Income Tax Ordinance 2001

Time to do away with it

Dr. Ikramul Haq

Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. Dr. Ikram is Chief Partner of Lahore Law Associates (fax: +92 42 6365584, e-mail: irm@brain.net.pk; website: http://www.paktax.com.pk). He is a member of the visiting faculty of the Lahore Institute of Tax Education (LITE). He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani law and global narcotics trade, some of which are co-authored with his wife, Mrs. Huzaima Bukhari.

The failure to act prudently brings certain things as fait accompli in a nation’s life. The Income Tax Ordinance 2001, which was imposed upon us on 13 September 2001 through a Presidential Ordinance on the dictates of the International Monetary Fund (IMF) as a precondition for release of the final tranche of Stand-By Arrangement, is Pakistan’s fait accompli. Ever since the posting of the draft of new tax law at the CBR’s website, many conscientious writers and representatives of ICAP, ICMA and tax bars have highlighted its deficiencies, dichotomies, contradictions and possible disastrous effects for the taxpayers, but all this fell on deaf ears of the Government. The present government has been claiming persistently, “we are not dictated” by the donors. One wonders what motivated it to impose on us an alien piece of tax legislation, which is the worst work of a legal draftsman [allegedly prepared by some Australian taxman] I have ever come across.

I have decided not to analyse this Ordinance [which will be effective from 1st July 2002] for two reasons: one, it is not even worthy of any comments being a totally hopeless, half-hearted attempt [CBR says the real version will be the one as amended through the Finance Ordinance 2002, and the present one is just to please the IMF] and secondly being fait accompli it is not reversible, thus pinpointing its deficiencies, anomalies and dichotomies would be an exercise in futility. The government and the CBR were helpless being under immense pressure from the IMF to promulgate this law before 15 September 2001 if they wanted to get the last tranche of Stand-By Arrangement. It is undisputed fact that the Committee constituted for redrafting the Income Tax Law did not prepare this law. On the dictates of the IMF, an alien expert (sic), who possessed neither expertise nor any insight into the mundane realities of Pakistan, simply handed it over to our “independent” and “sovereign” State.

The IMF’s Mission that left Pakistan in the first week of September asked the government to enforce the new Income Tax Ordinance before the decision regarding last tranche of the Stand-By Arrangement was to be considered. The last tranche of the IMF Stand-By Arrangement is $ 131 million (105 million SDRs) was to be withdrawn by end-September.  On September 6, 2001, the Central Board of Revenue (CBR) formally placed a request to the Cabinet Division to include the draft Income Tax Ordinance 2001 in the agenda of the next Cabinet meeting. The Ordinance is going to be enforced in July 2002, but its promulgation was made on 13 September 2001, two days after the New York tragedy. Had the Government waited for some more days, it could have avoided its promulgation as after our joining the Bush Camp, the IMF not only released the last tranche without any hassle, but also stopped its “financial terrorism”! Since we are partners in fighting “terrorism” now, all is well and the Government can refuse its enforcement. One hopes that the Government will take this bold decision.

The promulgation of this new Income Tax Law (sic) is an ugly joke with the entire nation. The military junta has been trying to convince us that they keep national interests ahead of everything and pay least heed to any international pressure that dissuade them from their “holy mission of protecting national interests”. Their actions speak otherwise as far as tax policies are concerned. In order to please the foreign donors they have been following each and every command of the IMF, which is perpetually destroying our economy and making the life of ordinary people more and more miserable with every passing day. This appears to be the beginning of the agenda of CIA, unveiled in a section of our press on 7th September 2001: Pakistan is the best example where globalization could cause breakdowns because the country “seems to encompass the worst of everything.” In its latest report on global demography trends, ‘Reshaping the Geopolitical trends’, the CIA says: “Globalization means there could be breakdowns in bigger, developed, urban places where the United States may not be able to intervene.” The IMF through anti-people policies, which our government is following in letter and spirit, is paving the way for ‘breakdown”.

The CBR people have openly admitted [Business Recorder, 7th September 2001] “the pressure of the IMF to enforce it now is basically lack of its confidence on any future change in government policy that could delay the promulgation and actual enforcement of the Ordinance”. The Spokesman of the CBR admitted “the collection of income tax would be done on the enforcement of the Ordinance in July 2002. It would be part of the Ordinance to be promulgated, that the enforcement would be done in July next. The suggestions and proposals being received on the proposed new income tax law are being analysed. These will also be discussed with stakeholders and whatever the government approves would appear in the budget for fiscal 2002-03. At present there should be no apprehensions on account of provisions relating to taxing of perquisites under the new law”.

This shows the seriousness and sincerity of the CBR stalwarts (sic) towards the process of tax reform. They are only worried about the IMF dictates and have no concern what negative impacts the new Ordinance would cause to the public at large in general and to the tax payers in particular. Pakistan joined the IMF on 11 July 1950 and some $5 billion worth of disbursements in more than 25 installments received so far have lead to a falling rupee, lower purchasing power, expensive electricity as well as natural gas, a declining standard of living, increased unemployment, inflation, deindustrialisation, unequal distribution of wealth, ethnic tension, child labour and now a complete loss of sovereignty.

The present regime has no mandate to enforce through Presidential Ordinance the new Income Tax Law. No taxation without representation is a cardinal constitutional principle. Since people do not have the right to vote against or in favour of the present regime, it has no mandate to enact a new tax law. It should leave this matter for the future elected government. However, it can leave the draft prepared by some alien scholar (one wonders how much money was wasted on this badly drafted, incomplete and useless document) for public debate with a view to help the next democratic government to already have some consensus on the new amendments in the income tax law. The process of open public debate may take two to three years. The next democratic government to be elected in October 2002 will have then an easy task either to make necessary changes in the existing income tax law or to enact altogether a new one. This regime has neither constitutional authority nor moral sanction to promulgate altogether a new Income Tax law. It can only make amendments in the existing law. The CBR’s high-up have no authority to say that after promulgation of this IMF-imposed law, the government would make amendments through the Finance Ordinance 2002 taking into account the suggestions of the stakeholders.

Every civilised society respects and adheres to the cardinal principle that one should not be forced to pay a tax imposed by a government without having the opportunity to vote for or against the tax measure, either directly, or through elected representatives. The present setup (which is a military rule minus martial law) since deposing the elected government on 12 October 2000 has imposed a number of tax measures in utter violation of this well-established rule of law.

Tax system is one of the fundamental elements of a constitutional democracy.  The important questions such as who is to be taxed, how much and for what purposes, are essentially political questions.  These kinds of questions are always resolved through a political process.  How tax obligations are to be imposed, administered and enforced are constitutional questions.  The imposition, administration and enforcement of taxes raise problems about the rule of law, proper division of powers, the role of judiciary and so on.

The imposition and administration of taxes is a purely constitutional issue, which cannot and should not, be tackled by a military regime against whose policies the people have no right to vote. Political process for the establishment and reinforcement of a constitutional democracy and democratization of society has always been interrupted in Pakistan by military regimes, for which the blame goes mainly to the political leadership itself, which is both immature and corrupt.

Sufferings of the Pakistani masses are increasing day by day as the present regime is vigorously following the agenda of tax reform prescribed by the foreign masters who have their own vested interest to see this nuclear-state as a bankrupt economy. Their designs have now a better chance to succeed, as no representation is possible against the taxation measures of the present military regime. The excessive use of administrative discretion and delegation of legislative authority to tax bureaucracy has destroyed the entire tax system of the country. The so-called wizards sitting in the CBR have been playing havoc with the tax laws by issuing infamous SROs and administrative instructions. The process was a modus operandi to serve the political masters during the so-called democratic governments. It continues unabated during the present setup, now in order to serve the interest of foreign masters to impose all kinds of oppressive, anti-people tax laws and recovery measures.

No tax should be imposed unless the government has actually exercised the legal power to impose it. In some countries such as France and Belgium, this “right” to choose untaxed alternatives is understood in constitutional rules enjoining the strict interpretation of law. The so-called champions of democracy while strongly asking for the restoration of electoral process in Pakistan [before the 11 September 2001] have not opposing the present regime’s harsh, illogical and authoritarian tax policies, knowing that in fact, their own agenda is being implemented without any questioning or resistance through the people’s right to vote against it. This unveils the real motives of the foreign donors and their lip service to the cause of restoration of democracy in the country. There exists a serious danger in today’s Pakistan that the very legitimacy of the taxation system may be destroyed, if not ultimately the legitimacy of the government. Oppressive tax measures are not a basis for good governance. If the present regime wants to protect the vital interests of Pakistan, it must pave the way for design and reform of democratic institutions, standards, norms and moral values without which instability will increase. There is a genuine apprehension that any further disintegration of our political, legal and fiscal institutions may culminate into a complete breakdown.

The just promulgated Income Tax Ordinance, 2001 signifies the level of our submission and subjugation as a nation. The process of its drafting and promulgation excluded the stakeholders and professional. It has being imposed on us in a ruthless and shameful manner. The critics in Pakistan raised a number of important questions when the Government constituted a Task Force (sic) to redraft the existing Income Tax Law. The most important questions posed by them were:

Do we really need a new Income Tax Law?

What is wrong with the present one?

Can we really improve the tax system and tax apparatus by just promulgating a new law?

Do the present government against whom taxpayers have no right to vote has legal or moral authority to enact a new tax law?

These and many other questions of pivotal nature have not been addressed publicly and instead wasteful adventures have been made by neem-hakims (quacks) to further destroy the existing tax legislation. We do not need a fresh legislation in any tax laws. However certain amendments are required that should be made after proper consultation with all the concerned and by eliciting professional advice. I tried a pun by drafting a new law (sic), just to prove my point that if only rewriting a new code is the solution of the problem, it can be done single-handedly by many of us and there is no need to waste colossal money and bringing in so-called experts from abroad and hiring of exorbitant local consultants on for this meaningless task.

My draft which is published in Taxation [a famous law reporter of Lahore] of January 2001 is much simpler than one drafted by the Australian expert (sic). However, The government was no interested to listen to the local experts and they were made the members of different task Forces just as an eyewash and for face saving that the process is well represented. In fact, the entire law is drafted on the dictates of the IMF to further destroy our industry and make the life of common people miserable at the hand of ruthless tax machinery. The new Income tax Ordinance gives unprecedented discretionary powers to the Commissioner of Income Tax. This law is going to have devastating and disastrous effects on already ailing economy.

It has failed to achieve any of the goals set for redrafting of the new law. It is neither simpler nor business-friendly. It has more exemptions than contained in the Income tax Ordinance, 1979. It has presumptive taxes as well as plethora of withholding taxes. It encompasses all the ills of fiscal uncertainties, will increase tax burden of salaried class to the extent of confiscation of their entire emoluments and is bound to create more confusion and litigation between the tax collectors and taxpayers. The Pakistani government after joining hands with the USA and its allies for their “military terrorism” of defencelss Afghanis is no more under “fiscal terrorism” of IMF. It is therefore a golden opportunity to tell the IMF that the trash prepared by its ‘expert” cannot be enforced. One hopes that our Government will seriously heed to this request, as it will save million of people, taxpayers and professionals from an undesirable legislation, which is neither necessary nor beneficial for our economy.