State Bank proposes task force to promote return filing

KARACHI: The central bank advised tax authorities to set up a task force to identify causes of low return filings and then utilise motivational methods to nudge people into meeting their tax obligations.

“The efforts to enhance tax base through increase in documentation and expansion in the scope of differential taxation did have an impact on raising tax revenue,” the State Bank of Pakistan (SBP) said in its latest report on the state of economy. “These efforts can be complemented by utilising behavioral insights to encourage voluntary income tax return filing and thus tax payments.”

Number of returns filing in Pakistan is abysmally low as compared to country’s burgeoning population of more than 200 million. The apex tax authority Federal Board of Revenue received 1.07 million tax returns during the last fiscal year of 2016/17.

SBP said Pakistan’s tax-to-GDP ratio of 2.5 percent (Q1FY18) was one of the lowest in the region due to “overemphasis on traditional approaches and lack of innovative tools such as behavioral approaches in tax policy”.

“There is a growing recognition and mainstreaming of behavioral economics around the world, inspired by success stories of utilising behavioral tools to complement tax efforts,” it added. “This offers a unique opportunity for tax authorities in Pakistan to re-think their approach towards resource mobilisation and to unleash country’s true revenue potential.”

The central bank advised the authorities to learn from countries that are using behavioral tools to nudge people for voluntary tax payments and filing of income tax returns.

It also recommended them to set up a behavioral insight team or nudge unit in the country to perform controlled experiments to draw behavioral insights, much like those established in US, Canada, Germany, Netherlands, France, and Denmark. “These insights, in turn, can be used to create different nudges to motivate taxpayers and boost revenue collection,” it said.

SBP said generally behavioral approaches take into consideration basic human tendencies to influence taxpayer’s behavior.

The existing economic models simplify assumptions to draw insights into human decision making. Most assume people are rational, unemotional, and self controlled.

“However, in real life we see a number of departures from standard rational choice.”

The central bank also explained what the nudge unit should do.

“First of all the behavioral insight team analyses a given situation to identify the real cause of behavioral deviation. Is the given deviation an outcome of cognitive limitations, lack of self control, or a social preference,” it said. “Once, a behavioral cause is identified, it becomes easier for the tax authority to design a suitable nudge to mould human behavior.”

SBP further said if lack of information or complexity in filing tax returns is identified as the main cause for non-payment or non-filing “a specific campaign to disseminate the relevant information or making returns filing easier can make a lot of difference”.

“On the other hand, if non-filing of tax returns is an outcome of natural tendency or a social norm then such hurdles can be removed by designing appropriate nudges to mould taxpayer’s behavior,” it added.

“Currently, the dominant model pertaining to tax communication corresponds with different taxpayers by sending different text messages to raise revenue collection.”