Undesirable changes proposed vide Finance Bill, 2012
Huzaima Bukhari & Dr. Ikramul Haq
The Income Tax Ordinance, 2001 provides for the scheme of levy of income tax, tax administration machinery and mechanisms for redressing taxpayers’ grievances. The right of appeal against orders of appellate authorities is also available to the tax administration authorities (for whom it is not uncommon to be aggrieved at relief granted by appellate authorities) for which they could also prefer a higher appellate forum to examine the correctness of relief so given by an appellate authority.
The appellate mechanism under the Income Tax Law is as follows:
- Tax assessment is made by Commissioner or by Taxation Officers working under him through delegated powers.
- In case a taxpayer is aggrieved at the assessment made by the Commissioner, he can appeal to the Commissioner (Appeals)—an officer of the Inland Revenue working under the control of Federal Board of Revenue (FBR).
- In case either of the parties, the taxpayer or the Commissioner, is aggrieved at the decision of the Commissioner (Appeals), the aggrieved party can further file an appeal before the [1]Appellate Tribunal Inland Revenue (ATIR).
Apart from deciding whether or not an assessment is correctly made, the ATIR has powers to decide other matters dealing with exercise of quasi-judicial powers of the tax administration such as, for example, whether or not tax assessment could be reopened by the Taxation Officer and thereby disturb finality of the assessment, whether or not registration as a charitable/non-profitable exemption has been correctly declined by the Commissioner, or whether or not a particular assessment order could be subjected to revision by the Commissioner because of his perception that the order so sought to be revised is erroneous and prejudicial to the interest of the revenue. ATIR is not only an appellate forum for taxpayers, but it is equally important for FBR in case relief is given to the taxpayer by the Commissioner (Appeals), who is incidentally a member of the Inland Revenue Service. The Commissioner can also challenge the order of the Commissioner (Appeals) before the ATIR.
In developing economies like Pakistan, one of the biggest problems is a relatively small tax base and the reluctance of ordinary people to even file tax returns and thus submit their financial affairs to the scrutiny of the tax administration. Once a taxpayer professes faith in the effectiveness of legal remedies against any unjust tax levy or unjust act of the taxation authorities, he is more likely to be truthful and honest to the taxation authorities accepting a reasonable levy of tax.
The degree of taxpayer satisfaction does, therefore, go up which, in turn, is a sine qua non for better voluntary compliance resulting in greater resource mobilization. While on the surface a tax judiciary inherently deals with involuntary collections enforced by a tax administration, an efficient tax judiciary actually creates a conducive atmosphere for better voluntary compliance by the taxpayer and, thus increased revenue for the State. A tax administration which disposes of appeals promptly and reaches a fair and final settlement speedily is itself entitled to be classified as a tax incentive.
To a tax collector, an efficient tax judiciary ensures that demands arising out of legitimate tax assessments, which can stand scrutiny of law, are not unnecessarily locked up in litigation. As long as there is a pending litigation in relation to a particular tax levy, there is a natural and quite understandable desire on the part of the taxpayer not to pay the disputed amount for the duration of legal proceedings. An efficient tax judiciary resolves the disputes quickly, quashes the demands which are not legally sustainable, and thus segregates serious tax demands from frivolous tax demands, while also giving finality to legitimate tax demands. This in turn ensures that the taxpayer cannot resort to dilatory tactics for paying genuine and legitimate tax demands which have received judicial approval. An efficient tax judiciary thus helps in removing impediments from collection of tax demands by the State which, once again results in greater resource mobilization.
An effective [2]tax judiciary does not only settle tax disputes between taxpayer and the State, but it also lays down guiding principles on the basis of which such disputes are resolved. These decisions, which have authoritative value in the sense that same decision has to be taken on materially identical facts, also have normative effect and these decisions thus help in correcting judicial courses. This way, an effective tax judiciary also contributes to smooth functioning of the tax machinery.
The setting up of the [3]Tribunal in 1941 brought about a paradigm shift in redressing grievances. The original scheme of things ensured complete functional independence of the institution, a high degree of legal and technical expertise of the Members manning the benches, user friendly, simpler and informal procedures, and an inexpensive and quick justice delivery system. Over the decades, the [4]Tribunal has been strengthened and changes made to cope with the increasing burden of cases and growing complexity of disputes.
Powers of the ATIR are exercised by the benches [section 130 of the Income Tax Ordinance, 2001]. The cases in which amount of tax or penalty does not exceed Rs. one million can be heard by a single member, either a Judicial Member or an Accountant Member. Majority of the cases are heard by division benches comprising one Judicial and one Accountant Member. There is no ceiling on amount of tax involved or income assessed in the cases to be heard by such division benches. Special benches, of three or more Members, of which at least one Member must be a Judicial Member and one Accountant Member, are formed on the issues on which either division benches have expressed conflicting views or on the issues which are of considerable importance. It is thus ensured that the decision of each of the regular or larger bench has benefit of inputs from a Judicial Member as also from an Accountant Member.
The qualification for appointment as Judicial Member is the same as that for the appointment of a High Court judge, and only well experienced and competent people from the legal profession and judiciary are selected.
Prior to amendment in 2007, the Accountant Member must have been an officer of Grade 21. In 2007, the Commissioner in Grade 20 having appellate experience of five years was also included. In 2010, the condition of working as Commissioner Appeal was removed. And now the Finance Bill 2012 has reduced the condition from 5 to 3 years. The amendments made in 2007, 2010 and the ones proposed in Finance Bill 2012 are highly undesirable. The officer from FBR having little experience or no experience of appellate work should not be part of ATIR.
In India, accountant members are selected from amongst senior officers of Indian Revenue Service and from amongst chartered accountants having at least 10 years of practical experience in taxation. Thus, every bench has the unique advantage of examining issues from the point of view of a trained legal expert as well as from the perspective of a mature revenue person or CA, who has knowledge and understanding of real life tax and business realities. Normally, one of the Members in the bench is a senior person with reasonable exposure to varied situations to be dealt with in the cases. While, on the factual aspects decision of the Tribunal is final, on substantive questions of law, an appeal can be filed before the High Court. The interference by the High Court and by the Supreme Court, however, is more of an exception than the rule.
The proposal through Finance Bill 2012 to lower the service period requirement for Commissioner to be Member of the Tribunal to three years [section 130(4)(b)] needs to be reconsidered. It will turn Tribunal into ‘camp office of FBR’. Junior Commissioners who have never even worked as Commissioner of Appeals would obviously lack the skills to work as Accountant Members. The technical quality of work and understanding of matters required at Tribunal level would be compromised by such appointments.
Amendment proposed in section 130(5) that is deleting the words “and except in special circumstances”, is to facilitate an Accountant Member to become the Chairman of ATIR. This is blatantly against the principles of independence of judiciary. A person having lien with FBR (an executive authority) cannot perform the functions of Chairman as it would be violative of Para 5 of the National Judicial Policy 2009 which says:
“All special courts/tribunals under the administrative control of Executive must be placed under the control and supervision of the Judiciary, their appointments/postings should be made on the recommendation of the Chief Justices of concerned High Court” [Page 12]
Thus the original position of law that only a judicial member can be Chairman of the Tribunal should be maintained.
To make Tribunal a truly independent forum, it is even more imperative to provide for recruitment of Chartered Accountants and ICMAs as Accountant Members through FPSC. As far as officers from FBR are concerned, the appropriate rank should be Chief Commissioner or Commissioner with five years of experience, with at least two years as Commissioner of Appeals.
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The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences (LUMS).
[1] Income-tax Appellate Tribunal’ was established on 25th January, 1941. After independence, the name as such was retained by India and Pakistan, except that we changed it to Appellate Tribunal Inland Revenue (ATIR) on 28 October 2009 through a Presidential Ordinance in the wake of amalgamation of income tax and sales tax into one unified group. The Tribunal, that has already completed 71 years of its existence, is considered as mother of all Tribunals. In Pakistan it has permanent seats at Lahore, Islamabad, Peshawar and Karachi.
[2] In the Sub-continent, income tax was introduced by the British colonial rulers in the year 1860, but for its first eight decades of existence, mechanisms for redressing grievances left much to be desired. There was no separation of administrative and appellate functions, and the very Assistant Commissioners and Commissioners, under whose supervision and guidance, tax assessments were made by the Income Tax Officer, were the first and second appellate authority against the order of the Income Tax Officer. There was thus a clear clash of interests between the administrative and appellate functions of the tax authorities. A Commissioner, on one hand, had revenue targets to achieve, and while deciding appeals of the taxpayers, who perceived their tax assessments to be unjust and unfair, on application of the taxpayer, had to refer the points of law for the opinion of the High Court. If the Commissioner so declined to state the case at the request of the taxpayer, the taxpayer could approach the High Court and seek a writ of “mandamus” requiring the Commissioner to state the case. This system of redressing the taxpayers’ grievance was not very user friendly as there was no independent adjudication by anyone outside the tax administration on the question of facts, and the costs involved in the legal process, i.e. before High Courts, were very high. This system was perceived to be oppressive and undemocratic. There was so much resentment against this system that the Government had to give in to public pressure and, by Income Tax (Amendment) Act, 1939, bring about two important reforms—first, that judicial and administrative functions of the tax authorities were separated; and—second, an independent body, Income Tax Appellate Tribunal was created to hear appeals against orders of the first appellate authority on all questions of facts and law. That is how Income Tax Appellate Tribunal was set up in the Sub-continent in 1941.
[3] The setting-up of the Tribunal in 1941 was welcomed by the public at large. The then Leader of Opposition in the Legislative Assembly, Mr. Bhulabhai J. Desai, welcomed the proposal by stating on the floor of the Assembly as follows:
“… with the intervention of such a Tribunal, a substantial step has been gained from the point of view of the taxpayer, that so far as any injustice will be done to him either by misapplication of law or by a wrong finding of facts by the official hierarchy, he will have now redress from an independent body with sufficient legal and accountancy qualifications…..”
[4] Incidentally, the Income Tax Tribunal was the first Tribunal set up in the Sub-continent, and it was this successful experiment which resulted in setting up of many more Tribunals.