Tax Gap Concepts Essay

The IRS has defined the concepts of a gross tax gap and a net tax gap.

The IRS defines the gross tax gap as the difference between the aggregate tax liability imposed by law for a given tax year and the amount of tax that taxpayers pay voluntarily and on time for that year. Net tax gap as the amount of the gross tax gap that remains unpaid after all enforced and other late payments are made for the tax year. Reasons for Tax Gap in Pakistan The tax gap analysis revealed that there are a several factors contributing to the high tax gap in Pakistan.

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The structural problems, such as narrow tax base due to exemptions, but tax evasion and distrust of public institutions, and administrative weaknesses all also take a toll on tax collection. Recent reviews of tax returns reveal that even compliant taxpayers do not provide essential information in the returns. Due to these discrepancies in returns, a number of opportunities for underreporting income or claiming lower rates and liabilities are generated. There is approximately a tax gap of 58 percent or Rs 1,855.

54 billion in the overall economy of Pakistan, pointing towards implementation of substantial changes in tax policy including broadening the tax base, reducing distortions and phasing out exemptions for bridging the huge gap. Federal Board of Revenue (FBR) has reportedly analysed data that has led to the conclusion that there needs to be an analysis of the tax gap that exists due to the illegal economy that comprises more than 60 percent of the documented economy.FBR is not only responsible for massive loss to the exchequer due to corruption and leakage as revealed by the former Finance Minister Shaukat Tarin, but has also exhibited a penchant for going for the easiest option possible to generate revenue. Thus FBR focus has not been on enhancing documentation and withdrawing exemptions on the income of the rich and influential but on levying taxes that are easy to collect notably the sales tax and the withholding tax that allows for an automatic deposit on sale of identified products..Pakistan is not a poor country; the State’s kitty is empty because of unwillingness of the rich to pay taxes, colossal wastage of taxpayers’ money on unproductive expenses and non-exploitation of vital natural resources.

The absentee landlords (they include mighty generals who have been allotted State lands under one pretext or the other during the last many decades) have been resisting proper taxation on their enormous income and wealth.The dire need in today’s Pakistan is to reduce inequalities through a policy of redistribution of income and wealth by taxing the rich and mighty. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends in all democratic countries. In Pakistan, there has been a gradual shift from equitable to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the fundamental principle of horizontal and vertical equity.

The equity principle can be held to be satisfied when the overall classification of individuals into categories is reasonable and broad enough to contain many individuals within each category and there is equality of treatment within each category. This report provides estimates of Pakistan’s tax gap by type of tax and describes the methodologies and data used to produce these estimates. A country’s tax gap is the amount of tax that goes uncollected due to non-compliance with the tax law.For estimation purposes, the operational definition of the tax gap is the difference between potential and actual federal tax revenue, where potential revenue is the amount of tax that the government would collect if everyone fully complied with the tax law.

It is a simple matter to get actual tax collections by type of tax, so the trick to estimating a country’s tax gap is to obtain a reasonably accurate measure of potential tax revenue.Our basic strategy is to use micro-simulation models and using the Data of cement sector to particularly estimate the TAX GAP OF CEMENT SECTOR to estimate the potential revenues from Pakistan’s cement sector in federal taxes. Such modeling requires micro-economic data with information about the relevant tax bases and a tax calculator to simulate tax liabilities by type of tax.

The advantage of this approach is the detailed information that it provides on the rate of compliance by type of tax which should be helpful in targeting scarce tax enforcement resources and in evaluating tax policy reforms.

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