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How to spruce up the tax justice system

Pakistan
20 Aug 2009

The existing tax justice system in Pakistan needs a complete restructure. It's hopelessly outdated, painfully ineffective and marred with inefficiency and inordinate delays. If a restructure were to take place it would result in fiscal disputes between the State and taxpayers being settled within a year at the most. Taxand Pakistan investigates.

How to spruce up the tax justice system

The existing tax justice system - hopelessly outdated, painfully ineffective and marred with inefficiency and inordinate delays - needs complete restructuring, so that fiscal disputes between the State and taxpayers get settled within a year at the latest. The four-tier appeal system, under the tax laws - direct and indirect - consumes so much time for final settlement that the very purpose of seeking a remedy becomes infructuous - justice delayed is justice denied, aptly applies to the existing tax appellate system.

The government is busy wasting billions of rupees - large sums of money borrowed from the World Bank and other donors - for the ill-directed tax reforms (sic), but no effort has, so far, been made to revamp the ailing tax appellate system for the rapid disposal of tax disputes and reduction in unnecessary litigation. The tax system should be credible - as is the case in UK, where out of 30 million taxpayers hardly 20 file appeals in court - and should not be vulnerable to undue litigation wasting the precious time and money of the State and taxpayers alike. Presently, the following four-tier appeal process is in vogue, under the direct and indirect tax codes (we have made an analysis of the existing conditions and suggested ways for restructuring):

1. A taxpayer, if aggrieved, files an appeal against the order of the Taxation Officer/Assistant Collector of Customs/Sales Tax, before the Commissioner of Appeals/Collector Appeals, who works under the administrative control of the Federal Board of Revenue (FBR). It is a travesty of justice that he has to seek relief from the departmental authorities. How can the FBR-controlled men do justice? They act as helping hands for their brothers in service for collection of irrational and harsh demands to meet budgetary targets. They do give relief, but when the case is undoubtedly in favour of the taxpayer, but even for this "favour" one has to grease their palms. The Annual Confidential Reports (ACRs) - vital for further promotion in the service - of these "appellate" (sic) authorities are written by their bosses in the FBR. Due to this constraint, they cannot impart justice, even if they want to do so. The first-tier of appeal, in view of this fact alone, should be abolished immediately.

2. The next tier is the Appellate Tribunal. The Tax Appellate Tribunals (dealing with direct and indirect taxes) are under the Ministry of Law, which is against the principle of the "independence of judiciary". Working as a single, double or full (in special cases) benches, members are chosen from the legal fraternity or judicial services (Member Legal) and the tax department (Member Account). Member Accounts, work with a heavy heart as they are sent against their consent. They are the "dumped ones" - not liked by the department, hence condemned to go on deputation to the Tribunal. A Judicial Member's salary is even lower than that of a civil judge. Why should he work in such pathetic conditions? The Tribunal is the final fact-finding authority and no further appeal lies to the High Court, unless question of interpretation of law is required. Such an important forum dealing with federal statutes is financially dependent on Ministry of Law. The status of Tribunal should be that of Federal Tax Court and appeal against its decisions should go directly to the Supreme Court as is the case with Service Tribunal. The existing Income Tax and Customs Tribunals should be merged and renamed the National Tax Court. The right of intra-court appeal should be provided and then final appeal under Article 185 should lie with the Supreme Court. Judges for the national Court should be recruited in the same manner as judges of the High Courts, with the Chief Justice of Pakistan - under whose administrative control they would be - with the final say in the selection.

3. Tax codes are Federal statutes, but references against the orders of the Tribunals go to the High Court that work within the provinces. A person filing a reference in the Lahore High Court may get a different order on an identical issue filed in the Sindh High Court. On identical issues, there is no certainty of uniform orders at the level of High Courts. It is therefore, better to establish a National Tax Court directly under the Supreme Court. Presently, thousands of tax references are lying in the High Courts of the country. It takes years and years, at this forum, for taxpayers to get to get the first hearing - what to talk of the final decision that may take more than ten years.

4. The final court of appeal - as for all other matters - is the Supreme Court that ends the tumultuous journey of the FBR or taxpayer, on any disputed legal issue requiring the interpretation of law. If the National Tax Court is established by just elevating the status of the Income Tax and Customs Tribunal, there would be a drastic reduction in litigation - the National Court, on its own, can also elicit the opinion of the Apex court on any important legal issue settling the controversy without the proliferation of appeals on the same issue.

The existing 4-tier tax appeal system - marred with inordinate delays - is also expensive. The taxpayers and FBR spend enormous money on issues that can be solved easily through mutual agreement procedure. The office of Tax Ombudsman - once headed by able persons like Justice Saleem Akhtar - can be utilised for this purpose [ref. section 33 of the Federal Ombudsman Ordinance]. Unfortunately, the important office of Tax Ombudsman is now headed by an ex-IG of Police! This is how the FBR intentionally destroys an established institution that passes strictures against its highhandedness. Now the FBR has itself become a de facto adjudicator through the process of alternative dispute resolution, whereas this should be the exclusive domain of the Tax Ombudsman.

How tax cases are decided in our country can be illustrated in the light of the Supreme Court's decision in the case of Assistant Collector of Central Excise & Land Customs v. Mst. Siddiqan Afzal & Others 2008 PTR 34. This is a classical case of inefficiency and apathy on the part of the tax department and inordinate delay in the dispensation of justice in Pakistan. The honourable apex court after taking into account the legal and factual position held:

"Show cause notice to the owner was issued after fifteen years of the seizure of gold and eight years after coming into force of the Customs Act, 1969, gold has now become liable to be returned to owner after two months of coming into force of Customs Act, 1969 as no notice was issued within the time prescribed."

For this act of blatant maladministration the tax department in any civilised society would have been taken to task by asking to pay substantial pecuniary damages to the family. The accused passed away during litigation and his widow was unnecessarily and compulsively dragged in a long-drawn legal battle, which must have not only been costly but also agonising for her in terms of time consumed. This exposes the efficacy of our tax judicial system. One wonders if it really should be called a "judicial system," where proceedings started in 1963, were ultimately settled in 2007. Another such instance is the case of Crescent Distributors v. Customs, Excise & Sales Tax Appellate Tribunal & Others (2009 PTR 52). In the Karachi High Court, a simple dispute relating to whether a particular chemical item was exempt from Sales tax or not was eventually decided in favour of the taxpayer after 9 years of struggle! Considering that the Sales tax law is applied on a daily transactional basis, it is indeed a pity that it took such a long time for the taxpayer to seek justice for a consignment imported almost nine years back.

Since there are innumerable cases, there appears no point in discussing the merits and demerits of the system at this juncture. Finding an appropriate solution is more important rather than mere criticism, as with the changing realities, there is also an urgent need to revamp the system in such a way that justice is actually done in the shortest possible time and with the least amount of frustration for justice seekers, whether the taxpayer or tax department.

Without any iota of doubt, the four-tier appellate structure discussed above has become out-dated, ineffective - fraught with innumerable encumbrances. Replacement of the entire system as suggested above - in line with the prevailing judicial remedies in other departments of the government - is the only way out. To quote an example, one can easily refer to the Civil Service Act of 1973, under which government employees can approach the Services Tribunal to settle all disputes pertaining to their service matters.

Appeal against any order of the Service Tribunal lies directly to the Supreme Court. This should also be the case for tax matters. There should only be direct appeal to the Tribunal (that should be renamed as the National Tax Court), with the right of intra-court appeal and then, direct appeal before the Supreme Court. If the tax appellate system is redesigned on the two-tier appeal system (National Tax Court and Supreme Court), the following advantages will emerge:

  • Post of the Commissioner/Collector Appeals will stand abolished and their services will be utilised in the field where there is scarcity of officers.
  • Direct appeals will be filed in National Tax Court, having registry offices all over Pakistan (present offices of Income Tax & Customs Appellate Tribunals could be utilised and more can be opened). In this way, taxpayers will face no difficulty in going to the far flung areas.
  • Order of a bench of the National Tax Court can be assailed by filing an intra-court appeal.
  • Against the order in an intra-court appeal, one can go directly to the Supreme Court, where leave to Court is a prerequisite for admission.
  • Taxpayers, as well as the department, will be relieved of the burden of pursuing their cases at four different levels.
  • Tax authorities will also be relieved of passing biased judgements and worrying about the future of their careers.
  • Tribunals after conversion into National Tax Court, and selection of judges by the Supreme Court, will be better equipped to give quality and speedy decisions.
  • The High Courts would be relieved of the continuously rising number of tax cases that remain undecided for many years, because of the huge pendency of other civil and criminal cases and non-availability of specialised tax judges.
  • If the above reforms are implemented, there will be very few tax cases going to the apex court, as only those will be heard, where leave to appeal is granted in which important issues of legal interpretation are involved.

Tax Appellate system - like all other judicial institutions - should be independent in the true sense of the word. The honourable apex court of Pakistan has elaborated this principle in Government of Balochistan v Azizullah Memon PLD 1993 SC 31, by the holding that "separation of judiciary from the executive is the cornerstone of the independence of the judiciary". This should be equally applicable to the tax appellate fora. The right of access to justice to all is a well-recognised inviolable right, enshrined in the Constitution of Pakistan - it means "the right to be treated according to law, the right to have a fair and proper trial and the right to have an impartial court or tribunal".

Justice in tax matters, therefore, can only be done if there is an independent judiciary, which shall be separate from the executive and not dependent on it - PLD 1982 SC 146. It is imperative that the status of Income Tax and Customs Tribunals should be that of National Tax Court, directly under the Supreme Court. This alone can ensure speedy, satisfactory and reliable settlement of tax disputes leading to the credibility of the tax system - ultimately achieving the cherished goal of a tax-compliant culture. The present structure, up to the level of Tribunal - not be independent - is violative of law laid down by the apex court in Government of Balochistan v Azizullah Memon PLD 1993 SC 31. If it is not restructured by the government, as suggested above, a petition will be filed in the Supreme Court.
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The writers, tax lawyers, are visiting professors at the Lahore University of Management Sciences (LUMS).

Taxand's Take

The government is busy wasting billions of rupees - large sums of money borrowed from the World Bank and other donors - for the ill-directed tax reforms (sic), but no effort has, so far, been made to revamp the ailing tax appellate system for the rapid disposal of tax disputes and reduction in unnecessary litigation. The tax system should be credible - as is the case in UK, where out of 30 million taxpayers hardly 20 file appeals in court - and should not be vulnerable to undue litigation wasting precious time and money from the State and taxpayers alike. Presently, a four-tier appeal process is in vogue, under the direct and indirect tax codes.

It is imperative that the status of Income Tax and Customs Tribunals should be that of National Tax Court, directly under the Supreme Court. This alone can ensure speedy, satisfactory and reliable settlement of tax disputes leading to the credibility of the tax system - ultimately achieving the cherished goal of a tax-compliant culture. The present structure is violative of law laid down by the apex court in Government of Balochistan v Azizullah Memon PLD 1993 SC 31. If it is not restructured by the government a petition will be filed in the Supreme Court.

Dr. Ikramul Haq from Hazaima Ikram, the Pakistan member of the Taxand network, has analysed the existing conditions in Pakistan and suggested ways to spruce up the current tax justice system. The full article can be read below.

Your Taxand contact for queries is:
Dr. Ikramul Haq
T. +92 42 35300721
E. ikram@huzaimaikram.com

 

Taxand's Take Author