Tax evasion exists in all countries, though in varying degrees. It is a serious problem in developing countries, which are in the process of evolving their tax systems.

1.What is Tax Evasion and Tax Avoidance?

1. Tax evasion is an illegal attempt to reduce the tax payable by deliberately under-reporting or not reporting taxable incomes or concealing one's true state of affairs from tax authorities. Tax evasion is a criminal offence and if detected is punishable by financial penalties or even by imprisonment or both.

2. Tax avoidance means preventing or reducing one's tax liability through manipulations within the framework of existing tax legislation. Tax avoidance, as against tax evasion, is legally permissible and hence a legitimate aim of taxpayers.

3. Tax avoidance is resorted to through such devices as formation of holding companies to claim artificial deductions, constitution of trusts and family partnerships, transfer of income earning assets to one's wife and children for fractioning income for tax purposes, investing in provident funds and life insurance policies, and manipulation of capital gains.

2. Methods of Evading Taxes

2.1 The following devices are generally employed to evade income tax: 1. Non-reporting/under-reporting of taxable income. 2. Maintaining multiple set of account hooks, fraudulent changes in account books, and keeping transactions out of account books. 3. Opening and operating bank accounts under assumed names. 4. Doing business in the name of dummies. 5. Over-reporting expenses. 6. Fragmenting income to reduce tax liability. 7. Transfer pricing manipulations (by companies).

2.2 Although evasion of tax is a common tendency among people belonging to different groups, opportunities for it vary according to the nature of income earned by taxpayers. In the case of income from salaries and interest from deposits, evasion is less likely because of proper recording and auditing of transactions, and deduction of tax at source. However, opportunities for tax evasion are very large in the case of self-employed in business and professions. They can insist on their customers to pay them in cash or accept invoices, which underestimate the payment.

3. Why Tax is evaded

3.1 Among the host of causes of tax evasion, the level of tax rates is probably the most crucial. It is widely believed that higher the rate of tax, the greater is the tendency to evade taxes. High tax rates make tax evasion more tempting. Tax evaders readily take greater risks if they know that in the event of success the reward is high.

3.2 Tax evasion is more in countries where there is general apathy on the part of people towards the government and its laws. People will have less respect for tax laws if they perceive the tax system to be unfair in terms of level of taxation (tax-GDP ratio) and/or distribution of tax burden among various classes. Similarly, there can be a feeling among taxpayers that government is indulging in wasteful expenditure, e.g. digging the roads too often or spending excessively on government functionaries. There is a widespread feeling among the common men that there is considerable waste in government expenditure, that there is excess staff and that the tail to teeth

ratio is unduly high. And with it all, it is generally felt that the public, which pays the taxes, gets poor service and members of the public are treated often not as masters who pay but as supplicants. Moreover, salaried persons envy tax evasion opportunities available to self-employed professionals and retail traders, and are tempted to conceal then-incomes from non-salary sources.

3.3 Lenient penal action in case violation of law is detected also encourages tax evasion. Tax evasion by politicians and bureaucrats sends wrong signals to the general public that non-compliance is acceptable. A regime of controls, licenses, and shortages also breeds tax evasion and black money.

3.4 The problem of tax evasion in underdeveloped countries is associated with the peculiar characteristics of their economies, which, in most cases, are agriculture-based in the sense that a substantial part of national income originates from and the majority of the work force is engaged in agriculture. Moreover, there is widespread illiteracy, lack of accounting practices. limited monetisation and shortage of administrative resources.

4.1 The effects of tax evasion on an economy are indeed disastrous. Tax evasion cuts at the very root of the revenue potential of a tax system and therefore hinders the resource mobilization efforts of a government. Lack of funds may distort implementation of development plans and force a government to resort to deficit financing in case public expenditure is inelastic.

4.2 Tax evasion may interfere with the declared economic policies of a government by distorting saving/investment patterns and availability of resources to various sectors of the economy. For instance, government may impose credit restrictions to discourage certain activities (e.g. speculation) but money saved through tax evasion may finance and encourage the same activities.

4.3 Evasion of tax seriously undermines the equity attribute of a tax system. Honest taxpayers, who are obliged to bear disproportionate tax burden, feel demoralized and tempted to join the tax evaders' camp.

4.4 Tax evasion leads to the creation of black money, which in turn is a menace to the economy in its own way. Tax evasion and black money encourage concentration of economic power in the hands of undesirable groups in the country.

4.5 Tax evasion eats into the time and energy of tax administration, which is obliged to unravel the intricate manipulations of tax dodgers.

Tax evasion leads to degradation of social and moral standards. Social abuses like bribery, intimidation, blackmailing, tampering with official records, submitting fake documents etc. all go with tax evasion.

5. How to control Tax Evasion

The following methods may be considered to check tax evasion.

5.1 High tax rates increase premium on tax evasion, which in turn generates black money. Contrarily, it can be expected that lowering of tax rates improves tax compliance and broadens the tax base.

5.2 This is a system of collecting income tax whereby money is periodically deducted by the employers, financial institutions, and others from wages of employees, returns on securities, and other payments. Thus, intermediaries (or third parties) do the job on behalf- of the government as regards assessment of the taxable base and the collection of tax thereon. Generally, a fixed percentage is withheld from the payment made which is deposited in government's account. At the time of filing the return of income, the taxpayer encloses withholding tax receipts and in case of overpayment he can claim refund of tax.

5.3In every country, their are some soft-to-tax and hard-to-tax sources of income. Wages and salaries are properly recorded and therefore it is easy to assess and collect taxes on them through the Pay-As-You-Earn system. Similarly, income from securities paid through hanks can easily be subjected to deduction at source.

5.4 Presumptive tax scheme is an easy way to collect and assess the tax. By this method both taxpayer and the assessing authority are some what absolved from their responsibility. Presumptive taxation suits a developing country like Pakistan where there is large unorganized business sector consisting of small retail establishments, and self-employed professionals. It is easy to administer this tax, which can become an effective source of revenue. It also promotes horizontal equity.

5.5 The use of computer facilitates storage and cross checking of economic information will definitely to some extent curb the tendency of avoiding the tax.