Atlantis Highlights in Computer Sciences, volume 4
Proceedings of the 3rd International Conference on Integrated Intelligent Computing
Communication & Security (ICIIC 2021)
Fraud Prevention in Taxation System of Pakistan
Using Blockchain Technology
Daniel Mago Vistro1,* Muhammad Shoaib Farooq2, Attique Ur Rehman2, Mohsin A.
Khan2
1
School of Computing, Asia Pacific University, Kuala lumpur, Malaysia.
2
School of System and Technology, University of Management and Technology, Pakistan.
*
Corresponding author. Email:
[email protected]ABSTRACT
Taxation department of Pakistan collects and keeps record of legislated taxes imposed by governments. Pakistan is
among those countries which still maintain records of taxations in registers, thus maintaining immutability of records is
really hard. Tax records have great risk of being lost or altered by someone and results in leading towards committing
fraud in taxes. Blockchain has provided advantage to many industries because of its enhanced security and traceability
in current trustless environment. We have presented a tax management solution which has an objective to provide secure,
efficient and auditable system in Pakistan environment using blockchain technology. Our proposed methodology is
about digitizing of the records of taxations using the blockchain distributed ledger based technology. Finally, future
work prediction is also given, which will help getting directions for controlling fraud cases from most senior officers
posts.
Keywords: Blockchain, Distributed, Ledger, Taxation, Technology.
1. INTRODUCTION not, this is also the major cause that people have lost their
trust in the government [4].
Taxation department is government authorized
department which collects, maintains, manage the The Taxation department is lacking through its
taxations which are applied by the government on goods, management. It also has poor management of keeping tax
services, companies, professionals, buildings, businesses records. Records are being maintained in the copy
etc. Taxes are paid for the purpose of economical registers. Traceability of change in registers and
development of the country. Tax percentage is different maintains immutability is quite challenging in registers.
for each category; major categories include firms, goods, Tax officers maintain tax records of firms and individual
societies and individuals [1]. in the registers [5].
In Pakistan only 5% of Pakistani people pay indirect Security for each transaction will be provided by
taxes and other 95% of people keep avoiding paying blockchain [23-26] which will make each tax safe money
these taxes by not showing their income or by making safe and traceability will gain trust of Pakistani people
good relation with any senior tax officer or practitioner that their money is going under development of their
[2]. Indirect Tax collection is the most difficult and country. When people will know that the record entered
challenging task to be done in Pakistan from last years. in blockchain will never be changed or erased then they
This is due to unprofessional behavior of tax officers and will trust the government officials and feel safe to pay
insincerity with their job and country [3]. their tax money. Blockchain ecosystem is presented in
Figure 1, in which the main features of blockchain are
Most Pakistani people are not much aware of tax presented. Distributed ledger distributes each transaction
system and do the same as their fathers and grandfathers or record entry to each member of that blockchain, this
were doing to save themselves from paying tax. People will provide immutability. Privacy and Security are those
also have lost trust in the government that whether their main features for which we are shifting from registers to
tax money is going towards development of Pakistan or blockchain technology, because prevention of fraud can
Copyright © 2021 The Authors. Published by Atlantis Press International B.V.
This is an open access article distributed under the CC BY-NC 4.0 license -http://creativecommons.org/licenses/by-nc/4.0/. 582
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be only done when there is full proof security, hence conventional system. Each transaction will be tracked
these features make the blockchain best to choose for this and monitored by DGT; DGT in Indonesia is Directorate
type of scenario [6] [15-22]. General of Taxation officer. However, this proposed
solution was only f¬¬or Tax Invoices but not the whole
We have proposed a solution for preventing the
tax system, there are still chances of fraud from other side
alteration or deletion of records; we have digitized all the
of the system.
records that were being maintained on copy registers.
Only digitization was not perfect solution for this, Frankowski and Barański [9] discussed in their paper
because only digitization might lead to fraud and such that taxes are now being digitized in modern way and into
cases again, as records can also be edited and deleted in different shapes. Through blockchain technology the way
computer systems or in a normal database too. of paying taxes and submitting them into databases has
been totally changed. Many countries are noticed that
they have implemented this modern way of digitizing
taxes in the continent of Europe, these countries include:
Brazil and South America. It is proved that this
technology has brought better compliance and greater
efficiency in tax authorities. The process for paying the
taxes became easy and time saving. However, in this
paper the architecture or model of system using
blockchain being used in Brazil and South America was
not clearly defined and explained.
Experts in Tax and Technology [10] wrote a paper
which was published on paper water house cooper’s
platform and discussion was done on that how blockchain
technology can bring up improvement in the tax
management system. It was as survey paper and
suggestions from government law officials and tax
Figure 1 Blockchain Ecosystem. officials were taken regarding this implementation on tax
Blockchain and ledger technologies made every system. Transparency, control, security and real-time
record secure and not able to be edited again ever as they information, these characteristics can be really helpful in
provide so many securities feature that normal database making tax management system really efficient and fraud
cannot provide [7]. Blockchain decentralization made the proof. But there was not example or real time scenarios
records tamperproof which means no tampering of were discussed here which caused this paper to be
records would be done. bookish kind of paper.
In this research paper, introduction has been discussed We have proposed a solution for preventing frauds in
in Section I, related work would be discussed in Section taxation department of Pakistan using the similar
II, detailed discussion on proposed methodology/solution approach as discussed in other related papers we have
will be discussed in Section III, reason for selecting this discussed. But we have applied the blockchain ledger
solution will be discussed in the Section IV. In the end technology to whole tax management system not only on
we will conclude the research paper in Section V. the tickets compared to other papers. In our paper we
have showed that how blockchain would show efficiency
in Pakistani system and how it should be working.
2. RELATED WORK
Milla Sepliana [8] used a qualitative approach 3. PROPOSED SOLUTION FOR TAX
evaluate blockchain technology that whether they can be MANAGMENT
applied to Value Added Tax (VAT) system or not. And
if they are eligible to be applied then what would be This research has presented efficient and secure
results. This paper was based on the environment and tax solution to be implemented on Taxation management
system of Indonesia. In Indonesia there are serial system for managing the tax records and maintain the log
numbers of invoices for every tax record which is called of each action taken in the system. This secure and fraud
Tax Invoice Serial proof solution helps the country economical condition
grow towards development and gain the trust of people
Number (TISN). It was proposed that if they apply of Pakistan to give their tax with no stress that their
blockchain technology of type permissioned blockchain money could be stolen or misused.
in TISM system then the system will be more efficient
and quicker. In their paper, it was also described that how
blockchain based system would be better than
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3.1. Proposed Framework layer ensures trusted environment and each node is
connected to every other node within the network and no
We have proposed high level architecture diagram in other node is allowed to enter, as it is permissioned
Figure 2. Stakeholders of our proposed framework are tax blockchain. Infrastructure layer is responsible for storing
officers and inspectors who are responsible for managing and management of records and every data in blockchain.
the tax management system and the tax payer, who pay This layer is also responsible for sharing data between
tax according to the tax he has to pay in the bank. Tax each other node inside its own permissioned blockchain
management system consists of interplanetary file system network. After every transaction, the data is shared to all
(IPFS) which provides peer to peer hypermedia protocol other nodes.
that makes the web safer and faster [11].
Figure 2 Proposed Framework.
Tax management system is designed as a
decentralized application (DAPP) and has blockchain
distributed ledger based technology. Our proposed
framework describes that when a tax payer pays his tax
in the bank, then tax officers or inspectors verifies his
payment from the bank and enters the tax payer amount Figure 3 Proposed Blockchain Layered Architecture.
in the tax management system application. Tax officers
can also see which person have not paid the tax yet and 4. WHY DAPP WHY NOT APP?
then they can send legal notices to them. If they don’t pay
the tax then they will get punishment for that which is The reason that we are suggesting the application to
defined as per Pakistan’s law. In our proposed framework be built in blockchain based app (Decentralized
it is shown that permissioned blockchain is used instead Applications - DAPP) but not on simple applications
permission less blockchain because our system is not (APP) is discussed here. An application is centralized and
publically available to every other user. Only tax officers there is lesser amount of security as compared to which
and inspectors are allowed to access it, not even tax DAPP provides. In APP, people have lost trust to share
payers are allowed to use it. Our system is to make sure their information as hackers might use it for harmful
purposes [12].
that each tax record is kept safe and not editable for
anyone and if someone tries to edit then he would be
called for explanations in courts and case would be filed
on him.
3.2. Proposed layered Architecture
Layered architecture for proposed solution is shown
in Figure 3. On interface layer, the applications of
taxation management system would be running,
decentralized application (DAPP) and web portal for tax
officers will take place in application layer. Application
layer verifies identification of users and records. Protocol
layer provides security by applying consensus
algorithms, which makes blockchain database harder to
hack.
Permissioned blockchain will also prevent any other
user entering into our tax management system. Network
Figure 4 Reason for using DAPP.
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