Do Deadline Extensions Encourage Tax Filing? Evidence from Pakistan

Muhammad Khudadad Chatta

No 2020-21, CSAE Working Paper Series from Centre for the Study of African Economies, University of Oxford

Abstract: This paper analyzes the impact of a tax broadening policy in a low compliance, developing country context with a narrow tax base. The Board of Revenue in Pak¬istan regularly gave out extensions to the tax filing deadline under the assumption that time is a binding constraint to filing behavior. To study the impact of ex¬tensions on tax compliance behavior, I use a rich panel dataset of all tax returns filed in Pakistan from 2007 to 2017 and combine this with data extracted from offi¬cial government circulars containing details about deadline extensions. I find that deadline extensions are associated with individuals and unincorporated businesses delaying the filing of their tax returns by 88% and 70% of the extension duration respectively. Extensions also reduce the compliance of individuals and unincorpo¬rated businesses with the final extended deadline by 4.5 and 1.1 percentage points respectively. I then provide evidence for learning and information provision as the underlying mechanisms at play. Finally, I provide evidence that extensions do not encourage individuals and unincorporated businesses to file their tax returns, sug¬gesting that time is not a binding constraint. Together, these findings reveal that deadline extensions are ineffective in broadening the tax net as they impose addi¬tional costs, such as lost interest revenue due to delayed filing and lower compliance with government set deadlines, without providing any benefits.

Date: 2020
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