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the tax policies and the tax laws create the potential for raising tax
revenues, the actual amount of taxes flowing into the government treasury, to a
large extent, depends on the efficiency and effectiveness of the revenue
administration. Weaknesses in revenue administration lead to inadequate tax
collections. Financing of the resulting budget deficit through borrowing or
monetary expansion can cause an unsustainable increase in public debt or
inflation respectively. In the alternative, revenue shortfalls shrink the
budgetary resource envelope, thus, affecting the government’s ability to
implement its policies and programs and provide public services. Unexpected
dips in revenue collections also cause budget cuts that result in major
inefficiencies in the public expenditure management.
The
quality of revenue administration influences the investment climate and private
sector development. Firms contemplating investment aren’t only concerned about
the formal tax system, but also about how the system works. A revenue
administration that is perceived to be arbitrary or predatory discourages
investment. Further, weakness in the enforcement capacity of the revenue
administration put law-abiding firms at a competitive disadvantage, as their
competitors in the informal sector are allowed to get away with tax evasion.
This reduces incentives for businesses to join the formal private sector.
Tax
and customs administrations routinely figure near the top of public sector
organizations with a high-incidence of corruption. The cost of this corruption
is high, both for the government and the tax payers. The government suffers
major revenue leakages as dishonest revenue officials allow unjustified tax
breaks to obliging tax evaders. Honest tax payers suffer as corruption in
revenue administration leads to harassment, inflated assessments, high
litigation costs and leniency towards non-compliant competitors. Any serious
effort to reduce corruption in a country and improve governance, in all
likelihood, has to involve reform of revenue administration.
Effective
revenue administration is needed to enable it to keep up with the increasing
sophistication of business activity and tax-evasion schemes. The existence of
tax havens, electronic financial transactions and the increasing use of the
e-commerce pose major challenges in enforcing the tax laws. Without a matching
increase in the professional and technological capacity of the revenue
administration, its chance of monitoring taxable activity and countering tax
evasion are seriously reduced.
Tax
and revenue agencies are under constant pressure to find ways to maximize
revenue and efficiency and improve constituent services.
[Disclaimer:
Compiled from multiple sources. If the above text contains your work, please
let me know, I will credit the authentic sources.]
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