The Effect Of Corruption On Taxtation System Essay Example for Free

The Effect Of Corruption On Taxtation System Essay Introduction: The Federal government to collect taxes on income other than agriculture income, taxes on capital value, custom, excise duties and sale taxes. In the modern age, corruption is found in almost all the countries of the world. It has been found in all the ages, like an incurable diseases. It has a great crime against the member of the society. Corruption in the tax administration is a two way process. For each corrupt employee, there is a corrupt private sector person who is corrupt either willingly or under duress. Findings in 2001 suggest that a large majority of the private sector justifies non-payment of the taxes because of the simple non-performance of the government in its duties. Many respondents to the survey mentioned other countries where the state ensures provision of inadequate quality infrastructure as health, education, social security, roads and above all security of life and property. Corruption cannot be viewed in isolaton, as it is a part of the broader issue of governance and public management. The quality of a country s’ governance is a critical factor for its development process. It is thus surprising how very small attention is given to one of the most fundamental way that public revenue are raised. Developing countries are typically unable to generate sufficient amount of revenue from taxation because these countries face a number of institutional problems in the process of revenue generation. One of the main problems is corruption in tax administration and tax system reforms (Brondolo,et al.(2008). The quality of governance as a whole is also relevant in this context. It is agreed that the presence of tax system and corruption of public officials is a social phenomena that can significantly reduce tax revenue and seriously hurt economics growth and development. We feel that overlooking them will make any corruption reduction in the tax administration. Hence, even if we cannot change anything in this area, it is our duty to take the decision makers about the very important rule that the play in encouraging and sustaining corruption in the tax administration. Various studies try to investigate the determinants of tax revenue [e.g.,Teera(2003);weiss (1969);Tanzi and zee (2000) and imam and jacobs (2007) .Imam and Jacobs (2007) explain that real per capita income, share of agriculture in GDP, trade openness, inflation and corruption are the most important determinants of tax collection. Gupta (2007) finds that several structural factors like per capita GDP share of agriculture in GDP trade openness foreign aid, foreign debt and some new institutional variable like corruption and political stability are statistically and strong determinants of revenue performance. Pakistan’s Taxation System Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below: Direct Taxes Direct taxes primarily comprise income tax, along with supplementary role of wealth tax. For the purpose of the charge of tax and the total income, all income is classified under the following heads: †¢ Salaries †¢ Interest on securities; †¢ Income from property; †¢ Income from business or professions †¢ Capital gains; and income from other sources. Personal Tax All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates rending from 10 to 35 per cent. Tax on Companies All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 39%. However, the effective rate is likely to differ on account of allowances and related to industry, location, exports, etc. Inter-Corporate Dividend Tax Tax on the dividends received by a public company from a Pakistan company is payable at the rate of 5% and at the rate of 15% in case dividends are received by a foreign company. Inter-corporate dividends declared or distributed by power generation companies is subject to reduced rate of tax i.e., 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all non-company shareholders by the companies are subject to with holding tax of 10% which is treated as a full and final discharge of tax liability in respect of this source of income. Treatment of Dividend Income: Dividend income received as below enjoys tax exemption, provided it does not exceed Rs. 10,000/-. Objective: The main objective of these is to increase the efficiency of tax administration, specifically by reducing corruption and taxation system. Literature review: Sandamo (2004) defines the concept of systemm in the following words.†Tax system is a violation of the law: when the taxpayer from reporting income from labour or capital which is in principal taxable, he engages in an illegal activity that makes him liable to administrative or legal action from the authorities.† Various studies explain that collection of tax revenue is one of the important areas where corruption is most likely to arise [Galtung (1995); Li (1997); Toye and Moore (1998); Tanzi (2000); and Tungodden (2003). Fjeldstad (2005) examines the experience of the Uganda Revenue authority (URA) in controlling fiscal corruption. The study concludes that several factors have contributed to the unsatisfactory results of the URA. The study also explains that pay level of employees in URA is one of the several factors affecting the behavior of tax officers. Fjeldstad and Bertil (2001) explain that this paradox does not justify policies to stimulate corruption. It analyses that in the short corruption may raise tax revenue but in the long run the opposite will be the case. with high Tanzi and Dvoodi (1997) have provided evidence that countries level of corruption tend to have lower collection of tax revenues in relation to GDP. The implication is that some of the taxes paid by taxpayers are diverted away from public accounts. Tanzi(1999) argues that a distinction needs to be made between taxes collected by the tax administrators and taxes received by the treasury. Sanyal, et al. (1998) investigates the relationship between corruption, tax system and laffer curve. The study explain that a corrupt tax administration leads to laffer curve behavior (a higher tax rate leads to a smaller net revenue). The study explain that â€Å"net revenue earned from a truth revealing audit probability always exceeds net revenue through audits, taxes, and penalties in the cheating region†. Hadi (2006) has taken an effort to see the relationship between corruption and tax evasion. This study analysis that how bribery affects tax evasion. It also explains how tax-payers would be tending to pay bribes to maximize their expected income. The study used three different groups of people, individual taxpayers, tax collectors, and inspectors. The results shows that size of bribe negatively affect the tax evasion. Chand and Karl (1999) examined the issue to control fiscal corruption by providing incentives to fiscal officers. A model is developed to expose the incentives effect. This study explains the importance of organizational setup and conditions of service of fiscal officers. The study concludes that corruption has to be done due to low wages and other social circumstances. Phillps and sandal (2008) explains the relationship between governance and tax reforms. The study explains that three key dynamics reflects the relationship between governance, taxation and investment climate. Firstly good tax system positively depends on good governance. Secondly a fair domestic taxation system promotes good governance because benefit tax system allows population to pay fairly. Aizenman and yothin (2005) explains that collection efficiency is determined by the penalty on underpaying and probability of audit. Their main purpose is to prove the dependence of VAT collections efficiency on some key structural and political economy factor, The study shows that collection efficiency of the value added is affected by economic structure that increase the cost of enforcement. The collection efficiency reduces with less urbanization, less trade openness and higher share of agriculture. Conclusions: *The study concludes that governance and corruption are two main determinant of tax revenue. *Corruption has adverse effect on tax collection, while good governance contributes to better performance in tax collection. * The study concludes that corruption has negative effect on tax revenues. * In developing countries tax revenue collection depends on efficiency of government. Thus the accountability , political stability , government effectiveness, regulatory quality , rule of law and control of corruption and are important factors in determining tax revenues in developing countries. * An improved tax to GDP ratio can be achieved by using a combination of good governance, improved tax administration, good macroeconomics policies and other discretionary tax measures. Policy implications: *As confidance building measure to address tax payers concern. Government must demonstrate genuine authority at the top level, arrange public of tax return of ruling elite, some percentage of taxes revenues for specific social sectors, and create a demonstrable linkage between revenue generation and development expenditure of an area. *Separate tax assessment and adjudication. *Maximum authority to tax administration. *Policy implications for governments internationally when consideration is given to the issue of effective administrations. Efforts need to be made by governments to make improvements to the governance ( voice and accountability, political stability , government effectiveness, regulatory quality , rule of law and control of corruption) as a starting point. *Fiscal corruption in the tax administration is reduced by required laws, which are enforced by independent and efficient judicial system. *Democratic political institutions are in place, taxpayers are allowed to freely express their opinion about the tax system, so tax administrations should become more transparent and publicaly accountable, hence fiscal corruption is more easily exposed. *Developing countries need actively to strive to reduce the opportunities of corruption in tax administration and change in incentive structure for tax officials. *International donors like IMF may benefit in achieving its objectives if its adopt eradication of corruption as the prime component of conditionalities’.which are almost always attatched to their programmes of soft loans. *Business process reengineering should minimum tax payers/tax collectors interaction , simplified system and rules , reduced discretionary power s, Strengthened monitoring ad accountability, and increase transparency. References: Acconcia, A.,M.D’Amato, and R.Martina (2003) Tax Evasion and Corruptionn in Tax Administration Journal of public Economics. Aizenman, J. and Y.Jinjarak (2005) The Collection Efficiency of the value Added Tax: Theory and international Evidence. Alm J.,R.W. Bahl and M.N. Murrey (1991) Tax Base Erosion in Developing Countries . Bird, Richard (2004) societal institiutions and Tax Effort in Developing Countries. Gupta, S.A (2007) Determinants of Tax Revenue Effort in Developing Countries . Phillips, M. and R.Sandall (2008) Linking Business Tax Reforms with Goverance. Tanzi, V. and H.Zee (2001) Tax policy for Developing Countries. Tanzi, Vito (2000) Taxtation in the last Decade.Centre for Research on Economics Development and Policy Reforms. Tanzi, V. And H.Zee (2000) Tax policy for Emerging Markets: Developing Countries. Washington , DC: International Monetatry Fund.