Tax Audit, Tax Penalty and Tax Compliance: A Case Study of Pakistan

Abstract

Taxation is the backbone of an economy. Thus, an effective tax collection system is crucial for developing a country. The primary objective of this study was to investigate how tax audits and fines affect taxpayer compliance, especially in Pakistan's socioeconomic environment. To accomplish the goal of this study, 400 instruments were distributed among Pakistani citizens who were actual or potential taxpayers using the convenience sample approach. A total of 247 instruments were deemed suitable for analysis. Employing Partial Least Squares Structural Equation Modeling (PLS-SEM) using SmartPLS software, the study's measurement model was analyzed. The study's model was also evaluated for its ability to produce precise forecasts. The results showed a clear relationship between tax compliance, tax audits, and tax penalties. The study's findings demonstrated that tax audits had less effect than tax penalties. The deterrence theory regarding tax compliance was examined in this work. The suitability of employing PLS-SEM as a statistical technique to investigate the associations above was also discussed. Finally, the study has many theoretical and practical implications. For instance, apart from addition to the current literature stockpile, lawmakers and tax authorities may make effective policies in light of recommendations. In light of the study's suggestions, governments may develop strategies to promote tax compliance among the general population.