YARDSTIC INTERNATIONAL

COLLEGE

School of Postgraduate Studies

Department of Accounting and Finance
Section- 1
Title: - Reasons of Tax Avoidance and Tax Evasion: Reflections from
Pakistan
Group assignment for the partial fulfillment of the course “Advanced

Taxation”
GROUP MEMBERS
1. FILIMON KEBEDE
2. EYERUS G/EGZIABHER
3. EYERUS ESHETU
4. SERKE BELETE
5. SEADA HUSSEN
6. ZEHARA SHAMSU

Submitted to: Kasu Birbirsa (Ass.p)

Submission date: Jan 17, 2024 G.C
 Reasons of Tax Avoidance and Tax Evasion: Reflections from Pakistan
Muhammad Muazzam Mughal, *Muhammad Akram
Journal of Economics and Behavioral Studies Vol. 4, No. 4, pp. 217-222, Apr 2012
(ISSN: 2220-6140)
Hailey College of Commerce University of the Punjab, Lahore-Pakistan

Amount of taxes serves as life blood for government. According to the researcher, results indicate
that there exists a highly significant positive relationship between individual variables of
reasons/causes of tax avoidance and evasion in Pakistan at 100% significance level. As per the
study, it is also perceived that both tax avoidance and tax evasion are linked with shadow economy
and Schneider and Enste (2000) reported that shadow economy is that economy in which people
do not show their real income and taxable income that they have earned through legal activities
including barter and monitory activities in order to avoid paying tax.

Tax avoidance and tax evasion are also exist and considered as major problems for the Pakistan
that create interruption in the working of government to provide the services to general public. Tax
avoidance can be defined as the activity of tax payers in which they try to find out different ways
to lessen or eliminate his tax liability and do not show their legal income without violating law,
whereas, tax evasion can be described as the activity of taxpayers in which they wayward and
premeditated infringement of law for the purpose of escaping tax payments that has been
indisputably inflicted by the tax authority.

The main objectives of the study was to explore different factors regarding causes/reasons of tax
avoidance and evasion, which are highly preferred by the individual taxpayers in Pakistan, in
result, they try to avoid and evade amount of tax; and examine the relationship between identified
factors of causes/reasons of tax avoidance and evasion in Pakistan. The study results indicated that
as the sentiments of grievance increased in absolute terms, the level of tax evasion also increased
and the level of tax moral belief decreased. Fisher et al. (1989) also examined the behavior of
taxpayers in order to explore the behavioral determinants of tax evasion. Alligham and Sandmo
(1972) conducted study in order to examine the behavioral determinants of tax evasion by
introducing a seminal theoretical model. In this study, he explained that the behavior of tax evasion
was based on level of risk aversion, amount of penalty imposed, and probability of being audited.
Moreover, study found an ambiguous relationship between marginal tax rate or income and tax
evasion. Orewa (1957) conducted study and investigated the characteristics of tax evasion. Study
found that high degree of inter-district mobility is the main reason of tax evasion on the part of
taxpayers and argued that mobility of wage earners, salaried persons and self-employed persons
with permanent and known addresses is an important factor of tax evasion because they keep
themselves in movement from one place to another in order to earn legal money. He also found
the reasons of partial evasion such as: resentment toward illiterate persons that present only their
salaries and wages as taxable income, and traders maintain inadequate records.

According to 2010 census, there are 271 cities in Pakistan and in this study 72 cities are targeted.
Further, non-probability sampling technique is used in which each respondent does not have equal
chance to select as sample. From 72 cities targeted Population by the researcher a total of twelve
hundred questionnaires are distributed among those respondents whose incomes fall in taxable
range. In response, one-thousand and forty-three questionnaires are received; however, response
rate is 86.92%. Different statistical techniques like factor analysis to calculate factor loadings,
standard deviation, arithmetic mean, percentages, Central Limit Theorem to know the correctness
of factors based on probability, and correlation analysis are applied in this study while analyzing
the data.

The findings depicted that the value in result is equal to zero which means there is hundred percent
probability that all variables mentioned in favor of reasons of tax avoidance and evasion are
correct. The study revealed top five reasons of tax avoidance and tax evasion on the base of factor
loadings and arithmetic mean. On the base of factor loadings, ranking of top five variables is in
such manner: no public enlightenment campaign is at first; lack of adequate tax incentives is at
second; poor relationship of tax payers & authority is at third; proliferation of taxes is at fourth;
and illiteracy of tax calculation is at fifth. On the other hand, on the base of arithmetic mean, poor
relationship of tax payers & authority is at first; lack of adequate tax incentives is at second;
proliferation of taxes is at third; illiteracy of tax calculation is at fourth; and no public
enlightenment campaign is at fifth.
The study concluded that on the base of central limit theorem, there is 100% probability that all
the variables regarding reasons, ways, and social and economic effects are correct. Furthermore,
on the base of factor loadings, ranking of top five reasons/causes is in such manner: no public
enlightenment campaign is at first; lack of adequate tax incentives is at second; poor relationship
of tax payers & authority is at third; proliferation of taxes is at fourth; and illiteracy of tax
calculation is at fifth. On the base of correlation analysis, all variables are, except variable non-
existence of an equitable & efficient tax system and poverty, highly significantly positively
correlated with each other. The study focused on exploration of major reasons/causes of tax
avoidance and tax evasion from individual taxpayers of seventy two cities of Pakistan. This
phenomenon can be extended up to many more cities of Pakistan and corporations can also be
included in analysis to explore the reasons/causes of tax evasion and avoidance. We as a group
recommended that:

A tax census should be conducted in a country to know about the actual number of taxpayers
whether they are individuals or businessmen so that tax evasion incidences should be reduced.
New policies should not only be developed to remove reasons/causes of tax avoidance and evasion
but also developed to reduce size of shadow economy because shadow economy is that economy
in which people do not show their real income and taxable income that they have earned through
legal activities including barter and monitory activities in order to avoid paying tax. Corporations
are not only the main and major taxpayers but also they are the systematic tax avoiders and tax
evaders. Despite this fact the study didn’t include them. Therefore, could the researchers include
corporations who are the major taxpayers for the government revenue, the findings of the study
might not only revealed the systematic reasons/causes of tax evasion and avoidance made by
corporations, but also the remedy to prevent them from these evil actions in order to safeguard the
government revenue, the public interest in general and the economic growth of that particular
country.