FBR advised establishing behavioral insight units for exploring revenue potential

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KARACHI: State Bank of Pakistan (SBP) has given a solution for enhancing tax-to-GDP ratio through establishing a behavioral insight team by Federal Board of Revenue (FBR).
The SBP in its latest report said despite a number of attempt to tax reform tax administration and compliance, the tax-to-GDP ratio in Pakistan remains low.
“One reason for this shortfall could be over emphasis on traditional approaches and lack of innovative tools such as behavioral approaches in tax policies,” the central bank said.
It said there is growing recognition and mainstreaming of behavioral economics around the world, inspired by success stories of utilizing behavioral tools to complement tax efforts. “This offers a unique opportunity for tax authorities in Pakistan to re-think their approaches towards resource mobilization and unleash country’s true revenue potential.”
Countries such as US, Canada, Germany, Netherlands, France and Denmark have fully operative behavioral insight units, while other countries are increasing following suit. “These behavioral units usually communicate with taxpayers and send information in a particular format to achieve a desired objectives,” the central bank added.
First of all the behavioral insight team analyzes 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? Once, a behavioral cause is identified, it becomes easier for the tax authority to design a suitable nudge to mould human behavior.3 For instance, if lack of information or complexity in filing tax returns is identified as the main cause for non-payment/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 tax payer’s behavior.
Learning from these country experiences, the tax authorities in Pakistan can use behavioral tools to nudge people for voluntary tax payments and filing of income tax returns. In this context, it is suggested to establish a behavioral insight team or nudge unit in the country to perform controlled experiments to draw behavioral insights. These insights, in turn, can be used to create different nudges to motivate tax payers and boost revenue collection.