Organisational effectiveness and tax compliance in Punjab

This research will serve as a prelude to a full-scale evaluation to understand how the tax and economic outcomes of competing firms are affected by tax leakages. Both theoretical (Acemoglu & Jackson 2017, Besley 2019) and empirical (Del Carpio 2014, Besley et al, forthcoming) literature suggests that taxpayers’ compliance decisions are affected by how their peers behave.

The ability to mobilise domestic revenue remains one of the key barriers to economic growth and sustainability for most developing/emerging economies of the world (Besley & Persson 2013). These countries are characterised by low tax-GDP ratios, pervasive tax evasion, and weak institutional capacities. Pakistan faces this issue acutely: for the fiscal year 2022-23, the Federal Board of Revenue projects the tax-GDP ratio at 9.5%, well below regional averages (Sarfraz, 2022). Pakistan has failed to capture the potential of domestic tax revenue, with the World Bank estimating a gap of 50% in collection across all taxes. Our proposal focuses on compliance in the context of the largest provincial source of revenue in Punjab; the Sales Tax on Services (STS), a value-added tax. Our research is a response to a demand of the PRA to improve compliance and use evidence-based policy in the realm of taxation.

We aim to experimentally vary the compliance of taxpayers’ geographic neighbours and competitors in the case of restaurants in Punjab, Pakistan, a major source of sales tax revenue for the province, and look for evidence of strategic complementarity of tax compliance decisions. In parallel, we will also do the groundwork for another study that examines the optimal allocation of taxpayers to enforcement teams.