Student Name: Mueed Babar

CMS ID: 123-16-0019

ETHICS IN TAXATION

Tax is a compulsory contribution as in its basic definition it is designed to distribute income from the rich
to the poor and to cover costs of development of society but distribution as such leads to conflict in
interest of tax payer and that of the authority entitled to collect tax. Purpose of tax is to generate revenue
for public service, but the objective of public service is not always true to its nature rather tax collection
is mere way of generating revenue of which taxpayer is under obligation and if a system is based on such
notion, it promotes an ethical conflict between both parties. That results in resistance from taxpayer.

For Legislators: An ideal tax system is that is based on ethical and rational principles where taxpayer
does not feel to be paying an unfair chunk of their income without any rationale. It is therefore duty of
legislators to form such tax laws to promote voluntary contribution of public.

A good tax system has nine basis to construct on as defined by Adam Smith in his ‘Canons of Taxation’.
As long as these are fundamentals of tax system ethical conflicts between taxpayers and tax, legislators
can be avoided.

First principle is that there should be social justice and distribution of wealth should be based on equity,
that is rich people should pay more taxes than poor people should. Then it is clarity, efficiency. Tax paying
/collection system should clearly be laid under with respect to amount to be paid and manner underlying,
which should be easy and convenient for taxpayer in order to avoid hardships on way of paying taxes,
which is to prevent tax evasion and corruption. And as far as efficiency and productivity goes two source
problems for tax authorities are costs of collecting taxes, which is to be kept minimum and reluctant tax
payers for which revenue should be generated from small portion of society rather than burdening whole
society. Parallel to which a tax system should be able to adjust taxes without taking any hefty measures
to educate taxpayers and implement new charges.

Ethics in Perspective of FBR:

For FBR and tax administrations, it is in best interest of public to avoid abuse of powers by the Tax
administration. Moreover, work with fairness and strive to be impartial, fair, neutral, and consistent in
administering the law without regard to race, social or economic circumstance along with full
transparency of proceedings.

Best Tax administration is not that which collects most revenue rather it depends how this revenue
generation is accomplished. Whether all stakeholders are taxed fairly or tax is collected from poor
/salaried class after failing to collect taxes from entrepreneurs/businesses. Thus, equity demands that tax
administrator should not achieve its objectives in an irrational manner. Further target to promote
voluntary tax compliance and to make the tax administration a service oriented organization and to
implement comprehensive policies and programs for the education and facilitation of taxpayers,
stakeholders and employees.
Ethics for Tax Practitioners:

Tax practitioners’ major ethical principle is to work with integrity, which imposes an obligation on all tax
practitioners to be straightforward and honest in all professional and business relationships. Integrity
also implies fair dealing and truthfulness. Tax practitioners should not be associated with the reports,
returns, communications, or other information where they believe that the information is either
misleading or misrepresented. In addition to integrity, it is duty of tax practitioner to avoid any bias,
conflict of interest or the undue influence of others. A Tax practitioner may be exposed to situations that
may impair such objectivity.

Tax practitioners have obligation to retain their knowledge of their clients to themselves. Refrain from
disclosing to third parties the client’s business confidential information acquired as a result of
professional and business relationships without proper and specific authority or unless there is a legal or
professional right or duty to disclose, and using confidential information acquired as a result of
professional and business relationships should to their personal advantage or the advantage of third
parties.

Ethical Considerations for Tax Payers:

Most taxpayers pay their taxes, without any issues. Tax can be used for all sorts of purposes, and it is
often clear what people question about these purposes. We can start with the provision of law and order
and the more extensive public services such as healthcare and education. Tax payers will also approve of
taxation for these things because they allow more goods and services to be produced, and they also allow
more welfare to be served to society, it will also enhance people’s opportunities to use their talents and to
lead satisfying lives.

However, not all taxpayers act in this way, they look for strategies to reduce their tax liability which
include, tax evasion, tax avoidance, and tax planning.

Tax Evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax
authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less
income, profits, or gains than the amounts actually earned, or overstating deductions. Tax evasion is an
activity commonly associated with the informal economy.

Tax Avoidance is the legal use of tax laws to reduce one's tax burden. Both tax evasion and avoidance
can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to subvert
a state's tax system, although such classification of tax avoidance is not indisputable, given that avoidance
is lawful, within self-creating systems.

Tax Planning is the exploitation/use by the taxpayer of legally permissible methods, tax credits, tax
rebates, and tax reductions in order to avoid or reduce tax liability. This is also known as “tax
minimization.”