Huzaima Bukhari & Dr. Ikramul Haq
For the first time in the history of Income Tax Law in Pakistan, Alternate Dispute Resolution (ADR) option was provided by inserting section 134A vide Finance Act 2004 which was aimed at extending the much-desired-for facility to taxpayers to avail administrative means for resolving disputes through mediation outside the ambit of convention appeal system. This provision required the Central Board of Revenue (CBR) to notify procedures for (a) referral of disputes and (b) mediation of unresolved issues and (c) entering into binding agreements or offers in compromise. In the last 18 months this mechanism has failed to attract the actual potential that it entailed. This article attempts at analyzing the reasons for poor response. It also suggests certain ways to improve it.
The main idea behind this provision was to provide arbitration of unresolved/disputed issues between the taxpayers and CBR. Unfortunately no public debate was initiated prior to its insertion. The CBR (de facto lawmaker) did not bother to elicit opinion from the stakeholders and experts. It is sad that the CBR is unilaterally pursuing the tax reform agenda (sic) without involving the taxpayers and public at large, who will have ultimately to pay back the heavy loan of over US$100 million provided by World Bank and others for this entire exercise. Time and again we have emphasised that no reform agenda can succeed unless all the stakeholders are taken into confidence and participation of representatives of people is ensured at the time of enactment of laws. At the moment CBR is running the entire show unilaterally starting from policy decisions to the stage of implementation. In any democratic set up it would have been simply inconceivable and unacceptable.
The result of not consulting tax experts, taxpayers, tax bars and other trade bodies is obvious: bad presentation of a well-intended law. The salient features of section 134A of the Income Tax Ordinance, 2001 [hereinafter “the Ordinance”] read with rule 231C of the Income Tax Rules 2002 [hereinafter “the Rules”] are:
- Any aggrieved person [in rule 231C the scope is extended to “class of persons”] in connection with any matter of income tax pertaining to liability of income tax, admissibility of refund, waiver or fixation of penalty or fine, relaxation of any time period or procedural and technical condition may apply to the Central Board of Revenue in prescribed form for the appointment of a committee for the resolution of any hardship or dispute mentioned in detail in the application.
- The Central Board of Revenue may, after examination of the application of an aggrieved person, appoint a committee consisting of an officer of Income Tax and one or two persons from a panel of Chartered or Cost Accountants, Advocates, Income Tax Practitioners or reputable taxpayers for the resolution of the hardship or dispute.
- The committee will examine the issue and may, if it deems necessary, conduct inquiry, seek expert opinion, direct any officer of Income Tax or any other person to conduct an audit and make recommendations in respect of the resolution of dispute as it may deem fit.
- The Board may, on the recommendation of the committee, pass such order, as it may deem appropriate.
- The aggrieved person may make the payment of income tax and other taxes as determined by the Board in its order under 134A(4) and all decisions, orders and judgments made or passed shall stand modified to that extent and all proceedings under this Ordinance or the rules made thereunder by any authority or forum shall abate provided that, in case the matter is already sub-judice before any forum or tribunal or the court, an order passed by the CBR in the light of recommendations of the committee shall be submitted before that forum, tribunal or the court for consideration and orders as deemed appropriate.
- In case the aggrieved person is not satisfied with the orders of the Board, he may continue to pursue his remedy with the relevant authority as if no order has been made by the Board.
Section 134A has the following inherent defects that need to be removed:
1. CBR has been given the central role in all the matters that is from examination of application for ADR to passing of an order whereas informal dispute resolution mechanism should be implemented through an independent ADR Authority or office of Federal Tax Ombudsman (FTO).
2. For each and every case or at least for each major city, the CBR appoints a committee consisting of an officer of Income Tax and one or two persons from a panel of Chartered or Cost Accountants, Advocates, Income Tax Practitioners or reputable taxpayers. The committees do not enjoy the status of an independent and permanent authority. These committees keep on changing. The officers from the Department show little interest in attending the proceedings. They always project their point of view. This situation needs to be changed immediately. The taxpayer will only come forward for ADR when they know that there exists an independent Authority, which is a permanent and neutral body having members of impeachable repute and professional competence.
3. Conducting ADR through a committee, comprising a tax official, advocate or chartered accountant or cost accountant, for each case is a costly, procedurally cumbersome as well as time-consuming exercise. The whole concept of fast track dispute resolution stands negated.
4. The CBR has completely overlooked the fact that there already exists a provision in the Federal Tax Ombudsman Ordinance 2000 i.e. section 33 which clearly provides informal resolution of dispute. An already established institution can be engaged for ADR mechanism, especially when statutory provision is available to this effect and infra structure is available. It is strange that since the inception of the FTO office in 2000 neither the tax department nor the taxpayers thought of availing this vital provision of informal dispute resolution. The same fate is being faced by section 134A as the CBR has failed to properly implement it and convince the taxpayers that it is meant for amicable settlement of disputes and not imposition of CBR’s self-assumed judicial/administrative will.
In the Sales Tax Act 1990, a similar provision i.e. 47A was inserted as early as in 2002 but due to lack of proper infrastructure as discussed above and faulty perception of CBR only a negligible number of cases came for resolution. It is pertinent to mention that section 134A is replica of section 47A of the Sales Tax Act, 1990. If section 47A of the Sales Tax Act read with rules 62 to 71 of Sales Tax Rules have failed to attract the substantial numbers of taxpayers for informal dispute resolution then how section 134A, which is ditto copy of the earlier enactment, could have been of significant successes. There appears to be some fundamental flaw in the entire scheme which has not been realised by the CBR to this date. Making the same mistake again and again has become CBR’s favourite pastime.
The CBR has notified the Income Tax Dispute Resolution Rules [Rule 231C] in pursuance of section 134A(7) of the Ordinance. Since the law itself is faulty as shown above, the rules also portray many shortcomings as these do not provide swift procedure for fast track dispute resolution as is the case in many countries. The rule lacks detailed and comprehensive approach and does not provide e-submissions of applications and on-line facility for conducting video meetings of ADR committee that are necessary to successfully execute this important facility made available to the taxpayers for the first time in the history of Income Tax in Pakistan. On the contrary, Internal Revenue Service of USA has notified Fast Track Programme (FTM) which contains explicit, detailed and comprehensive procedures covering each and every aspect of Fast Track Dispute Resolution Mechanism. The CBR can learn a lot from this programme and after making some necessary changes to suit local conditions and environments can easily convert the present ADR scheme into FTM. We need FTM and not ADR in its conventional mode. In the present day’s world we can always find the latest and the best model to follow rather than to experiment with those which have already been discarded by others.
The ADR mechanism can be made successful after converting it into Fast Track Programme (FTM) and by ensuring that:-
- A permanent forum is established, independent of compliance functions, to efficiently prevent or resolve a dispute. If consider appropriate by the CBR, FTO Office under section 33 of FTO Ordinance 2000 can be utilised for this purpose.
- Fast Track Dispute Resolution Mechanism is simple, cost-effective and reliable so that taxpayers can come forward with complete confidence and faith.
Section 134A and rule 231C lack the correct perspective to provide:
1. Small businesses, self-employed taxpayers and tax officials the opportunity to mediate disputes through retired judges and tax officials, who are ready to work in public spirit, as a neutral party. Serving tax officials and tax professionals should not be part of the process as they cannot act as neutral parties. In USA and U.K under such a programme, most tax disputes are resolved within 40 days compared to several months through the regular appeal process. In USA alone since June 2002, more than 50,000 cases have been mediated with 100 percent resolution.
2. Resolution of tax disputes with large and middle-sized businesses at an earlier stage within a month’s time than through the normal audit and appeal processes.
If CBR wants to make ADR mechanism a success it needs to:
- Establish the Fast Track Mediation (FTM) programme to expedite case resolution and to expand the range of dispute resolution options available to taxpayers. For this purpose a permanent Office of ADR should be established at CBR to administer the FTM programme or alternately FTO Office should be assigned the task under section 33 of the FTO Ordinance 2000.
- Ensure that FTM should allow tax officials and taxpayers an opportunity to mediate their disputes with ADR Authority/FTO acting as a neutral party.
- Consider that the ADR Authority, headed by a Director General, preferably a retired judge of Supreme Court or High Court and consisting of some permanent members, preferably retired Income Tax Officials, not below the rank of Grade 20 who rendered at least 25 years of service, work as neutral body.
- Establish ADR Authority as a permanent organisation because ad-hoc ADR committees are not interested to work with the public zeal that is required in such a process. Any good tax lawyer or chartered accountant or cost accountant will not volunteer for a meagre fee to resolve a tax dispute. Secondly, these persons should not be involved from the standpoint of professional ethics that debar them from entering into resolution of cases involving their competitors in the field. The CBR will be a loser in this process as taxpayers will be lured by professionals who may later on become their future tax advisors.
- Prescribe code of ethics for members of ADR committee. It is simply irreconcilable that a person who himself is engaged in tax practice can become a neutral person in resolving a tax dispute between a taxpayer and the department. The same principle applies to serving tax officials who act as a member of ADR committee.
The process of alternate dispute resolution in the form of fast track programme can only be successful if managed through an Independent Authority, not administrated by CBR, which is totally autonomous, comprising ex-judges and retired tax officials who are not involved in tax practice. In USA such a system is already in vogue since July 2000. If interested CBR can get further information about it at http://www.irs.gov/pub/irs-drop/rp-03-40.pdf and http://www.irs.gov/pub/irs-drop/a-03-36.pdf. There is no need to hire any so-called expert from USA, imposed by foreign donors, at enormous salary of US$ 15,000 per month for this task or other matters. The foreign donors first give us money and then get it back through their consultants. In the whole process the Pakistani nation is the loser.
The writers, prominent tax advisers and authors of many books on tax laws, are member Visiting Faculty of Lahore University of management Sciences (LUMS). They work for a multi-disciplinary law firm HUZAIMA & IKRAM (llp@nexlinx.net.pk).