Unclogging tax appellate system

Dr. Ikramul Haq

On October 12, 2020, the Chairman of Federal Board of Revenue (FBR), while testifying before the Public Accounts Committee (PAC), revealed that more than “Rs.1.856 trillion revenue has been stuck for years due to litigation in various courts, resulting in difficult financial conditions for the country”. The fault, however, does not entirely lie with the tax tribunals and courts. This fact was also admitted by Chairman FBR: “The appellant tribunals have been non-functional for two years”. In other words, he confirmed inaction on the part of coalition Government of Tehreek-i-Insaf (PTI). He did not disclose why the Law Ministry is not filling vacancies in tax tribunals and how many frivolous appeals/references were filed by FBR for which strictures were passed by higher courts in a number of cases. He also failed to disclose the success rate of FBR in tax tribunals, five high courts and Supreme Court.  

The Chairman FBR also shifted the blame on courts claiming that “tax defaulters get stay orders from courts”. In fiscal matters, a stay order as per Article 199(4A) of the Constitution gets vacated after six months from the day of its grant. Similar provisions exist for tax tribunals. FBR also did not tell PAC how many times their counsel asked for adjournments or filed applications for early hearing in cases involving huge revenue.

Before the PAC, Chairman FBR claimed: “Recoveries of Rs. 117 billion are pending in Supreme Court, Rs. 136 billion in Islamabad High Court, Rs. 228 billion in Lahore High Court, Rs. 134 billion in Sindh High Court, Rs. 169 billion in Peshawar High Court and Rs. 602 million in Balochistan High Court”. Litigation related to remaining amount, FBR admitted, “is stuck with the tribunals and their appellate forums and majority of them are non-functional due to absence of members”.

Obviously, in all pending cases, stay orders are not in existence. FBR should have disclosed the number of cases and amount involved in cases where stay orders were granted by any tribunal or high court or Supreme Court. No such detail was given. A member of PAC, Khawaja Asif, asked to provide the same and pointed out that PTI Government “a couple of months back gave an undertaking to fill up vacant positions in tax tribunals”. The Ministry of Law and Justice informed PAC that “the summary regarding appointment of members and presiding officers for the tribunals have been forwarded to the Prime Minister”. So, they shifted the blame on Prime Minister’s Office! Another PAC member, Sardar Ayaz Sadiq, suggested that the Attorney General should move applications for early hearing of FBR-related cases. He also asked when a stay order could only be valid for six months, how recoveries involving billions of rupees remained intact even after five to seven years.

FBR informed PAC that in the Finance Act 2020, Alternative Dispute Resolution (ADR) mechanism to settle the dispute out of court is made convenient. However, Chairman FBR did not tell PAC that names of ADR members based in various cities, were announced just a few weeks ago, though the Act became effective from July 1, 2020, after receiving assent of President of Pakistan on June 30, 2020. The Chairman of PAC, Rana Tanvir Hussain, suggested that FBR “should evolve a mechanism to settle disputes with the taxpayers and expedite recoveries by adopting a flexible approach”.

It is pertinent to mention that mostly harsh, arbitrary, illegal and excessive orders are passed by FBR officials to show “performance” and/or “collection” by adjudicating officers that ultimately are quashed by Tribunal or higher courts—only those sustain that are legal and based on facts with evidence. However, at the level of Commissioner of Inland Revenue (Appeals) or Collector of Customs (Appeals), it becomes difficult in majority of the cases to get relief as they work directly under the administrative control of FBR that by itself is a travesty of justice and against the command of the Supreme Court that no appellate forum should work under the administrative control of Executive. This principle was laid down by the Supreme Court of Pakistan in Government of Baluchistan v Azizullah Memon PLD 1993 SC 31 that “separation of judiciary from executive is the cornerstone of independence of judiciary”.

The Government of PTI, instead of making tax tribunals free from clutches of Executive as per directions of the Supreme Court, further muzzled it by giving right of appointment of members to the Prime Minister in the Finance Act,2020. It was admitted before PAC that summary for appointment of members in Appellate Tribunal Inland Revenue (ATIR) and for Customs Tribunal “is pending with the Prime Minister”.

It is a reality that through unbridled and unchecked power, taxation officers raise unlawful demand that in majority cases could not stand the test of appeals/references in tax tribunals, high courts and Supreme Court, but taxpayers suffer and incur heavy costs of litigation without getting any damages in the end, even when orders are held arbitrary/unlawful. In a recent case, Federal Tax Ombudsman imposed pecuniary damages for unlawful act by a taxation officer and President of Pakistan upheld this order. There should be a deterrent of awarding damages in frivolous cases filed by taxpayers or FBR.   

The existing tax appellate system is redundant and marred with inefficiency/inordinate delays. It 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 meaningless—justice delayed is justice denied aptly applies to the existing tax appellate system. The governments in the past wasted billions, including huge funds borrowed from the World Bank and other donors—for tax reforms, but no effort has been made to revamp the tax appellate system for rapid disposal of disputes/reduction in litigation.

Tax codes are federal statutes but references/appeals against the orders of ATIR or Customs Tribunal go to the High Courts that work within the provinces. A person filing reference/appeal 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; imperative to establish National Tax Court directly under the Supreme Court. If National Tax Court is established, 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.

For dealing with the existing backlog, the Government of PTI may consider one-time de-logging litigation scheme asking taxpayers to pay 25% of disputed demand in pending cases and matter would be deemed to have been settled. In 1998, through such a scheme India [Kar Vivad Samadhan] generated revenue of over Rs. 900 billion. This scheme would not only generate substantial revenue for the State, but would also drastically reduce workload of tribunals, high courts and Supreme Court.

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The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS)