Governments of developing countries are constantly scrambling to raise the revenues required to finance higher service demands expected by their citizens and the infrastructure (economic, social and environmental) that will enable them to grow the nation towards being industrialized. And to sustain the all imperative comparative advantage over neighbouring nations. Taxation revenues continue to be the main source of revenue for Government spending. This in turn requires well-designed tax policies (new taxes and tax reform) that are translated into clear legislation and are administratively feasible. Perhaps the greatest challenge facing these countries is to improve the effectiveness of their tax administrations.
Tax Administrations in developing country contend with the same range of challenges with developed nations, although the significance of typical collection issues may be greater. As a result these countries suffer significant losses in revenue collection. Introducing tax initiatives such as self-assessment and GST does alleviate the revenue leakages to certain extent, however the agencies capacity and capability to administer an effective and efficient taxation system is the ultimate determinant to maximizing collections.
It has longed been realized that the existence of widespread tax evasion as part of the hidden economy is a critical concern to developing countries, as it is with developed nations. Hidden income can be defined to include legitimate earnings which are hidden actively or passively to evade tax, as well as illegal earnings derived from non-lawful operations and services. Without trivializing the complexity in dealing with the later type of evasion, the taxpayer’s perception of the administration influences their obligation behaviour. It’s more so evident in developing countries where the administration may not be seen by taxpayers as service organization nor as an active enforcer. For example, common trends include:
Inability for taxpayers to get information from or transact with the agency, either low responsiveness, inconsistent advice, multiple hand-offs, huge queues at the service counters etc.
Assessments and refunds taking months to process, often taking over six months to make a refund
No urgency for Taxpayers to get registered, especially with small to medium enterprise and self-employed
Lodgments and payments not pursued actively by the agency, often resulting in over 30% of non-filers
Accumulating Debt not pursued in a timely manner by the Agency. Over the years can amount to considerable loss in non-recoverable debt (ie. timing issue).
Low level of compliance actively, in terms of education and enforcement. Taxpayer being audited is seen as just bad luck.
The common complaint of the developing country’s tax administration is the lack of resources. In terms of priority, these agencies are more focused on transaction processing activities which are largely manually driven. They are constantly bogged down dealing with never ending processing back-logs, including low turn-around in assessments, refunds, audit cases, appeals, rulings and so on. A large portion of the administration’s staff would be devoted to these low-value activities, which actually does not grow the revenue. The executive management of these administrations is well connected to the best-practices being adopted elsewhere, and understands the positive application to their own environment. They are challenged by the expected rate of change imposed on their agency, constantly battling the needs of Government to collect more and implement new policies quickly, at a lower operational cost.
Taxpayers who demand the same levels of services they come to expect from the commercial sector Employees who are frustrated no having the revenue-agency tools to deliver superior services or for effective compliance enforcement. In this hast to modernize the tax agency often turns to automation and Information Technology as the savior and try to implement large amounts of innovation in a short period. As examples, interactive internet service, imaging for data capture, data warehouse, mobile audit workbench, IVR/CTI. All of these are essential IT enablers for the business; however, they often fall short of delivering the benefits in improving service and compliance enforcement in developing countries.
Lesson learnt elsewhere tell us that certain characteristics of an agency are central to support business innovation (new ways of doing business) using IT. Without these characteristics, the agency would cripple its efforts to modernize. These characteristics are: Having the building blocks for tax processing, Registration, Lodgment, Payment and Policing. High level of data quality
Effective Change Management ability
Building Blocks for Tax Processing
The main functions of a tax administration, in dealing with taxpayers, aside from actual tax collection or sanctioning non-compliance, largely involve gathering and processing information. The four interrelated blocks are: Registration: Identify potential taxpayers and register taxpayers. Each taxpayer would be identified via a tax identification number and contact details are maintained. This information is core all business activities and imperative to maintain accurate and completed details. Lodgement: Capture, quickly process and record information to assist taxpayers in meeting their tax obligation. Non-lodgment needs to be managed
 Developing The International Dialogue on Taxation, A Joint Proposal by the Staffs of the IMF, OECD and World Bank, 13 March 2002.
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