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Recouping tax losses judiciously

Huzaima Bukhari & Dr. Ikramul Haq

Judicial overreach is when the judiciary starts interfering with the proper functioning of the legislative or executive organs of the government. This is totally uncharacteristic of the role of the judiciary envisaged under the Constitution and is most undesirable in a constitutional democracy. Judicial overreach is transgressive as it transforms the judicial role of adjudication and interpretation of law into that of judicial legislation or judicial policy making, thus encroaching upon the other branches of the Government and disregarding the fine line of separation of powers, upon which is pillared the very construct of constitutional democracy. Such judicial leap in the dark is also known as “judicial adventurism” or “judicial imperialism”….Constitutional democracy leans heavily on the rule of law, supremacy of the Constitution, independence of the judiciary and separation of powers. Judges by passing orders, which are not anchored in law and do not draw their legitimacy from the Constitution, unnerve the other branches of the Government and shake the very foundations of our democracyJustice Mansoor Ali Shah in C.P.446-L/2019 re Mian Irfan Bashir v The Deputy Commissioner (D.C.), Lahore, etc.

The successive governments in Pakistan, civil and military alike, failed to tackle the twin menaces of black money and tax evasion for lack of judicious approach. They have been offering unconstitutional amnesties and money whitening schemes to the rich and mighty, who amassed enormous wealth through illegal means or through legal means but not paying taxes on the same. As noted by Justice Mansoor Ali Shah of Supreme Court of Pakistan in the above case, constitutional democracy and rule of law go hand in hand and their absence creates a chaotic state like ours. The Constitution of Islamic Republic of Pakistan [“the Constitution”] requires strict adherence to laws of the land by all, including the judiciary. All institutions must work within their defined boundaries under the Constitution. However, it is a matter of record that the honourable judges while performing their sacred duty of defending the Constitution have not been declaring unconstitutional amnesty laws passed by the National Assembly and through Ordinances by military dictators causing tax losses of billions of rupees. Resultantly, Pakistan is one of the heavily indebted countries of the world with no plan to break this debt prison.    

The incumbent Prime Minister also availed tax amnesty offered by General Musharraf, yet was declared “sadiq” and “ameen” by the highest court that has to defend the Constitution and rights of the people. After the exit of military dictator as self-imposed President on August 18, 2008, under the so-called civilian rule, all the three governments, under Pakistan People’s Party (PPP), Pakistan Muslim League (Nawaz)—PML-N—and Pakistan Tehreek-i-Insaf (PTI) caused huge losses to national exchequer through various tax amnesties and money whitening schemes. All these are documented in a book, Pakistan Tackling FATF: Challenges & Solutions, (AA Publishers, Lahore, January 2021).

The amnesty schemes availed by tax evaders and even public officeholders were not declared unlawful by the Supreme Court though these did not draw their legitimacy from the Constitution. No judge of High Court or the Supreme Court declared these unconstitutional by taking suo motu action. It may be mentioned that the Supreme Court of Pakistan on February 1, 2018 in Suo Motu Case No. 2 of 2018, which is still pending for adjudication, made the following remarks:

It has been common knowledge for years that a large number of Pakistani citizens, who are residents of Pakistan and are maintaining accounts in foreign countries without disclosing the same to the authorities competent under the laws of Pakistan or paying taxes on the same in accordance with law. Prima facie, it appears that such money is siphoned off without the payment of taxes through illegal channels and represents either ill-gotten gains or kickbacks from public contracts. Such money creates gross disproportion, inequality and disparity in the society, which warps economic activity and growth, and constitutes plunder and theft of national wealth”.

Urgent action is needed from the honourable Supreme Court in the pending Suo Motu Case No. 2 of 2018 that was taken after seeing what is termed in the above order “…..not anchored in law and do not draw their legitimacy from the Constitution, unnerve the other branches of the Government and shake the very foundations of our democracy”.

In cases of financial crimes, the real issue is retrieval of looted money and retrieval of tax on untaxed assets. This has not been done even in any case although the Supreme Court asked for action against the Attorney General in 2010 for withdrawal of Pakistan’s claim of US$ 60 million in para 177 to 179 of the case reported as Dr. Mobashir Hassan and other v FOP and others PLD 2010 SC 265. Tragically, even after 10 years, the order of Supreme Court remains unimplemented.

Frequent tax amnesties and policies of appeasement towards the corrupt has made Pakistan a “soft state”—famously articulated by the Nobel Laureate, Swedish sociologist Gunnar Myrdal in his 1968 three-volume work, Asian Drama: An Inquiry into the Poverty of Nations. It is a broad based assessment of the degree to which the state, and its machinery, is equipped to deal with its responsibilities of governance. The more soft a state is, the greater the likelihood that there is an unholy nexus between the law maker, the law keeper, and the law breaker.

The study, ‘What is hidden, in the hidden economy of Pakistan? Size, causes, issues and implications’, by Ahmed Gulzar, Novaira Junaid and Adnan Haider, shows that corruption and tax evasion are not only causing an expansion in the size of the informal economy but also hampering the growth rate, thereby adding more to economic uncertainty, income inequality and poverty. Successive governments in Pakistan—military and civilian alike—instead of dealing with these issues have been pardoning and appeasing tax evaders through various laws and amnesty schemes. The coalition government of PTI treaded the same path, contrary to what Premier Imran Khan had been saying before coming to power that he will open even the cases of those who availed the tax amnesties of the PML-N in 2018.

It is worth recalling that before coming to power, Premier, Imran Khan, and top leadership of Pakistan Tehreek-i-Insaf (PTI) were calling tax amnesties as “immoral”, “undesirable”, “unlawful” and a “slap on the face of honest taxpayers”. After coming into power, PTI took many U-turns but the worst one was offering asset whitening scheme, drafted and owned proudly by then Chairman of FBR, Syed Muhammad Shabbar Zaidi, resulting into tax losses of billions of rupees.

The Government of PTI notified its first asset, income, expenditure and asset whitening scheme—Assets Declaration Ordinance, 2019—through a Presidential Ordinance on May 14, 2019. The scheme gave generous incentives to those who had not been paying their taxes honestly, concealing and/or understating assets/incomes/sales/expenses and cheating the State. It was later passed by National Assembly as part of Finance Act, 2019 which means that it was made part of Money Bill that was unconstitutional in clear violation of the judgement of Supreme Court [(2016) 114 TAX 385 (S.C. Pak.)] which says:

We may develop this point further; although Article 73(3)(a) of the Constitution states that a Bill shall not be a Money Bill if it provides for the imposition or alteration of a fee or charge for any service rendered, this does not mean that if a particular levy/contribution does not fall within Article 73(2) it must necessarily fall within Article 73(3). Sub-articles (2) and (3) are not mutually exclusive. There may very well be certain levies/contributions that do not fall within the purview of Article 73(3) but still do not qualify the test of Article 73(2) and therefore cannot be introduced by way of a Money Bill, and instead have to follow the regular legislative procedure. The discussion above that the subject contributions/payments do not constitute a tax is sufficient to hold that any amendments to the provisions of the Ordinance of 1971, the Act of 1976, the Act of 1923, the Ordinance of 1968, the Act of 1968 and the Ordinance of 1969 could not have been lawfully made through a Money Bill, i.e. the Finance Acts of 2006 and 2008, as the amendments did not fall within the purview of the provisions of Article 73(2) of the Constitution”. 

The above judgement of the Supreme Court approved the brilliant discourse and conclusion on Money Bill by the illustrious Justice Mansoor Ali Shah (as Chief Justice Lahore High Court, later elevated to Supreme Court) in 2011 PTD 2643as under:

The special legislative procedure is, therefore, an exception and must operate in its restricted scope. Being a special procedure it also has to be construed strictly as it is a deviation from the normal legislative process under the Constitution. Integrity of a money bill must be jealously guarded and matters falling outside the purview of Articles 73(2)(a) to (g) of the Constitution should not be permitted to stealthily crawl into a money bill (at times due to political sophistry of the Government in power) -and adulterate its sanctity”.

The PTI coalition government gave yet another amnesty to developers and builders and buyers through another Presidential Ordinance [The Tax Laws (Amendment) Ordinance No. 1 of 2020] promulgated on April 17, 2020 and then made part of Finance Bill 2020, passed by the Parliament in violation of Article 73(2) of the Constitution as elaborated by the Supreme Court in [(2016) 114 TAX 385 (S.C. Pak.)]. It received the assent of President on June 30, 2020 as Act No. XIX or 2020.   It was meant for the powerful land developers (or grabbers in some cases), builders and buyers having untaxed sources. This was renewed for further period on the last day of 2020 through a Presidential Ordinance and is still continuing.

On the last day of 2020, Prime Minister of Pakistan, Imran Khan, gave a “New Year gift” to nation [read rich developers, builders and contractors]. In a brief televised address, the Prime Minister, instead of offering relief package for 2021 to the needy and the poor suffering immensely after second deadly wave of Covid-19 endemic, extended amnesty for the rich and mighty, who even after numerous amnesties, offered by successive governments in the past, have yet failed to explain the sources of their investment in real estate business.

According to FBR’s Press release issued on December 31, 2020: “The last date for seeking immunity by builders and developers from probing their source of funds and availing fixed tax regime has been extended from 31st December 2020 to 30th June 2021. Similarly, the last date for builders and developers who want to avail fixed tax regime has been extended from 31st December 2020 to 31st December 2021. The last date for completion of projects has been extended from 30th September 2022 to 30th September 2023 and last date for buyers of housing units and plots has been extended from 30th September 2022 to 30th March 2023”.  

It is simply shocking that FBR on the one hand is acting as watchdog for real estate agents and on the other has issued clarification even 20 days before the President on February 11, 2021 opted to issue Presidential Ordinance II of 2021 [Tax Laws (Amendment) Ordinance, 2021] with retrospective effect (January 1, 2021), just 48 hours before start of sessions of National Assembly and Senate. 

Four amnesties were announced within five years [2013-18] by the government of Pakistan Muslim League Nawaz—PML-N. The last one in  2018 through 82,889 declarations fetched only Rs. 124 billion (domestic Rs. 77 billion and foreign Rs. 47 billion), though the then Adviser to Prime Minister on Revenue, Haroon Akhtar, claimed that collection would not be less than US$ 5 billion for foreign assets alone.

Many tax amnesty schemes were announced prior to that of 2018. The first scheme in 1958 fetched Rs. 1.12 billion, followed by Rs. 920 million in 1968, Rs. 1.5 billion in 1976, Rs. 10 billion in 2000 and Rs. 3.16 billion in 2008. Many other amnesties were also offered in 1985, 1991, 1998, 2012 and 2016, but the governments neither disclosed the amount of recovery nor the names of beneficiaries.

Prime Minister, Imran Khan, admitted the fact of availing Tax Amnesty Scheme of 2000, issued through an Ordinance by General Musharraf, issued under section 59D of the repealed Income Tax Ordinance, 1979 by paying tax of PKR 240,000 for undeclared Flat No.2, 165 Draycott Avenue, London (purchased for UK £ 117,000 in 1983 and sold in April 2003 at a net amount of £690,307).

According to the decision of the Supreme Court of Pakistan, non-declaration of London flat by Imran Khan, Chairman of PTI, in his wealth tax and income tax returns in Pakistan and subsequent disclosure through an amnesty scheme saved him from disqualification under Article 62(1)(f) of the Constitution. Availing the amnesty scheme was an open confession of dishonesty. Although tax benefit as extended by the State was derived yet ineligibility under section 99(1)(f) of Representation of Peoples Act, 1976 (ROPA), effective at that time [later consolidated under Election Laws Act of 2017 by the Parliament] and Article 62(1)(f) of the Constitution stood established.

The issue before Supreme Court in Constitutional Petition 35 of 2016, Muhammad Hanif Abbasi v Imran Khan Niazi [PLD 2018 SC 189] was declaration of assets by Imran Khan held through an offshore company, Niazi Services Limited (NSL)—a Jersey-based limited liability company formed on 10.5.1983. The Petitioner submitted: “Under the Wealth Tax Act, 1963 repealed on 1.7.2003 (“the Act, 1963”) the Respondent was bound to declare NSL and the assets owned by it. He referred to Sections 4 [particularly sub-section (1)(a)(iii) and (5)] and 14 of the Act, 1963 and the Wealth Tax Forms (old and current)”. According to Imran Khan, since the amnesty scheme conferred privileges and rights, disclosure under it was complete with respect to income earned and the asset acquired—entitling him to complete immunity from all tax consequences on account of past non-disclosure. The declaration of asset by him made in the year 2000 also reflected in statements of assets and liabilities filed before the Election Commission of Pakistan (ECP) along with his nomination papers filed for the 2002 general elections. In Para 59 of its judgement, the Supreme Court noted as under:

“Coming back to the factum of non-declaration of the London flat and NSL, the learned counsel for the Respondent informed that the Respondent began filing his income tax returns in Pakistan in 1981. It is an admitted fact that he neither disclosed NSL nor the London flat in such income tax returns. It is the Respondent’s case that he did not disclose NSL as an asset in his tax returns for the reason that it is a juristic person of which he was not a shareholder, director or owner. He also did not disclose the London flat upon legal advice that since it was purchased with foreign income, there was no requirement to make its declaration in his income or wealth tax returns. The fact is that the Respondent purchased the London flat in 1983, two years after he became an income tax filer in Pakistan in 1981. Even if foreign earnings as non-resident were the source of funding for the London flat, yet it was an asset which he was bound to disclose in his wealth tax return under the Wealth Tax Act, 1963 after he became a filer in 1981. Therefore, the Respondent was a defaulter in relation at least to his duty under the Wealth Tax Act, 1963. This situation continued until 1.3.2000, when the Central Board of Revenue (“CBR”) announced a Tax Amnesty Scheme 2000 (“the Amnesty Scheme”)…”  

The above paragraph confirms that there was default of non-payment of tax under Wealth Tax Act, 1963 by Imran Khan for 17 years and he availed tax amnesty scheme to cover it. The Supreme Court concluded: “As the sale of the London flat had been finalized before 30.06.2003, therefore for the purpose of the Respondent’s annual statement of assets and liabilities under Section 42A ROPA made as of 30.6.2003 the London flat had ceased to be his asset”.

The issue was not that of declaration of asset after its sale (which was undoubtedly not to be made) but the implication of availing tax amnesty for tax evasion for 17 years vis-à-vis Article 62(1)(f) of the Constitution. Can such a person still pass the test of being “sagacious, righteous and non-profligate and honest and ameen”—the expressions contained in the provision of the Constitution? The Court answered the question in affirmative: “Declaration of the London flat in the Amnesty Scheme in 2000 followed by its disclosure in the Respondent’s wealth statement as of 30.06.2002 filed under Section 58 of the Ordinance, 1979 and reporting the same in the statement of assets and liabilities annexed by the Respondent with his nomination forms in the general election of 2002, he cannot be faulted for concealment or misdeclaration under the taxation laws of the country or the ROPA”.

The judgement in the case of Imran Khan by the highest court of the country sanctified a tax defaulter passing the test of Article 62(1)(f) of the Constitution and section 99(1)(f) of ROPA only on the plea that “he availed amnesty before filing of nomination papers”. In Muhammad Siddique Baloch v Jehangir Khan Tareen [PLD 2016 Supreme Court 97], it was held by the same Supreme Court that a person who was untruthful or dishonest or profligatehas no place in discharging the noble task of law making and administering the affairs of State in government office”. In the case of Imran Khan, a different ratio decidendi emerged that tax avoidance and/or evasion becomes legitimate after availing amnesty and makes a person eligible to contest election and hold public office.

In any established democracy where the written constitution is supreme or otherwise, avoiding/evading tax and/or availing tax amnesty disentitles a person to take part in politics what to speak of representing people and becoming Prime Minister. Judgement in the case of Imran Khan set a precedent that in Islamic Republic of Pakistan even defrauding the State and citizens and the supreme law of the land a person can hold the highest office as President of Pakistan after the Constitution (Eighteenth Amendment) Act, 2010, [commonly called 18th Amendment] is just a ceremonial office. It was good news for tax-lax public representatives and future candidates as a new amnesty for foreign assets/incomes was on the card—publically announced by Adviser to then Prime Minister on Finance, Revenue and Economic Affairs, Miftah Ismail. They could avail and avoid disqualification in 2018 elections.

In the 2018 Amnesty, issued just a few months before the end of tenure of PLM-N, “confidentiality” was assured by the National Assembly. In other words, the voters were deprived of not even knowing who availed it! This was in utter violation of fundamental right granted under Article 19A of the Constitution, which says: Every citizen shall have the right to have access to information in all matters of public importance subject to regulation and reasonable restrictions imposed by law

Elaborating the above right, the Supreme Court of Pakistan in Watan Party & Others v Federation of Pakistan & Other PLD 2012 Supreme Court 292, held:

“Article 19A has thus, enabled every citizen to become independent of power centres which, heretofore, have been in the control of information on matters of public importance….. Article 19A is a grant of the Constitution and, therefore, cannot be altered or abridged by a law enacted by Parliament…It, therefore, not for this Court to deny to the citizens their guaranteed fundamental right under Article 19A by limiting or trivializing the scope of such right through an elitist construction whereby information remains the preserve of those who exercise state power.”

[underlined and bold for emphasis]

The Supreme Court that condoned the crime of tax evasion by Imran Khan earlier in Muhammad Jamil v. Munawar Khan and others PLD 2006 SC 24, Khaleefa Muhammad Munawar Butt and another v. Hafiz Muhammad Jamil Nasir and others 2008 SCMR 504 and Muhammad Ahmad Chatta v. Iftikhar Ahmad Cheema and others 2016 SCMR 763) justified disqualification for false declaration even if a delinquent person offers a perfect, legally acceptable explanation for the source of funds for acquiring the undeclared assets.. In Rai Hassan Nawaz v Haji Muhammad Ayub & others[2017 PLD 70 SC], the Supreme Court held:

 “Where assets, liabilities, earnings and income of an elected or contesting candidate are camouflaged or concealed by resort to different legal devices including benami, trustee, nominee, etc. arrangements for constituting holders of title, it would be appropriate for a learned Election Tribunal to probe whether the beneficial interest in such assets or income resides in the elected or contesting candidate in order to ascertain if his false or incorrect statement of declaration under Section 12(2) of the ROPA is intentional or otherwise.”

The ever-growing informal economy, which is ironically called ‘The Secret Strength of Pakistan’s Economy’, has grown to the extent that tax gap is now over 100%. The real tax-to-GDP ratio if we take into account the monstrous size of unreported (untaxed) economy will be much less than claimed. Tax collection by Federal Board of Revenue (FBR), after blocking refunds and taking advances of billons of rupees, is not enough to bridge the fiscal gap that last year was over 8% of GDP.

The cumulative size of informal (untaxed) economy is around Rs. 50 trillion. If flat rate of 10% is offered to all those who have failed to pay income tax in the past, in just one year collection can reach Rs. 5 trillion. This will help enhancing income tax alone to Rs. 6 trillion in future as every person would be on tax roll.

In view of the huge size of untaxed economy, a paradigm shift in policy is needed to replace the entire taxation system for fiscal stabilization. The equation is simple. Federal government needs at least Rs. 8 trillion of revenue (for meeting all development and non-development expenditure), for which determination of a fair tax base is imperative. The current complex system only favours a few thousand officers and their staff along with people having money power and who can blatantly flout the law. A simple flat rate tax that is neither burdensome nor difficult to implement is the solution but it would deprive the bureaucracy and some vested-interests of illegal enrichment. Nonetheless, the government of PTI has no option but to dismantle the existing, out-dated and anti-growth tax system if it is serious to overcome the twin malaises of fiscal deficit and debt burden.

The tax system that will work smoothly for Pakistan, keeping in view our peculiar socio-economic circumstances and behavioural analysis of masses, must be a low-rate with no compliance hassles. All taxes, except customs duty, should be merged into one single tax code (IRS Tax Code) with complete assurance to the masses that they would be free from any kind of harassment; and money collected would be spent towards their welfare. The agenda of fair taxation cannot succeed if wastage of public funds and its abuse by the rulers continue unabated. The quid pro quo for paying taxes is as important as the system to collect taxes. Where the citizens blamed for non-payment of their due share of taxes, public authorities are equally, if not more, responsible for indulging in corrupt practices taking cover of complicated procedures or inefficiency that eventually lead to poor collection of revenue.

The tax base with respect to direct tax vis-à-vis fair distribution of incidence can be achieved by imposing 10% flat rate tax on net income of individuals and 2.5% of tax on net wealth of Rs. 10 million whichever is higher and reducing corporate tax rate to 20%. This simple taxation would induce voluntary compliance provided all the citizens are aware of the fact that competent and effective tax machinery exists having a tax intelligence system that can easily detect tax avoidance. Without this deterrence even the new system which is a great deal simpler, will be unworkable. Nowhere in the world is proper collection of taxes possible without a strong enforcement apparatus. However, the apparatus should be friendly and firm—friendly, to the extent of educating and guiding the people for fulfillment of their tax obligations, and firm to the extent of punishing willful defaulters.

As far as sales tax is concerned, Pakistan needs harmonized sales tax which should be single-digit. All tax collections should be through a National Tax Agency (NTA) which should replace all existing authorities at both federal and provincial levels. Further details of simplified taxation can be seen in ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ [PRIME Institute, Islamabad, 2016, its revised and enlarged version of December 2020 is available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/) and in Tax Reforms in Pakistan: Historic & Critical View, published by Pakistan Institute of Development (PIDE) (available free at: https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf.

TheNational and provincial assemblies should pass a law agreeing on establishment of NTA responsible for collecting all taxes imposed by the federal and provincial governments. This would facilitate people to deal with a single revenue authority rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].

The provinces should also feel responsible for better and efficient tax collection. Presently they are isolated and rely on distribution from the divisible pool whereas the Federal Board of Revenue annually collects less than the assigned revenue target. The responsibility to collect revenues should be joint and several giving a participative sense to all federating units.

The NTA should consist of officers and staff representing the federation of Pakistan as in taxes, both the centre and provinces have equal stakes. If the size of the pie grows every federating unit will get more and the Centre will also have more money at its disposal. For NTA, an all Pakistan Tax Service should be established. Recruitment for All Pakistan Tax Service must be independent of the present Central Superior Services structure. Competent people having knowledge in accounting, law, IT and administration should be selected through a special Board, comprising members from the existing Federal and Provincial Public Service Commissions and private sector having experience in these areas.

The optimum collection of taxes fairly and without hampering growth should be the focus of tax reforms. For this purpose, establishment of NTA and automated Tax Intelligence System are prerequisites. The system should be able to send quarterly information to potential taxpayers about their economic activities so that they can be informed in advance as to how their incomes and expenditure should finally look like in their tax declarations. At the same time, the State must demonstrate with actions and not mere words that there is prudent spending of public money through a transparent process enjoying the confidence of the people. The following areas need to be strengthened:


1.1 Objectives and basic requirements

Audit under all tax codes—Income Tax, Sales Tax, Federal Excise and Customs etc—should be structured in the light of order of Supreme Court [CIR Sialkot v Messers Allah Din Steel & Rolling Mills and Others 2018 PTD 1444]:

  1. The basic aim of audit is to provide a system of checks and balances and ensure that the taxpayer in whom the system reposes confidence acts justly, fairly and transparently. It is therefore imperative that:-selection of cases through computer balloting should be based on transparent risk-based criteria and bench-marks should be made public prior to filing of returnsselection of cases by Commissioner/Collector should be on the basis of cogent reasons/evidence approved by Member Audit
  2. Upon selection, taxpayer should be dealt in an even-handed, impartial and transparent manner:-shall be granted ample opportunity to justify, substantiate and defend the information provided in the return that he voluntarily fileda general timeframe is necessary to put in place in order to ensure that the tool of the audit is not abused or misused to pester, torment or harass the taxpayer on account of reasons not attributable to himadherence to guidelines and timeframes would enhance confidence of the taxpayers in the system and at the same time act as a check on lethargy and inefficiency on the part of department functionaries  

1.2 Training of Auditors: The taxpayer audit function plays a critical role in the administration of tax laws. In addition to their primary role of detecting and deterring non-compliance, tax auditors are often required to interpret complex laws, carry out intensive examinations of taxpayers’ books and records, while through their numerous interactions with taxpayers operating very much as the “public face” of a revenue body. These factors, as well as the sheer size of the audit function in most revenues bodies, provide a strong case for all revenue bodies paying close attention to the overall management of the tax audit function. FBR must concentrate on training of auditors as its top priority.

1.3 The main aim of audit should be tackling non-compliance. The primary goal of a revenue body’s compliance activity is to improve overall compliance with their tax laws, and in the process instill confidence in the community that the tax system and its administration are fair. Instances of failure to comply with the law are inevitable whether due to taxpayers’ ignorance, carelessness, recklessness and deliberate evasion, or weaknesses in administration. To the extent that such failures occur, governments, and in turn the communities they represent, are denied the tax revenues they need to provide services to citizens.

Paradigm Shift in Adjudication

2.1       In developing economies like Pakistan, one of the biggest problems is a relatively small tax base and the reluctance of ordinary people to file tax returns and thus submit themselves to scrutiny of their affairs by the tax administration. However, once a taxpayer professes faith in the effectiveness of legal remedies against an unjust tax levy or unjust action of the taxation authorities, he would be more likely to be truthful to the taxation authorities, and willing to accept a reasonable levy of tax.

2.2 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 taxpayer’s part not to pay the disputed amount during pendency of litigation. An efficient tax judiciary resolves disputes quickly, quashes demands which are not legally sustainable, and thus segregates serious tax demands from frivolous tax demands, as also giving finality to legitimate tax demands. This in turn ensures that taxpayers cannot resort to dilatory tactics for paying these genuine and legitimate tax demands which have received judicial approval. An efficient tax judiciary thus helps removing impediments in the way of collection of genuine tax demands by the State, which, once again, results in greater resource mobilization. An effective tax judiciary does not only settle tax dispute between a taxpayer and the State, but it also lays down principles on the basis of such resolved disputes which provide guidance for the future. These decisions, which have precedence value in the sense that same decision has to be taken on materially identical facts, also have normative effect thus helping in correcting the judicial course. This way, an effective tax judiciary also contributes to smooth functioning of the tax machinery.

2.3.      To make Tribunal a truly independent forum, it is imperative to replace the existing 4-tier appeal system under the tax laws—direct and indirect—with two-tier system. The Customs Tribunal and Appellate Tribunal Inland Revenue should be merged into a single National Tax Tribunal. Like the Services Tribunal this too should work under direct supervision of the Supreme Court. Appeals against its decisions should go directly to the Supreme Court. After merging Appellate Tribunal Inland Revenue and Customs Tribunal, the new entity should be renamed as National Tax Tribunal. Appeals against the orders of the Tribunal should lie with the Supreme Court alone. Members for Tax Appellate Tribunal should be recruited in the same manner as judges of High Court.  The pay, perquisites and salary structure of Chairman, members and staff should be at par with the Judge of a High Court.

2.4       Recovery of tax demand should be made only after decision of the Tribunal and not before. Bank accounts should not be attached without prior notice to the taxpayer and after seeking approval in writing of Commissioner in the light of reply submitted by the taxpayer.

The above steps alone can establish what the honourable judge of the Supreme Court in a recent order has highlighted that no state can work smoothly where the rule of law,  separation of powers and effective and independent judiciary are non-existent.  


The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

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