traders of Lahore with respect to the understanding the existing tax system ranging from its set of laws to the procedures of filing tax returns. Traders view the existing tax system as ultra-complex, non-responsive and unreliable. 2. Traders are largely unaware of the utilization of tax proceeds collected from them. They seem to possess lower level of understanding of Govt. spending programs. Further, a vast majority of traders are unable to have knowledge to keep track of the tax collected from them. 3. The institutional channels of tax communication have failed to a large extent to communicate effectively with the traders to create a sense of tax citizenship among them. A

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14 large number of traders in our sample were of the opinion that tax officials do not guide them comprehensively on the importance of paying taxes. 4. Formal education in Pakistan does not have a major effect on creating tax awareness among traders as there is a clear absence of syllabus providing information on the importance of paying taxes. This information gap is being filled by the distorted opinions of non-formal tax information channels in Pakistan.

References: Buchanan, J. (1960); Fiscal theory and Political Economy; The University of North Carolina Press; Chapel Hill; pp. 59-64 Buchanan, J. (1967); Public Finance in democratic process: fiscal institutions and individual choice; The University of North Carolina Press; Chapel Hill Puviani, A. (1903); Teoria della illusione finanziaria; Sandron; Palermo. Csontosl, Laszlo, Kornai" ,Janos and Toth, Istvan Gyorgy, (1998), Tax awareness and reform of the welfare state: Hungarian survey results, Economics of Transition, Volume 6 (2), pp 287-312, Gemmell, Norman, Morrissey, Oliver and Pinar, Abuzer, (2004) Tax Perceptions and Preferences over Superior University Lahore

15 Tax Structure in the United Kingdom, The Economic Journal, Vol. 114, No. 493, pp. F117F138 National Superentendency of Tax Administration ,Per , (2011) The development and strengthening of the tax citizenship Concept: the tax education programs presented in Inter- American Center of Tax Administrations CIAT, 45th CIAT General Assembly, Quito, Ecuador. Maurao, Paualo and Viega, Linda (2010), Elections, Fiscal Policy and Fiscal Illusion,
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Oates , E, Wallace,(1988) In G. Brennan et al., eds., Taxation and Fiscal Federalism: Essays in Honour of Russell Mathews, Sydney: Australian National University Press, pp. 65-82.
Hettich, W. and Winer, S. L. (1988). 'Economic and political foundations of tax structure', American Economic Review, vol. 78, pp. 701-12.

Gemmell, N., Morrissey, 0. and Pinar, A. (1999). 'Taxation, fiscal illusion and the demand for government expenditures in the UK: a time-series analysis', European Journal of Political 678Economy, vol. 15,704. Eckstein, Otto, (1964) Public Finance, Second Edition, Prentice Hall Inc., New Jersey. Seddon, Edumund, (1973) Economics of Public Finance, Second Edition, Macdonald & Evans Ltd. London. Tax Reforms in Pakistan, (2004)The World Bank Report. Sanandaji, Tino and Wallace, Bjrn, (2010) Research Institute of Industrial Economics, IFN Working Paper No. 837, www.ifn.se/wfiles/wp/wp837.

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16 Martinez & Vazquez, (2011) Taxation in Asia, Asian Development Bank,.

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