By Ikramul Haq*
Over the last many years, the need for tax reforms is stressed and reiterated by all quarters including the Government itself. However, each attempt in this direction during the last several decades proved to be a complete failure. The main reason for this failure is that search for rationalisation and simplification of our tax laws is misdirected as we are living in an era of complex and intricate economic environment. Neither the official policymakers (including so-called numbers of Expert Group nominated by Chief Executive) nor the professionals possess the vision for this gigantic exercise.
The issues and problems relating to tax system can only be tackled by way of a professional, scientific and empirical approach. Among other things, the most important and urgent task is to analyse the causes for inefficiency and rampant corruption in the tax departments and to take concrete steps for establishing a tax apparatus which is efficient, responsive and friendly.
The goal of tax reform cannot be achieved in a few weeks. The present government (or we can it s set-up!) is sadly mistaken if it is of the view that the process of tax reforms will be achieved by asking the President to promulgate a few more Ordinances. People comprising Chief Executive’s sitting in CBR (sic) are not capable or competent for this assignment. A well-thought-for, long -term and multi-faceted strategy is required for tax reform and the process can only be competed in phases. The three main constituents of such a strategy should be:
(a) Resource management
(b) Operation management
(c) Staff motivation
The present tax system portrays the worst possible oppression a state can resort to in the era of Enlightenment where every civilized society adheres to the principles of human respect, justice and equality. The following aspects of the prevalent tax structure will show where the actual fault lies and how the State should initiate a process of introducing a people-friendly tax system and tax culture where the masses would pay taxes as their human duty and not as helpless subjects subservient to oppressor rulers.
1. LACK OF JUSTICE SYSTEM
In any society the administration and dispensation of justice should be the top most priority. A society without a sound, reliable and speedy judicial system which does not ensure effective justice dispensation cannot survive for a long. The administration and dispensation of justice under the Income tad Law in Pakistan need serious attention. The entire system is now at the verge of collapse. We are heading to wards (towards) tax revolt courtesy the highhandedness of present tax machinery. The tax machinery is becoming ruthless by every passing day and almost every taxpayer has now become a victim of abuse of powers (arbitrary as well as unlimited!) by tax officials. Those who do not pay taxes in connivance with tax collectors are satisfied and safe. For them not paying to State is better than paying the tax collector for his self-aggrandisement. This is a pathetic state of affairs we are facing these days. It testifies to the fact that tax administration in Pakistan has a complete failure. The tax machinery has failed to mobilise tax resources (at least Rs. 350 billion are evaded in taxes alone annually due to unholy alliance between tax collectors and tax evaders) and those who are paying (though not according to their actual incomes, but partially) are sick of ever-increasing harassment. The tax collectors want to achieve their unreasonable (sic) targets from them without bringing into tax net those (presumably their “friends”) who do not pay.
In these circumstance, if no efforts are made to streamline/redesign the appellate apparatus, the day is not very far when those who are paying their taxes are compelled to stage a tax revolt. There is an urgent need to ensure “justice”, “rule of law”, “fairness”, “equity” and independence of appellate authorities from administration.
Appellate authorities, as a matter of law and principle, should be independent in the true sense of the word. At present, the taxpayer, if aggrieved, can file an appeals against the order of the Deputy Commissioner of Income Tax (DCIT) before the Commissioner of Appeals [CIT(A)] who works under the administrative control of Member Judicial, Central Board of Revenue. It is a mockery of justice that an important functionary in the hierarchy of judicial system is directly subordinate to Central Board of Revenue, which is the highest administrative authority under the Income Tax Ordinance, 1979. Everybody knows the attitudinal problems of these worthy Commissioners of Appeals (sic!). They are part and parcel of revenue collection machinery. They work as a strong arm of assessing officers and their fellow Commissioners of Zones, who are assigned with budgetary targets. The genuine appellant, victim of arbitrariness of the DCIT, cannot get any relief unless he pays “due” share to the CIT(A).
In a civilised society such an important function cannot be perceived to be performed by an administrative authority. Time and again the taxpayers and professionals have demanded that like Income Tax Appellate Tribunal (ITAT), the Commissioner of Appeals should also work under the Ministry of Law & wizards (sic) of CBR for obvious reasons. In fact, they will never accept independence of appellate authorities. They have managed to even dominate the ITAT by securing positions there is the garb of Accountant Member (as junior as serving commissioners). The ITAT’s status is no longer that of an independent Tribunal. The so-called accountant members again “represent” (in letter and spirit) the ‘Tax Collection Machinery’- how they can disassociate themselves from the tax machinery knowing well that their stay at ITAT is temporary and sooner or later (though majority want it “sooner!”) they have to go back to work as Commissioner/Regional Commissioner with the prime aim of meeting budgetary targets. The existing state of affairs amounts to open mockery of justice system under the Income Tax Ordinance, 1979.
The judicial system under the Income Tax Ordinance, or for that matter under any statute, should be completely and truly independent of administrative interference or control. It is an essential prerequisite for ensuring proper tax compliance and confidence of taxpayer in the system.
The present tax culture is based on “bad faith” between the taxpayers and the tax collectors. Both are victim of self-interest and their main aim is to cheat each other. This culture can only be changed if an effective judicial system is introduced and properly implemented. All appellate authorities should be part of judicial service working under the administrative control of the Honourable High Court. The present working of Tribunal under the Ministry of Law is against the principle of “independence of judiciary”. The Tribunal as well as first appellate forum (commissioner appeals) should work under the High Court of their territorial jurisdiction. The same system is presently in vogue for civil judges/magistrates.
It is the need of the hour to free the judicial system (through many call it quasi-judicial) under the Income Tax Law from the administrative clutches of CBR. It must work as an independent judicial service under the High Court. It is absolutely essential if we really want the people to pay their taxes honestly and diligently. No system can work unless it has effective check and balance mechanism. An independent judicial system alone can guarantee the proper collection of revenue in Pakistan.
2. INTERFERENCE IN JUDICIAL WORK
The Central Board of Revenue (CBR), the apex administrative body under the Ordinance, enjoys only an advisory jurisdiction and it cannot constitute itself as an assessing authority. In practice, however, the CBR stalwarts (sic) have assumed a self-styled role of “Lawmakers” and “Assessing Officers”, though both the functions are alien to powers delegated to CBR. A detail analysis of CBR’s transgression of power in this respect has repeatedly appeared in national press.
Way back in 1992, the Honourable Supreme Court of Pakistan in Al-hram Builders (Pvt.) Ltd. v. Income tax Tribunal [(1992) 66 Tax 147 (S.C. Pak) = (1992) SCC 950 clearly directed that Section 7 of the Income Tax Ordinance, 1979 (hereinafter: “the Ordinance”) is to be interpreted in restricted manner. The assessment proceedings are quasi-judicial and “guidance” to officers as envisaged in section 7 should not be interpreted to mean “interference” in judicial work.
This case gave a clear direction to lawmakers and CBR, but none moved. However, the CBR continued to interfere in quasi-judicial functions of its subordinates. Recently, a number of complaints appeared that the CBR even directed the appellate authorities “not to give any relief” in cases where “substantial” revenue is involved. It depicts a sorry state of affairs. CBR has emergal over the period a new East India Company.
The Honourable Lahore High Court in (1998) 77 TAX 127 (H.C. Lah.) passed a strong stricture against the CBR in the following words:
“It is matter of some regret that the Central Board of Revenue while issuing the circulars does not follow the law declared by the Supreme Court of Pakistan……the CBR will be well advised to desist from issuing such circulars which influences the decisions of the adjudicating authorities.”
It is well established law now that the judicial power of the assessing officers cannot be controlled by any administrative instructions by CBR or other tax authorities. The CBR is not competent to give directions regarding the exercise of any judicial powers by its subordinate authorities. It is a pity that in the presence of these judicial pronouncements binding under Articles 189 & 201 of the Constitution, the CBR is still resorting to judicial interpretation of law and issuing unlawful instructions to appellate authorities.
The learned Income tax appellate Tribunal, while dealing with this illegal exercise of powers by CBR (sic) in a case reported as (1995) 71 TAX 225 (Trib), held as under:
“The CBR, at times, issues instructions or explanations in reply to clarifications sought from individual tax payers, their authorised representatives, ITPs and Advocates, individually or through their representative associations. Its privilege to do so is not denied. The scope of such interpretation or explanation of departmental view cannot however be enlarged to encroach upon legislative authority of the Parliament.”
Nothing can be more contemptuous to a “presumption” created by law. Translated into simple words it means that legal presumption of accrual of income in such cases notwithstanding, the will of CBR being otherwise, the legal presumption may well be ignored. This kind of despotic benevolence can neither be favoured nor connived. All exemptions generally being intrinsically discriminative, extreme care needs to be employed while creating interpreting or enforcing them.
This is the high time that CBR should be directed to act in lawful manner. It is a great tragedy that apex administrative authority (CBR) itself has indulged in worst kind of highhandedness making the entire tax machinery an oppressive state apparatus. The misconduct and the malpractices of CBR have, in fact, destroyed the entire tax culture.
In the frenz (frenzy) of meeting unrealistic budgetary targets, it has violated all norms of justice, fair play and equity. The outcome is complete bad faith between the taxpayers and tax collectors. The sole responsibility for this erosion lies with the CBR. Any attempt to tax reform, therefore, needs to be started with setting the house in order i.e. complete overhauling of the CBR.
3. POLITICS OF GIVING “FISCAL INCENTIVES”
Nobody is above the law, nor is CBR or the Federal Government. The politics of giving “fiscal incentives” through delegated powers is the most disturbing aspect of tax administration in Pakistan. This delegated exercise of powers is, in fact, ultra vires of the Constitution of Pakistan in terms of Article 162.
The issue involved is of great public importance. There are numerous examples where the CBR exceeded its defined administrative powers. The law of the land must be adhered to by all and sundry. The CBR was established to implement and administer the tax laws and not to violate them.
The increase in public revenue is the cry of the hour. At this critical juncture of our history where economic survival is at stake, the CBR (especially during the Nawaz Sharif Government) was giving so called “fiscal incentives” to some selected ones, which, even if necessary, should have only be through a proper constitutional procedure..
In the past, Federal Government was also to be blamed for this extra-constitutional process. The CBR was nothing but a puppet in the hands of the rulers. The CBR administrative hierarchy knew very well how key administrative appointments were made. Those who accepted such appointments were fully aware as to “what they were required to do”. Their subservience to rulers of the day was the key for survival.
Adequate historic record is available to expose the Federal Government and the CBR as for long they have been violating the constitutional command and the legal provisions of taxing statutes. Blatantly they have been ignoring the judgments of the superior courts which are binding in terms of Article 189 and 201 of the Constitution of Pakistan. The following amendments were made by the Federal Government between 1-7-1996 to 30-6-1998 in the Income Tax Ordinance, 1979 (hereinafter “the Ordinance”) while exercising the delegated powers:
(i) SRO 574(I)/96 dated Ist July, 1996;
(ii) SRO 596(I)/96 dated 9th July, 1996;
(iii) SRO 597(I)/96 dated 9th July, 1996;
(iv) SRO 653(I)/96 dated 31st July, 1996;
(v) SRO 647(I)/96 dated 4th August, 1996;
(vi) SRO 1173(I)/96 dated 8TH October, 1996;
(vii) SRO 1207(I)/96 dated 16th October, 1996;
(viii) SRO 1399(I)/96 dated 24th December, 1996;
(ix) SRO 181(I)/97 dated 22nd March, 1997;
(x) SRO 703(I)/97 dated 13th September, 1997;
(xi) SRO 406(I)/97 dated 3rd June, 1997;
(xii) SRO 1313(I)/97 dated 20th December, 1997;
(xiii) SRO 23(I)/98 dated 16th January, 1998;
(xiv) SRO 111(I)/98 dated 19th February, 1998;
(xv) SRO 169(I)/98 dated 16th March, 1998;
(xvi) SRO 171(I)/98 dated 17th March, 1998;
(xvii) SRO 516(I)/98 dated 5th June, 1998;
(xviii) SRO 529(I)/98 dated 9th June, 1998;
Not a single amendment was placed before the National Assembly alongwith the Finance Bill 1997 and 1998. Section 14(2) of the Ordinance as inserted by the Finance Act, 1995, requires that all the amendments made by the Federal Government should be placed before the National Assembly during a financial amendments. It is strange that neither the so-called democratic governments nor the CBR realised in two years that a grave violation of law was committed. The so-called democratic governments always regarded the laws of the land as mere piece of paper. The people of Pakistan has a right to know as to what prevented the Federal Government and the CBR to hide all these amendments from the Sovereign Parliament. What is the validity of such amendments which were not placed before the Parliament in violation of Section 14(2)?
4. BUDGETARY TARGETS – HOW ACHIEVED?
The issue of fixation of budget targets and how these are achieved is another area which exposes the great fraud committed by the so-called democratic governments through CBR with the nation. In the past, the CBR issued the infamous Circular No. 2 of 1998 (which was later on withdrawn after the courts held it as illegal), which according to CBR was meant to “streamline” the refund procedure. Law requires that wherever any refund is due tit should be paid with the assessment order and there is no requirement of an application by the taxpayer (Section 100 of the Ordinance). The CBR itself issued instructions through Circular No. 3 of 1978, Circular No. 10 of 1985 to its officials to send refund vouchers alongwith assessment orders. “the officers in the field do not comply with the law and the CBR’s instructions especially when the matter relates to issuance of refund. The CBR cannot ensure the compliance of law and is now punishing the taxpayers to become a part of waiting list to get their refunds”.
CBR issued these instructions only as lip-service to satisfy the taxpayers. In reality, it is party to this administrative highhandedness. Every year bonus and cash rewards are given to tax officials for achieving targets (sic), but the collection never reflects the money due to taxpayers. The whole nation is shamelessly hoodwinked by the CBR. Year after year they are showing gross collection as “target achieved”. What about the money payable as refund? If all the refunds due in a financial year are issued the net collection will be the correct “figure as target achieved”. Does the chairman, CBR, possess courage to give us the correct figure for the year ending 30th June, 1999 of gross collection and refund due but not issued which will alone determine what is actually collected. The Auditor General has a constitutional duty to investigate this matter. The CBR has been projecting exaggerated figures of collection i.e. not to reduce gross collection by refund due. This is a criminal act of hoodwinking the people and to avoid the payment to taxpayers with ulterior motives.
5. CBR’S CHANGE MANIA
The tragedy of our policy markers has been that they believe in achieving economic progress through promulgating new laws and by introducing amendments in the existing fiscal laws. The Legislature and the rule-making authority alike share this perception. The CBR (working as Revenue Division under the Finance Ministry) has become almost pathological in its change mania. It is normal for them to issue hundreds of SROs (Statutory Regulatory Orders) with the Finance Bill and keep on adding the same even after the adoption of the Finance Act. They notify dozens of Rules under delegated authority on monthly basis. Various forms are changed overnight. Can we afford the luxury of throwing away millions of pages of printed forms, when most of our school going children lack resource to have writing paper?
Year after year, the Finance Bill continues the fatuous tradition of introducing experimental provisions most of which are absolutely illogical, whimsical and badly drafted in haste. They legislate first and think afterwards. Amendments are introduced which are never enforced, because they are repealed or amended before the date they are scheduled to become operative. The laws passed by the Parliament are either overruled or held in abeyance through delegated legislation in utter violation of Article 163 of the Constitution of Pakistan.
Every year with the adoption of Finance Bill complexity is heaped upon complexity and confusion becomes worse confounded. This state of affairs needs immediate attention of the present setup if it wants to reform the tax system.
6. CREDIBILITY OF SYSTEM
In the United Kingdom, there are 30 million income-tax payers, but the number of appeals filed in the High Court is only around 30 in a year. In Pakistan we have less than one million taxpayers (which in itself a shameful indicator with population of over 130 million), but the number of appeals filed in our Higher Courts is over 6,000 a year, in addition to more than 5,000 writ petitions. The figures reflect the tremendous public dissatisfaction with the quality of the law of fiscal administration. Our law reporters testify to the fact that generally a case reaches hearing in the High Court 15 years and in the Supreme Court 20 years, after the relevant assessment year. The situation is getting worse by the deluge of annual amendments through Finance Bill–the indigestible verbiage; and the flood of litigation is becoming more and more heavy every ear.
7. MINDLES TINKERING WITH LAWS
Two things strike the students of Pakistani fiscal laws with trepidation and amazement–the precipitate and mindless tinkering with the law by bureaucrats, who are the de facto legislators of Pakistan, and the anaesthetised patience of the Pakistani public. It appears that we the Pakistani have been forced to become a “law arousal” nation. We have been made to endure injustice and unfairness with feudalistic servility and fatalistic pessimism. The poor of Pakistan endure inhuman conditions, which would lead to a bloody revolution in many parts of the world. The rich endure foolish laws and sickening amendments that benefit none except the legal and accountancy professions, and they instinctively prefer to circumvent the law han to fight for its repeal.
8. UNASHAMED ABUSE OF POWER
There can be in doubt that the line between the lawful exercise of constitutional authority and the unashamed abuse of power was crossed by introducing section 80C in the Income Tax Ordinance which provides for the presumptive taxation in the case of certain taxpayers. What a shameless attitude of the so-called public representatives that income is deemed when stock-in-trade is just imported, regardless of the actual profit which may or may not be made in the future; and by section 80D and 80DD which provides for taxation of taxpayers which have no taxable income, regardless of even losses carried forward from earlier years. The honourable apex court held these provisions valid in 1997 and there was mood of jubilation amongst the CBR stalwarts that they could legally play havoc with the economy of Pakistan. They proved it by expanding the scope of presumptive taxation since then. The pace of the economic growth since the adoption of these laws has decreased significantly. The recession in business we are witnessing these days is the direct result of retrogressive fiscal laws.
9. AVOIDING REPETITIVE APPEALS
There is no provision in the Ordinance for avoidance of repetitive appeals either by the assessees or the department as is the case in Indian Income Tax Act, 1961 [Reference section 158A]. The best remedy would be for the department to take a decision on the disputed points involved in a particular case or in a number of cases at the highest level and decide whether to pursue the matters further or not. At present, even on small points, once addition or disallowance is made by the DCIT, goes on disallowing and/or goes on filing appeals against the order of the first appellate authority even where the first appellate authority and the Tribunal have given relief to the assessee on the same point in earlier years. This unnecessary leads to multiplicity of proceedings involving avoidable cost to assessees as well as to the department. Further, assessees face difficulties in seeking stay of tax demand even where they have won in appeal before the first or second appellate authority in earlier years or where similar question has been decided in favour of the assessees in other cases. In any event, even where stay is granted, the outstanding demand is adjusted against refunds due to the assessee. The matter should be thoroughly re-examined in all its aspects so that some satisfactory formula could be evolved and provision made in the Ordinance in this regard.
It is my unshakable belief that a future generation of Pakistan, with a sense of justice and fairness, will not allow such tyrammical (tyrannical) tax system to be in operation. Most is lost to the State by way of damage to taxpayers’ morale, which is very valuable though fragile national asset, than is gained by such arbitrary and cruel taxation. Every Government has a right to levy taxes. But no Government has the right, in the process of collection taxes, to inflict misery and harassment to the public and the gnawing feeling that he is made the victim of palpable injustice. Taxes are the life-blood of any government, but these cannot be so collected or imposed in a manner to suck the blood from the arteries of the public through proven-corrupt tax managers. The transfusion needs to be accomplished in accordance with the principles of justice, equity and fair play.
* The writer, a leading International Tax Counsel, specialises in tax, corporate and constitutional laws. He is Chief Partner of Lahore Law Associates (Email email@example.com). He is member of Visiting Faculty of Institute of Direct Taxes in Lahore. He is author of numerous books on Pakistani Tax Laws some of which are co-authored with his wife Mrs. Huzaima Bukhari. He is currently conducting research on Tax Reform in a Quasi-Constitutional Perspective for doctorate thesis.
 See Ikramul Haq’s articles in daily Dawn, October 5, 1998, October 26, 1998 and November 9, 1998.
 Pakistan Tax Decisions, February, 1999, Journal, Page 1.