Tax evasion is common among Pakistan’s 220 million people; only 2.5% are registered in the tax system but less actually pay it. Pakistan is one of the worst performers in the developing world in terms of taxation efficiently raising government revenue from taxation. However, despite the relentless efforts to reorganize and revise the country’s tax structure, it remains 10% of the total GDP. Failure to strengthen tax culture has hampered economic growth, bogged down social prosperity and prosperity. The difficult situation of the economy, the increase in external debt, the widening of the budget deficit and the burden of indirect taxes on the poor are some of the harmful consequences of the ravaged tax system in the country. This trend can be reversed by taking structural policy measures to make the tax system more efficient by making it a major source of revenue for Pakistan’s fragile and unstable economy.
One of the practices of the last days is the behavioral approach to tax policy. The behavioral approach to tax policy has been successfully adopted not only by developed countries, including the UK, but also by developing countries; for example, by Kenya and Rwanda. This approach considers human tendencies to influence audience behavior. This is a rapidly growing field in both developed and developing countries. This behavioral incentive had become popular after the emergence of the new concept of Nudge by a famous economist Richard Thaler (Thaler, 2018) and an administrative law expert Cass Sunstein. They essentially pointed out that human choices can be influenced by providing additional information about economic, moral, and social decisions. This additional information that influences human behaviors is called nudging. They argued that a small nudge can be important for public policy. Therefore, this concept has become popular with many public decision makers around the world.
Several experiments have been conducted based on nudging. In 2004, the Costa Rican government worked with the World Bank to improve tax filing rates among 50,000 non-filing businesses. The experiment was successful and brought 20% additional tax revenue to the country’s national economy. Moreover, the tax filing cases have also increased to the extent.
Similarly, another successful experience was conducted in Poland, where the Polish government, in collaboration with the World Bank, sent behaviorally informed letters to overdue taxpayers to improve tax compliance in the country. These behaviorally informed letters resulted in a 20.8% increase in the number of compliant taxpayers. This experiment showed another interesting result, that women had a higher repayment rate and they responded with a harsh message. Similarly, countries like Kenya, Kosovo and many other African countries have experimented with the same and achieved better results by adopting this concept of behavioral economics.
The withdrawal of the Statutory Regulatory Orders of 2001 from tax collection institutions is essential to strengthen Pakistan’s tax system. These SROs grant tax exemptions to certain sectors and sub-sectors.
Agriculture sector should also be taxed in Pakistan and farmers should be facilitated but land owners should be bracket taxed. It is fundamentally important that the tax collection capacity of the provinces must be strengthened. There should be certain areas like the service tax that have to be collected by the provinces. It should be noted that at present there are some sectors for which the provinces collect taxes, but the central government also imposes restrictions. Therefore, it becomes a demotion factor for the provinces to collect the tax in the spirit.
Ergo, the incumbent government which has faced a tumultuous and withered economic state, has a colossal opportunity to focus on Pakistan’s fiscal policy boost policy. In this regard, the government must collect data from enterprises and corporations subject to tax. The government must launch public service messages and thus use social media and other technological tools to push and incite the public to improve the tax system in this country.
Taking initiatives like pushing tax policy will undoubtedly bring better and efficient results for the country’s revenue exponentially. Government can save its revenue by influencing people’s behavior, pushing government directives and actions. Moreover, he has to initiate the companies and industrial units to induce the companies and industrial units to give boosts so that fiscal policy can be implemented vitally in the country and the fragile economy of Pakistan may respite through its uneven and difficult times.