Do deadline extensions encourage tax filing? Evidence from Pakistan

CSAE working paper

This paper analyses the impact of a tax broadening policy in a low-compliance, developing country context with a narrow tax base. The Board of Revenue in Pakistan regularly gave out extensions to the tax filing deadline under the assumption that time is a binding constraint to filing behaviour. To study the impact of extensions on tax compliance behaviour, this paper uses a rich panel dataset of all tax returns filed in Pakistan from 2007 to 2017 and combine this with data extracted from official government circulars containing details about deadline extensions. The paper finds that deadline extensions are associated with individuals and unincorporated businesses delaying the filing of their tax returns by 88%and70% of the extension duration respectively. Extensions also reduce the compliance of individuals and unincorporated businesses with the final extended deadline by 4.5 and1.1 percentage points respectively. The paper then provides evidence for learning and information provision as the underlying mechanisms at play. Finally, the paper provides evidence that extensions do not encourage individuals and unincorporated businesses to file their tax returns, suggesting that time is not a binding constraint. Together, these findings reveal that deadline extensions are ineffective in broadening the tax net as they impose additional costs, such as lost interest revenue due to delayed filing and lower compliance with government-set deadlines, without providing any benefits.