India and Pakistan: Tax Incentive Packages Comparison

1.2 Tax Culture

The concept of ‘tax culture’ is complex and the term to some extent remains ambiguous. It has been defined in various ways involving elements of sociology, history and economics. Some economists do not recognize ‘tax culture’ as an economic term and dismiss it as an emotive expression. In taxation literature the term is often used to indicate an established tax system and is therefore attached with progressiveness and modernity of a tax system. It is also used interchangeably with the terms ‘tax morale’ and ‘tax discipline’.  Thus a synthesis of various definitions of the term tax culture indicates a consciousness or awareness on the part of taxpayers of their obligation to pay taxes voluntarily. Nerré (2008) argues that the tax culture more specifically is the tax mentality which consists of tax morale and tax discipline and solely aims at the relationship of the taxpayer to the state in the context of taxation. In general, tax moral is a term connected with “willingness-to-pay taxes” or a feeling of obligation to the general public or community or state. Tax discipline then reflects the attitudes of the taxpayer in his or her actions

1.2.1      Impact of Cultural variations on Tax compliance

A national tax culture which appears synonymous with tax morale is a collective state of mind reflecting tax practices and behaviours resulting into establishment of relationship between tax state and taxpayers. Some theoretical models show that tax morale has been the intrinsic motivation to pay taxes. Tax morale evolves from the perception of individuals about the social, political and economic system. When taxes are perceived as unfair and few tangible benefits are received in return for taxes paid, then taxes cannot be collected voluntarily as a moral duty. Thus, the difference in tax morale among countries has significant impact on the level of compliance. Schneider and Torgler by their economic model confirm that a decrease of tax morale by 1 unit would lead to an increase in the informal economy by approximately 20 percent points. An experimental study utilizing surveys also found that tax morale has positive influence on compliances.

Tax morale is a conviction to contribute to society by paying taxes. Therefore, Schneider and Torgler term operating in the informal sector as an ‘attitude’ of a citizen towards tax obligations. They believe that the ‘attitude’ problem casts wider implications in the form of large informal economies as compared to the ‘behavioural’ issue (which is a driving force in tax evasion).

However, it is noted that the tax morale does change in response to changes in governments’ performance or changes in tax rates and tax burdens. Thus, to improve tax compliance, governments have to improve the delivery of their services including the operation of the tax system.

The above review of tax morale indicates that the compliance level depends on the quality of governance. The compliance can be improved by improving the governance and perception of fairness of tax system.

1.2.2      Tax Compliance Strategies

Tax compliance is the most intricate subject in taxation. Several strategies have been developed by academicians, tax administrations and tax policy makers to achieve maximum compliance. Tax compliance management is currently based on voluntary compliance by taxpayers through Self-Assessment Scheme (SAS). Some taxpayers are picked for audit to deter non-compliance under SAS.

As already discussed, the role of tax morale has a significant impact on the tax compliance. One-point increase in the tax morale increases the tax compliance for same level in a direct proportion. More simply, higher the level of tax morale, more the taxpayers comply voluntarily. Therefore, tax morale is vital for success of SAS and overall compliance management strategy. Government role in areas of tax administration and tax policy directly influences the tax morale and inter alia tax culture in a country. Whether introduction of tax amnesties for tax evaders can have impact on the morale of good or compliant taxpayers seems to be linked to the prevailing tax morale and quality of service delivery by the state institutions.

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