The existing tax appellate system - hopelessly redundant, painfully unproductive 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 4-tier appeal system under the tax laws - direct and indirect - consumes so much time for final settlement that the very purpose of seeking remedy becomes infructuous - justice delayed is justice denied aptly applies to the existing tax appellate system. The government has wasted 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 been made to revamp the ailing tax appellate system for rapid disposal of tax disputes and reduction in unnecessary litigation.
Tax system should be credible and equitable - as is the case in UK where out of population of 60 million, 30 million file income tax returns and hardly 20 appeals go to the level of high court - the system is highly credible and not susceptible to undue litigation wasting precious time and money of the State and taxpayers alike. Latest data released by Her Majesty Revenue and Customs shows the number of people liable for the 40 and 50 percent tax rate has increased from 3.25 million in 2010-2011 to 4.13 million in 2012-13. Their share of the income tax burden has risen from 54.2 percent in 2010-11 to 61.3 percent in 2012-13. The wealthiest one percent of taxpayers, nearly 300,000 people who earn more than £150,000 a year, are shouldering 26.5 percent of the income tax burden. In Pakistan, in 2012 only 10,280 non-salary individuals (business and professional individuals) declared income exceeding one million rupees whereas 63,500 salary individuals declared this level of taxable incomes.
Presently, the following four-tier appeal process is in vogue under the direct and indirect tax codes (we have made analysis of 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 Federal Board of Revenue (FBR). It is a travesty of justice that he has to seek relief from the departmental authorities. How can 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" appellant has to "oblige". The Annual Confidential Reports (ACRs) - vital for further promotion in the service - of these "appellate" (sic) authorities are written by their bosses in 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 Inland Revenue and Customs Appellate Tribunal. The Appellate Tribunals (dealing with direct and indirect taxes) are under the Ministry of Law which is against the principle of "independence of judiciary". Working as 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/Technical Member). Member Accounts/Technical Members work with 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 tribunal. A Judicial Member's salary is even lower than that of a civil judge. Why should he work in such pathetic conditions? 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 (see in Business Recorder, August 23/24, 2013) 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 as 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 national Court should be recruited in the same manner as judges of the High Courts with Chief Justice of Pakistan - under whose administrative control they would be-the final say in the selection.
3. Tax codes are federal statutes but references against the orders of the tribunals go to the High Courts that work within the provinces. A person filing reference in Lahore High Court may get a different order on an identical issue filed in 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 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 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 FBR or taxpayer on any disputed legal issue requiring the interpretation of law. If National Tax Court is established by just elevating the status of the Income Tax and Customs Tribunal, there will be drastic reduction in litigation - the National Court at its own can also elicit the opinion of the apex court on any important legal issue settling the controversy without 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-bureaucrat! This is how government intentionally destroys an established institution that passes strictures against its highhandedness. Now FBR has itself become de facto adjudicator through the process of alternative dispute resolution whereas this should be the exclusive domain of Tax Ombudsman.
How tax cases are decided in our country can be illustrated in the light of 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 dispensation of justice in Pakistan. The honourable apex court after taking into account the legal and factual position held:
"Show cause notice to owner was issued after fifteen years of seizure of gold and eight years after coming into force of the Customs Act, 1969, gold 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 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 Sindh High Court, a simple dispute relating to whether a particular chemical item was exempts from sales tax or not was eventually decided in favour of the taxpayer after 9 years of struggle! Considering that sales tax law is applied on 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 the justice seekers, whether 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 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 the 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 Tribunal (should be renamed as National Tax Court) with the right of intra-court appeal and then direct appeal before the Supreme Court.
It may be noted that 65% of the appeals in tax matters before Tribunals are by the Department. The system can be revamped by introducing the process of e-filing with the departmental appeals which may later be made optional for the taxpayers as well. Eventually, this will help in achieving a paperless Tax Court which will add to its efficiency and speed.
If the tax appellate system is redesigned on 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 far-flung areas.
-- Order of a bench of National Tax Court can be assailed by filing intra-court appeal.
-- Against the order in 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 holding that "separation of judiciary from executive is the cornerstone of independence of judiciary". This should be equally applicable to 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 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 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 credibility of tax system - ultimately achieving the cherished goal of 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.
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Faculty at Lahore University of Management Sciences (LUMS)