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Taxation: Institutional Reforms

Huzaima Bukhari & Dr. Ikramul Haq

All efforts in the name of tax reforms undertaken in Pakistan till today have miserably failed. These were nothing but mere patchwork here and there. Institutional reforms based on restructuring and redesigning of tax system have not been given any serious thought by our legislators and policymakers. The Sisyphean task of improving and reforming incorrigible, outdated and outmoded tax machinery, mainly on donors’ demand, is a futile and fruitless exercise. We need comprehensive institutional reforms along with simplification of tax codes. Pakistan urgently needs a national tax agency that can ensure optimal collection of revenues at all levels—federal, provincial and local—with efficiency and through facilitation and education of masses. It will also save multiplication of costs and ensure ease of doing business as presently taxpayers have to deal with various departments and make multiple payments.

In a detailed write-up[1], it was stressed that all the tax collection agencies in Pakistan should be merged into a single National Tax Authority (NTA), which should effectively enforce tax laws at federal, provincial and local levels, besides providing single window facility to taxpayers. A timeframe was also mentioned which unfortunately was not consider at the appropriate level. Even the recommendations of sub-committee on tax of Economic Advisory Council (EAC), approved by Prime Minister on November 25, 2018, showed complete apathy on this issue. The report prepared by EAC’s sub-committee is so superficial that it even does not take into account the most vital issue of fragmentation of taxation in Pakistan.

Before establishing NTA, all the four provinces should be consulted and consensus must be reached for establishing an All Pakistan Unified Tax Service (APUTS) as suggested and elaborated in various articles[2]. One major hindrance towards optimizing revenue collection is the scattered and haphazard tax collection through multiple authorities at the federal and provincial levels. The trend was further strengthened consequent to the 18th Constitutional Amendment after which the provinces established their own tax collection agencies at the provincial level. However, these provincial tax authorities still lack skilled manpower, tax collection expertise and other necessary human capital and paraphernalia to collect taxes. To meet these objectives, the services of FBR officers were requisitioned by the provincial authorities for their posting at provincial tax collection agencies on deputation basis. Resultantly, many of the FBR officers were sent to provincial tax agencies such as Sindh Revenue Board (SRB) and Punjab Revenue Authority (PRA). Although the 18th Amendment was widely appreciated by the provinces, it created fissures in the revenue collection authority of FBR resulting in further decline in tax collection because tax on services fell in the provincial domains. On one side, the move was hailed by the provinces but, on the other, the taxpayers immediately started raising their eyebrows because they had to now face both federal and provincial tax authorities. All major Chambers of Commerce expressed their concerns and showed reservations on the scattered tax collection in the aftermath of the 18th Amendment. It is important to mention that Excise and Taxation (E&T) department is already working as a separate entity under the provincial governments. The E&T departments have no formal administration connection with SRB, PRA and other provincial tax collection agencies. Unless, all federal and provincial tax agencies are unified and harmonized, the dream of optimum tax collection cannot materialize.

The PTI-led coalition government, if really serious in moving towards “New Pakistan” [New and reformed Pakistan] must address the administrative issues of tax collection necessary for optimizing revenue collection as per the country’s potential. In this regard, the formation of APUTS is the first major step towards harmonizing the tax system and culture in Pakistan. The proposed APUTS will function similar to All Pakistan Unified Group (APUG) services such as Pakistan Administrative Service (PAS) and Police Service of Pakistan (PSP).

The proposed APUTS will initially harmonize three main tax agencies: (1) FBR, (2) provincial tax authorities such as SRB & PRA, and (3) provincial Excise and Taxation departments. The officers will be posted anywhere in Pakistan, both at federal and provincial levels, directly from FBR Headquarters. An officer of the rank of Joint Secretary from Establishment Division may also be posted in FBR who could keep liaison with FBR over administrative issues of posting and transfers of officers. Officers performing better may be given station of their choice while the corrupt and inefficient may be posted outside the province as punishment. The provinces will continue to enjoy the benefits and power under the 18th Amendment as is the case of working of the PAS and PSP officers. The formation of APUTS will be a win-win situation for the federal government, the provincial governments and taxpayers. The proposed APUTS will have following advantages towards maximizing revenue collection at the federal and provincial levels:

  1. The officers will be posted anywhere in Pakistan, both at federal and provincial levels, through centralized postings/transfers.
  2. The taxpayers will feel better that they are in fact dealing with only one organization, the IRS, for paying taxes and redressal of their grievances.
  3. The formulation of APUTS will better handle tax matters all over Pakistan as a unified service just as PAS and PSP. There will be better coordination among federal and provincial tax authorities that will eventually increase badly needed revenue.
  4. Inland Revenue Service (IRS) will emerge as a strong but accountable government service spreading over the federal government, all four provinces, Gilgit-Baltistan and Azad Jammu & Kashmir.
  5. APUTS will better help the PTI government achieve its tax vision and targets.

NTA, having officers from APUTS, will be a competent and effective body, representing all constituents of the federation of Pakistan. NTA having nation-wide data at one place and centralised processing will certainly be able to compel all taxable persons to fulfill tax obligations and pay due taxes under various tax codes. NTA must replace Federal Board of Revenue (FBR) and all provincial revenue authorities that have miserably failed to collect revenues according to their actual potential. For example, provincial Revenue Boards have not been collecting agricultural income tax, imposed since 2000—collection of less than Rs.2 billion by all provinces together on this account in fiscal year 2017-18 is highly lamentable. In the same manner, provincial excise and taxation departments are not collecting taxes they are entrusted to administer. Same is the story of Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB) and Khyber Pakhtunkhwa Revenue Authority (KPRA) in respect of sales tax on services—their capacity to tax all taxable services is quite inadequate.

Federal Board of Revenue (FBR) needs restructuring as a short-term reform measure before it is merged in National Tax Authority [NTA]. In the long-term Pakistan must have single tax agency that collect taxes as well disburse benefits like universal pension and income support etc. The database of NTA and its digitization will be a great step towards e-government model for the country that is presently non-existent. The model of Canadian Revenue Authority[3] is worth consideration and adopting after suiting our peculiar needs and requirements.

The best example of an efficient tax structure is that of Sweden where tax agency, Skatteverket[4], has data base of each and every person, natural or juridical. Skatteverket is accountable to the government, but operates as an autonomous public authority. This means that the government has no influence over the tax affairs of individuals or businesses.

The main functions of Skatteverket are collection of taxes, registration of population and estate inventories. Everyone who lives in Sweden is registered with Skatteverket. Everyone who is registered is issued with a personal identity number, which is used in contacts with government agencies etc. Each personal identity number is unique and is made up of the person´s date of birth and a four-digit number. The Swedish Tax Agency processes a great deal of data about private individuals and companies. Everyone has a right to know about data processing under section 26 of the Personal Data Act. You can always contact a tax office or the Head Office of the Skatteverket if any personal data is incorrect or incomplete or if you have any other questions about the processing of your personal data. Had we established National Tax Authority[5] on the pattern of Skatteverket today we would not have any problem with census or collection of taxes or managing land records. This is the kind of innovation we need to debate and implement. The leakage of taxes of nearly Rs. 3 trillion can only be plugged through such automation.   

At present both at federal and provincial levels tax collection is highly unsatisfactory. All broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is only seven percent—in overall national revenue base (tax and non-tax revenue) it is around eight percent. This has made them totally dependent on the federal government for transfers from divisible pool or/and direct grants. The performance of provinces in collecting agricultural income tax is extremely pathetic. This is a common issue both at federal and provincial level arising from sheer absence of the political will to collect income tax from the rich and mighty—meagre collection of agricultural income tax—less than Rs.2 billion by all provinces together in fiscal year 2016-17—is dismal.

Pakistan will have to increase collection at all levels to improve tax-to-GDP ratio to a respectable level of 25-30%. This is not possible unless Federal Government after consultation with provinces introduces harmonised sales tax on goods and services and establishes NTA. All existing tax authorities at federal and provincial levels should merge in NTA. The NTA should be modern, automated and efficient, manned by competent personnel and run by an independent Board of Management comprising government officials and representation business and professions. The autonomous status of the NTA can be ensured like that of CRA (its Board of Management is directly accountable to Parliament through Canadian Minister of National Revenue).

NTA, unlike FBR, will not have any role in framing tax policy. For this a permanent Tax Policy Board should be established in terms of Article 156(2) of the Constitution of Pakistan as economic and financial planning is no more a federal subject alone. The Policy Board should have a permanent secretariat and its role should be that of a think tank [it can be housed in Pakistan Institute of Developmental Economics (PIDE)] to recommend to the federal and provincial governments and assemblies the tax policies for growth and meeting the needs of the country.  

There is a need to reconsider the role of the Planning Commission. The website of Planning Commission says:

The Planning Commission (denoted as PC) is a financial and public policy development institution of the Government of Pakistan. The Commission comes under Ministry of Planning, Development and Reforms. The Planning Commission undertakes research studies and state policy development initiatives for the growth of national economy and the expansion of the public and state infrastructure of the country in tandem with the Ministry of Finance (MoF). Since 1952, the commission have had a major influence and role in formulating the highly centralized and planned five-year plans for the national economy, for most of the 20th century in Pakistan. Although the five-year plans were replaced by Medium Term Development Framework, the commission still played an influential and central role in the development of the programme. Furthermore, the Public Sector Development Programmes (PSDP) also placed under the domain of the planning commission. The commission’s authoritative figures include a Chairman who is the Prime Minister, assisted by the deputy chairman, and a science advisor.

It is strange that with the devolution of a large number of subjects to the provinces since the Eighteenth Constitutional Amendment in 2010, Planning Commission is still working as arm of Federal Government without taking into account the command of Article 156(2) of the Constitution which says:

The National Economic Council shall review the overall economic condition of the country and shall, for advising the Federal Government and the Provincial Governments, formulate plans in respect of financial, commercial, social and economic policies; and in formulating such plans, it shall, amongst other factors, ensure balanced development and regional equity and shall also be guided by the Principles of Policy set-out in Chapter 2 of Part II”.

The deletion of the subject of national planning from the exclusive domain of the Federal Government, and the placing of the National Economic Council (NEC) in the list of subjects mandated to be the joint responsibility of the Federal Government and the Provincial Governments remains unnoticed by our parliamentarians and independent experts. Strangely, the provinces have not raised this issue till today.  

Centralised planning was an important factor in the dismemberment of the country in 1971. The planning, in the post-Eighteenth Amendment period should have to be federalised rather than centralised. But nobody has raised this issue. The Eighteenth Constitutional Amendment has redefined NEC on the pattern of Council of Economic Interests (CCI). The NEC forms part of the Chapter 3 of the Constitution entitled ‘Special Provisions’. Before the Eighteenth Amendment, Article 156 related to the NEC had two clauses. Clause (1) described the composition and clause (2) its functions. These clauses have undergone important changes after the Eighteenth Amendment. The pre-amendment clause (1) read as follows:

The President shall constitute a National Economic Council consisting of the Prime Minister, who shall be its Chairman, and such other members as the President may determine:

Provided that the President shall nominate one member from each Province on the recommendation of the Government of that Province.”

While the apex planning body, the NEC, has been federalised, Planning Commission continues to be centralised. The spirit of the Constitution can be satisfied by (1) making Planning Commission, in place of the Cabinet Division, the Secretariat of the NEC and (2) by reducing the number of its members to five, one each from the Provinces and the Federal Government. Prime Minister chairs the NEC and there is no need for him to Chair the Planning Commission. The Chairman should be appointed by the CCI to represent the Federation.

PIDE is now a University under the administrative control of the Planning and Development Division. With Planning Commission moving to the CCI/NEC, the Planning and Development Division can continue to deal with the development issues of the Federal Legislative List, Part I. PIDE can play the role of a think-tank for the Planning and Development Division. There is an urgent need for restructuring the planning mechanisms in the provinces. At present, only Punjab has a Planning and Development Board, with members in charge of the main sectors. Other provinces have their respective Planning and Development Departments. An important reason why the centralised role of planning and the Planning Commission continues is the weak capacity of the provincial planning mechanisms.

After the Eighteenth Amendment, the Planning Commission could no more be a centralised body.  Federal Legislative List, Part I, contains subjects which lie in the exclusive jurisdiction of the Federal Government. Before the Eighteenth Amendment, its item 32 related to planning–“National planning and national economic coordination including planning and coordination of scientific and technological research.” After the Amendment, the subject was included in the Federal Legislative List, Part II. The last-mentioned list of subjects is neither exclusively federal nor provincial; it is an area of joint responsibility. In the Constitution, a special institution, the Council of Common Interests (CCI), has been created to supervise the affairs of the Federation listed in Part II of the Federal Legislative List.

By abolishing the Concurrent List and deleting certain items from the Federal Legislative List Part-I, the Eighteenth Amendment has substantially increased the quantum of provincial autonomy. Second, the role of provinces in decision making of the federation has been substantially enhanced by the enlargement of the Federal Legislative List Part-II. Provinces now have more subjects to deal with than was the case before the Eighteenth Amendment. In the first place, they have been given full and effective control of the social sector, especially education, health, population, labour, social welfare, Zakat, Auqaf, environment, tourism, print media and cinematograph films, culture and archeology etc. Other than standards of higher education, research and international student’s exchange, the provinces are now entrusted with education policy formulation, planning, and curriculum standards.

The Eighteenth Amendment gives provinces equal rights over their natural resources. Article 172(3) confers 50 percent ownership of hydrocarbon petroleum resources to the provinces. The subject was earlier held by the federal government. There still exist legal and administrative bottlenecks for implementing this provision.

Another landmark decision through the Eighteenth Amendment is Article 167(4) providing that: “A Province may raise domestic or international loan, or give guarantees on the security of the Provincial Consolidated Fund within such limits and subject to such conditions as may be specified by the National Economic Council”.

Article 167(4) thus ensures provinces to run and administer their own local government systems and enter into direct financial loan or credit arrangements with external and internal lenders.

In view of Article 167(4), the role of NEC has become very important though it has yet not been realised by the centre and provinces. In this perspective, we should also discuss the idea of NTA. FBR has been persistently failing to meet budgetary targets for the last many years what to speak of realising the real revenue potential. FBR is dysfunctional to the extent that the system is not taxing the rich 3.5 million and income distribution disparities are rapidly widening. There is an urgent need to dismantle and reconstruct FBR.  

Below are some recommendations vis-à-vis implementation of Eighteenth Constitutional Amendment from a holistic point of view for better fiscal management and economic growth of Pakistan as well as making the federation a true representative of all and not just a few privileged ones as has been the case for the last 70 years of its existence.

  • First and the foremost need is establishment of an independent, totally federalised, CCI Secretariat that must have equal representation of centre and provinces and must include technical experts to build its capacity and ensure that the CCI mandate can be effectively supervised. On the issue of interpretation of Article 172(3) and its implementation special attention should be given to allay the fears of the provinces.
  • Immediate problems like inadequate infrastructure in the backward areas of all provinces and federally-controlled areas, lack of avenues for provincial revenue generation, low electricity generation capacity, and low quantum of representation of Balochistan in the Federal services must be resolved in CCI on priority basis.
  • A comprehensive policy along with operational framework needs to be adopted to promote a culture of Inter-Provincial Coordination for developing and coordinating information and communication amongst Federal/Provincial organizations. Research analysis is required by respective sectors/departments to pre-empt the notion that provinces lack fiscal capacity or discipline to tackle social and economic issues. The provinces have to legislate and create the necessary infrastructure to fully utilize the potential of the devolution process for the benefit of provinces and their people.
  • Planning, in the post-Eighteenth Amendment period has to be federalised rather than centralised. The Amendment has redefined the NEC on the pattern of CCI.
  • There is an urgent need for restructuring the planning mechanisms in the provinces. At present, only Punjab has a Planning and Development Board, with members in charge of the main sectors. Other provinces have their respective Planning and Development Departments. An important reason why the centralised role of planning and the Planning Commission continues is the weak capacity of the provincial planning mechanisms.
  • The message of the Eighteenth Constitutional Amendment is that the provinces should take charge of their own planning and development. This needs de-bureaucratization, appropriate investment in human capital and democratic devolution down to districts (Article 140A).
  • The provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence. Right to levy tax on agricultural income tax should be given to federal government. Despite levying taxes that should have been with provinces, the federal government has miserably failed to reduce the burgeoning fiscal deficit that exceeded Rs. 2 trillion in fiscal year 2016-17. Had provinces been allowed to generate their own resources, the present chaotic situation could have been averted. Centre and provinces should work together under NTA to improve efficiency in collecting taxes—see details of this in Towards Flat, Low-rate, Broad and Predictable Taxes, Islamabad: PRIME Institute (April (2016).
  • India has recently amended its Constitution and enforced unified Goods and Services Tax (GST)—popularised as ‘one nation, one tax’. This law has harmonised the indirect tax regime. GST with broad tax base will result in better tax compliance. Pakistan needs to learn from this move and must also consider introducing harmonised GST as early as possible.

Pakistan needs a paradigm shift in tax policy and revamping of entire tax administration. Establishment of NTA, capable of generating sufficient resources for the federal and provincial governments must be the top priority. Through consensus and democratic process, all the parliaments can enact laws for establishing autonomous NTA, comprising specialists and professionals that would facilitate people to deal with single body 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].

Tax collection and compliance at national level cannot be improved without establishing NTA and introducing an integrated Tax Intelligence System that can correlate sales tax collections on goods and services with income tax returns and monitor all transactions. A fully automated, professional and efficient NTA would alone be in a position to improve capacity by detecting tax avoidance and evasion through Tax Intelligence System. Before establishing NTA, major information technology and human resource improvements in tax collection methods as well as effective audit techniques should be developed along with development-oriented tax policy. Tax reforms are meaningless without an effective tax administration and rational tax policy. As a medium-term reform measure we must concentrate on debating and finalising the structure of NTA for achieving the goal of a functional, efficient and integrated tax administration. The model of Canadian Revenue Agency (http://www.cra-arc.gc.ca/menu-eng.html) is worth-studying. Further details can be seen in Towards Flat, Low-rate, Broad and Predictable Taxes, available at http://primeinstitute.org/wp-content/uploads/2016/08/Towards-Flat-Low-rate-Broad-and-Predictable-Taxes.pdf

If we want optimum collection of taxes fairly and without hampering growth, it is imperative to abolish the present tax laws and enact new ones. Collection of taxes should be through a single national authority, NTA, as suggested above. NTA should be equipped with modern Tax Intelligence System sending 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. For promoting tax culture it is necessary that there should be prudent spending of public money for welfare of masses through a transparent process.

Need for National Tax Tribunal

In any society, 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 dispensation of justice, cannot survive for long. Administration and dispensation of justice under the various tax laws in Pakistan need serious attention, the entire system being on the brink of disaster. There is an urgent need to ensure “justice”, “rule of law”, “fairness”, “equity” and independence of appellate authorities from the control of administration. The present tax dispute resolution system, based on conventional appeal and review system under various tax statutes, is on the verge of collapse. Everybody is totally dissatisfied with it. Those imparting justice complain about lack of facilities and huge number of cases, the complainants crying for early orders but forced to wait for years (sometimes decades), and the revenue persistently worrying about blockade of colossal amount of money in litigation process.

The present pathetic state of tax administration can be measured from the fact that every year over 85,000 writ petitions/appeals are filed in Pakistan against orders of the tax authorities. Litigants have to wait for years to obtain orders. On the contrary, in civilized countries, only a few cases go for litigation to higher courts. A case in point is the United Kingdom where the number of income tax filers is 30 million whereas appeals reaching the Lord Chancellor in a year number only around 30. This confirms the tremendous public satisfaction with the credibility of system and good governance by fiscal administration. In Pakistan, we have less than 1.5 million income tax filers and around 150,000-180,000 sale tax registered parsons, but the number of appeals filed annually is in thousands.

Appellate authorities, as a matter of law and principle, should be independent in the true sense of the word. The honourable apex court of Pakistan has elaborated this principle in Government of Baluchistan v Azizullah Memon PLD 1993 SC 31 by holding that “separation of judiciary from executive is the cornerstone of independence of judiciary”. The right of access to justice to all is a well-recognized inviolable right enshrined in the Constitution of Pakistan. It concludes “the right to be treated according to law, the right to have a fair and proper trial and right to have an impartial court or tribunal. Justice therefore can only be done if there is an independent judiciary which shall be separate from executive and not at its mercy or depend on it”—PLD 1982 SC 146.

It is a matter of record that none of the Government in Pakistan, military or civilian, has ever followed directions of the honourable apex court in making tax appellate system independent of Executive. In the given Pakistani milieu, it is imperative that all the judicial and quasi-judicial authorities working in tax appellate system should be merged into National Tax Tribunal and regulated/supervised by Supreme Court of Pakistan as is the case with Federal Service Tribunal. This is the only way to ensure independence of tax justice system in its true substance and constitutional requirement [Article 203].

Tax codes of Pakistan—Income Tax Ordinance, 2001, Sales Tax Act, 1990, Federal Excise Act, 2005 and Customs Act, 1969—provide grievance redressal mechanisms for taxpayers against the orders of tax officials and appellate authorities. The right of appeal against orders of the first appellate authority [Commissioner of Appeals or Collector of Adjudication] is available to the tax administration as well, because it is not uncommon that tax authorities are aggrieved at the relief granted by the appellate authorities to taxpayers, and a higher appellate forum to examine the correctness of relief so given by an appellate authority is justified.

The appellate mechanism under the tax codes provides right to appeal before the Commissioner of Appeals/Collector Adjudication in case a taxpayer is aggrieved by orders passed by the revenue authorities. In case the taxpayer or even the Commissioner/Collector is aggrieved by the decision of the Commissioner (Appeals)/Collector (Adjudication), the aggrieved party can carry the matter further in appeal before the Appellate Tribunal Inland Revenue (ATIR) or Customs Appellate Tribunal as the case may be.

Tax Tribunal in the Sub-Continent was established on 25th January, 1941. On 28 October 2009 it was renamed as Appellate Tribunal Inland Revenue (ATIR) through a Presidential Ordinance in Pakistan in the wake of amalgamation of income tax and sales tax into one unified group.  ATIR is not only an appellate forum for the taxpayers, but it is an equally important forum for FBR aggrieved by any relief given to the taxpayer by Commissioner (Appeals), who is incidentally a member of the Inland Revenue Service.

In developing economies like Pakistan, one of the biggest problems is higher tax rates on 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. 

The degree of taxpayer satisfaction would consequently increase which, in turn, is a sine qua non for better voluntary compliance resulting in greater resource mobilization. While on the surface a tax judiciary inherently deals with the involuntary collections enforced by the tax administration, an efficient tax judiciary actually creates a conducive atmosphere for better voluntary compliance by taxpayers and, thus, for greater resource mobilization by the State. A tax administration which disposes of appeals promptly and speedily reaches a fair and final settlement is itself entitled to be classified as a tax incentive.

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 from 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.

The powers of the ATIR are exercised by benches comprising Judicial and Accountant Members. The qualification for appointment as Judicial Member is the same as that for the appointment of a High Court judge, and only well experienced and competent people from the legal profession and judiciary are selected. Prior to amendment in 2007, the Accountant Member must have been an officer of Grade 21. In 2007, the Commissioner in Grade 20 having appellate experience of five years was also included. In 2010, the condition of working as Commissioner Appeal was removed. And the Finance Bill 2012 has reduced the condition from 5 to 3 years. The amendments made in 2007, 2010 and 2012 were highly undesirable. Officers from FBR having little or no experience of appellate work should not be made part of ATIR.  The technical quality of pure judicial work and understanding of matters required at Tribunal level would be compromised by appointment of such officers. Their induction should also be through Public Service Commission of Pakistan.

To make Tribunal a truly independent forum, it is even imperative to recruit Chartered Accountants as Accountant Members through Federal Public Service Commission. Officers from FBR coming as Accountant Members should possess minimum 20 years of experience, having served at least two years as Commissioner of Appeals.

The following points should seriously be debated for effective and efficient resolution of tax dispute:

  1. Existing 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 government has borrowed millions of dollars from the World Bank and other donors for tax reforms, but no effort has so far been made to revamp the ailing tax appellate system for rapid disposal of tax disputes and reduction in unnecessary litigation.
  2. The first appeal under the prevalent 4-tier appellate system lies before the Commissioner of Appeals/Collector Appeals working under the administrative control of Federal Board of Revenue (FBR). It is a travesty of justice. An aggrieved taxpayer is to seek relief from the departmental authorities. The FBR-appointed and controlled appellate authorities act as helping hands for their brothers in service for collection of irrational and harsh demands to meet budgetary targets. They do give relief where issues are already decided by higher courts in favour of taxpayers but even for this “favour” taxpayers have to grease their palms. The Annual Confidential Reports (ACRs)—vital for further promotion in the service—of these “appellate” (sic) authorities are written by their bosses in FBR. Due to this constraint, they cannot impart justice even if they want to do so. The first-tier of appeal in view of this fact alone should be abolished immediately.
  3. The second tier i.e. Tax Appellate Tribunal (one dealing with Customs and second with all other indirect and direct taxes) is under the Federal Government [Ministry of Law] which is against the principle of “independence of judiciary” [highlighted in Para 5, page 12 of NJP 2009]. Working as single, double or full (in special cases) benches, members are chosen from the legal fraternity or judicial services (Judicial Member) and the tax department (Accountant Member or Technical Member). Accountant/Technical Members work with heavy heart as they are mostly sent against their consent. They are the “dumped ones”—not liked by the Department hence condemned to go on deputation to Tribunals. They do, however, get double salary, courtesy FBR that is bent upon wasting billions of borrowed rupees on perks and perquisites rather than for any productive purposes. On the contrary salary of a Judicial Member is even lower than that of a civil judge. Tribunal is the final fact-finding authority and no further appeal lies to the High Court unless question of interpretation of law is required. Such an important forum dealing with federal statutes is financially dependent on Federal Government. The Customs Tribunal and Appellate Tribunal Inland Revenue should be merged into singular National Tax Appellate Tribunal. Like the Services Tribunal this too should function under direct supervision of the Supreme Court.  Appeals against its decisions should go directly to the Supreme Court.
  4. After merging Appellate Tribunal Inland Revenue and Customs Tribunal, the new entity should be renamed as National Tax Tribunal. Appeals against 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.  
  5. The pay, perquisites and salary structure of Chairman, members and staff should be at par with the Judge of a High Court, Sessions Judge and staff of the lower judiciary respectively.
  6. Tax codes are federal statutes but references against orders of the Tribunal go to the High Court that operates within provincial jurisdictions. A person filing reference 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 hence advisable to place Tax Appellate Tribunal directly under the Supreme Court. Presently, thousands of tax references are lying in different High Courts of the country. At this forum takes years and years for taxpayers to get the first hearing—what to talk of final decision that may take more than ten years as normal routine.
  7. The final court of appeal—as for all other matters—is the Supreme Court that ends the tumultuous journey of taxpayer or government on any disputed legal issue requiring interpretation of law. If Tax Appellate Tribunal is established, there will be drastic reduction in litigation.    

Without any iota of doubt, the four-tier appellate tax structure discussed above has become out-dated, ineffective—fraught with innumerable encumbrances. Replacement of the entire system as suggested above—in line with prevailing judicial remedies in other departments of the government—is the only way out. To quote an example, one can easily refer to the Civil Services Act of 1973 under which government employees can approach the Services Tribunal to settle all disputes pertaining to their service matters. Appeal against any order of the Services Tribunal lies directly to the Supreme Court.  This should also be the case for tax matters. First appeal should lie with Tribunal and for final adjudication, before the Supreme Court. If 2-tier tax appellate system is implemented, the following benefits and advantages will emerge:

  • Appeal Commissioners (sic) will be relieved of passing biased judgements and worrying about the future of their careers.
  • Existing Tax Tribunals after their conversion into National Tax Tribunal and selection of members by the Supreme Court will be better equipped to give quality and speedy decisions.
  • The High Courts would be relieved of the continuously rising number of tax cases that remain undecided for many years because of the huge backlog of other civil/criminal cases and non-availability of specialised tax judges.
  • Very few tax cases would go to the apex court where leave to appeal is granted in which important issues of legal interpretation are involved.

The tax reforms must start from making tax tribunals (inland revenues and customs) truly independent and effective judicial forums not working under the Ministry of Law. Tax Appellate system—like all other judicial institutions—should be independent in the true sense of the word. In order to initiate a debate, a proposed draft for National Tax Tribunal is given below. It may be discussed in public and Parliament after taking input from all stakeholders may enact it after adopting due process of law.


ACT NO. —– OF 20–

An Act to provide for the adjudication, by an appellate tribunal, of disputes with respect to all federal tax codes and for matters connected therewith or incidental thereto.

Short title, extent and commencement

1. Short title, extent and commencement. (1) This Act may be called the National Tax Appellate Tribunal Act, 20–.

(2) It extends to the whole of Pakistan.

(3) It shall come into force on such date as the Federal Government may, by notification in the Official Gazette, appoint.

2. Definitions. In this Act, unless the context otherwise requires, — (a) “Appellate Tribunal” means the Tax Appellate Tribunal constituted under section 3; (b) “appointed day” means the date with effect from which the Appellate Tribunal is established, by notification, under section 3; (c) “Bench” means a Bench of the Appellate Tribunal; (d) “Board” means the Federal Board of Revenue constituted under the federal Board of Revenue Act, Act, 2007 (Act No. IV of 2007); (e) “federal tax codes” mean the acts annexed at Schedule I to this Act; (f) “Member” means a Member  of the Appellate Tribunal and includes the President; (g) “notification” means a notification published in the Official Gazette; (h) “President” means the President of the Appellate Tribunal; (i) “prescribed” means prescribed by rules; (j) “rules” means rules made under this Act; and (k) “Supreme Court” means the Supreme Court of Pakistan as defined in Constitution of Pakistan; 

3. Establishment of the Appellate Tribunal. The Federal Government shall by notification, establish a tax appellate tribunal, to be known as Tax Appellate Tribunal, to exercise the jurisdiction, powers and authority conferred on such Appellate Tribunal by or under this Act.

4. Composition of the Appellate Tribunal and Benches thereof. (1) The Appellate Tribunal shall consist of a President and such number as the President with the approve of Chief Justice of Pakistan may deem fit, and subject to the other provisions of this Act, the jurisdiction, powers and authority of the Appellate Tribunal may be exercised by Benches thereof.

(2) A Bench shall consist of at least two Members.

 (3) Subject to the other provisions of this Act, the Benches of the Appellate Tribunal shall ordinarily sit at Islamabad and at such other places as the President may deem fit.

5. Qualifications for appointment as President or Member. (1) A person shall not be qualified for appointment as the President unless he– (a) is, or has been, a Judge of a High Court; or (b) has, for at least two years, held the office of a Member of Appellate Tribunal.

(2) A person shall not be qualified for appointment as a Member unless he– (a) is, or has been, or is qualified to be, a Judge of a High Court; or (b) has been a member of the Judicial Service and has held a post of District and Sessions Judge or any equivalent or higher post for at least five years.

6. Appointment of President and Members. (1) Subject to the provisions of sub-section (2), the President and every Member shall be appointed by the President of Pakistan following the same procedure as is laid down in the Constitution of Islamic republic of Pakistan for appointments of Judges of High Court.

(2) Appointment of a person as the President or a Member shall be made in consultation with a Selection Committee consisting of– (a) a Chairman who shall be nominated by the Chief Justice of Pakistan; and (b) such other members as may be nominated by the President of Pakistan through gazette notification.

7. Member to act as President or to discharge his functions in certain circumstances. (1) In the event of the occurrence of any vacancy in the office of the President by reason of his death, resignation or otherwise, such one of the Members as the President, on the advice of Chief Justice of Pakistan, may by notification, authorise in this behalf, shall act as the President until the date on which a new President, appointed in accordance with the provisions of this Act to fill such vacancy enters upon his office.

(2) When the President is unable to discharge his functions owing to absence, illness or any other cause, such one of the Members as the President, on the advice of Chief Justice of Pakistan, may by notification, authorise in this behalf, shall discharge the functions of the President until the date on which the President resumes his duties.

8. Term of office. The President or other Member shall hold office as such for a term that is prescribed in the Constitution of Islamic Republic of Pakistan for the Judges of the High Court.

9. Resignation and removal. (1) The President or other Member may, by notice in writing under his hand addressed to the President of Pakistan, resign his office: Provided that the President or other Member shall, unless he is permitted by the President of Pakistan to relinquish his office sooner, continue to hold office until the expiry of three months from the date of receipt of such notice or until a person duly appointed as his successor enters upon his office or until the expiry of his term of office, whichever is the earliest.

(2) The President or any other Member shall not be removed from his office except by an order made by the President of Pakistan on the ground of proved misconduct or incapacity after an inquiry made by a Judge of the Supreme Court in which such President or other Member had been informed of the charges against him and given a reasonable opportunity of being heard in respect of those charges.

(3) The Chief Justice of Pakistan may, by rules, regulate the procedure for the investigation of misconduct or incapacity of the President or other Member referred to in sub-section (2).

10. Salaries and allowances and other terms and conditions of service of President and other Members. The salaries and allowances payable to, and the other terms and conditions of service (including pension, gratuity and other retirement benefits) of the President and other Members shall be the same as that of Judges of the High Court.

12. Financial and administrative powers of President. The President shall exercise such financial and administrative powers over the Benches as may be vested in him under the rules: Provided that the President shall have authority to delegate such of his financial and administrative powers as he may think fit to any Member or officer of the Appellate Tribunal, subject to the condition that the Member or such officer shall, while exercising such delegated powers, continue to act under the direction, control and supervision of the President.

13. Staff of the Appellate Tribunal. (1) The President shall determine the nature and categories of the officers and other employees required to assist the Appellate Tribunal in the discharge of its functions and provide the Appellate Tribunal with such officers and other employees as it may think fit.

(2) The officers and other employees of the Appellate Tribunal shall discharge their functions under the general superintendence of the President.

(3) The salaries and allowances and conditions of service of the officers and other employees of the Appellate Tribunal shall be the same as that of judicial staff of High Courts. 

14. Jurisdiction, powers and authority of the Appellate Tribunal. Save as otherwise expressly provided in this Act, the Appellate Tribunal shall exercise, on and from the appointed day, all the jurisdiction, powers and authority exercisable in relation to an appeal against any appealable order mentioned in tax codes contained in Schedule I of this Act. 

16. Power to punish for contempt. The Appellate Tribunal shall have, and exercise, the same jurisdiction, powers and authority in respect of contempt of itself as a High Court has and may exercise, and, for this purpose, the provisions of the Contempt of Courts Act  shall have effect subject to the modifications that– (a) the references therein to a High Court shall be construed as including a reference to the Appellate Tribunal; (b) the references to the Advocate-General shall be construed, in relation to the Appellate Tribunal, as a reference to the Attorney-General.

17. Distribution of business amongst the Appellate Tribunal and its Benches. (1) Where any Benches of the Appellate Tribunal are constituted, the President may, from time to time, by order, make provisions as to the distribution of the business of the Appellate Tribunal amongst the Benches and specify the matters which may be dealt with by each Bench.

(2) If any question arises as to whether any matter falls within the purview of the business allocated to a Bench of the Appellate Tribunal, the decision of the President thereon shall be final.

18. Appeals to Appellate Tribunal. (1) Subject to the other provisions of this Act, every appeal to the Appellate Tribunal under this Act shall be filed within three months from the date on which the decision or order sought to be appealed against is communicated to the person aggrieved by the decision.

(2) On receipt of notice that an appeal has been preferred under this section, the party against whom the appeal has been preferred may, notwithstanding that he may not have appealed against such decision or order or any part thereof, file within forty-five days of the receipt of the notice a memorandum of cross-objections verified in such manner as may be specified by rules made in this behalf against any part of the order appealed against and such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented within the time specified in sub-section (1).

(3) The Appellate Tribunal may admit an appeal or permit the filing of a memorandum of cross-objections after the expiry of the relevant period referred to in sub-section (1) or sub-section (2), if it is satisfied that there was sufficient cause for not presenting it within that period.

(4) Every appeal to the Appellate Tribunal shall be in such form and shall be verified in such manner as may be specified by rules made in this behalf and shall, except in the case of an appeal preferred by the proper officer or a memorandum of cross-objections referred to in sub-section (2), be accompanied by a fee of two hundred rupees.

19. Procedure and powers of the Appellate Tribunal. (1) The Appellate Tribunal shall not be bound by the procedure laid down in the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice and subject to the other provisions of this Act and of any rules made by the Appellate Tribunal shall have power to regulate its own procedure, including the fixing of places and times of its hearing.

(2) The Appellate Tribunal shall have, for the purposes of discharging its functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:– (a) summoning and enforcing the attendance of any person and examining him on oath; (b) requiring the discovery, inspection and production of books of account and other documents; (c) reviewing its decisions; (d) dismissing an appeal for default or deciding it ex parte; and (e) any other matter which may be prescribed.

20. Deposit, pending appeal, of duty demanded or penalty levied. Where in any appeal under this Act, the decision or order appealed against relates to any duty demanded in respect of goods which are not under the control of the federal excise authorities or the customs authorities, as the case may be, or any penalty levied under the Federal Excises Act or the Customs Act, the person desirous of appealing against such decision or order shall, pending the appeal, deposit with the proper officer the duty demanded or the penalty levied: Provided that where in any particular case, the Appellate Tribunal is of opinion that the deposit of duty demanded or penalty levied would cause undue hardship to such person, the Appellate Tribunal may dispense with such deposit subject to such conditions as it may deem fit to impose so as to safeguard the interests of revenue.

21. Right of applicant to take assistance of legal practitioner and Government to appoint representing officers. (1) A person preferring an appeal to the Appellate Tribunal under this Act may either appear in person or take the assistance of a legal practitioner of his choice to present his case before the Appellate Tribunal.

(2) The Federal Government may authorise one or more legal practitioners or any of its officers to act as presenting officer and any person so authorised by it may present its case with respect to any appeal before the Appellate Tribunal.

22. Conditions as to making of interim orders. Notwithstanding anything contained in any other provisions of this Act or in any other law for the time being in force, no interim order (whether by way of injunction or stay or in any other manner) shall be made on, or in any proceedings relating to, an appeal under this Act unless– (a) copies of such appeal and of all documents in support of the plea for such interim order are furnished to the party against whom such appeal is preferred; and (b) opportunity is given to such party to be heard in the matter: Provided that the Appellate Tribunal may dispense with the requirements of clauses (a) and (b) and make an interim order as an exceptional measure if it is satisfied, for reasons to be recorded in writing, that it is necessary so to do for preventing any loss being caused to the appellant which cannot be adequately compensated in money but any such interim order shall, if it is not sooner vacated, cease to have effect on the expiry of a period of fourteen days from the date on which it is made unless the said requirements have been complied with before the expiry of that period and the Appellate Tribunal has continued the operation of the interim order.

23. Power of President to transfer cases from one Bench to another. On the application of any of the parties and after notice to the parties, and after hearing such of them as he may desire to be heard, or on his own motion without such notice, the President may transfer any case pending before one Bench, for disposal, to any other Bench.

24. Procedure for deciding the case where the Members of a Bench differ in opinion. If the Members of a Bench differ in opinion on any point, they shall state the point or points on which they differ, and make a reference to the President who shall either hear the point or points himself or refer the case for hearing on such point or points by one or more of the other Members and such point or points shall be decided according to the opinion of the majority of the Members who have heard the case, including those who first heard it.

25. Orders of the Appellate Tribunal. (1) The Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or annulling the decision or order appealed against or may refer the case back to the authority which passed such decision or order with such directions as the Appellate Tribunal may think fit, for a fresh adjudication or decision, as the case may be, after taking additional evidence, if necessary.

(2) The Appellate Tribunal may, at any time within four years from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub- section (1) and shall make such amendments if the mistake is brought to its notice by any party to the appeal: Provided that an amendment which has the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the other party shall not be made under this sub-section, unless the Appellate Tribunal has given notice to him of its intention to do so and has allowed him a reasonable opportunity of being heard.

(3) The Appellate Tribunal shall send a copy of every order passed under this section to the concerned taxation officer and the other party to the appeal.

26. Exclusion of jurisdiction of courts, etc. On and from the appointed day after deleting section 133 of the Income Tax ordinance, 2001, section 37I of the Sales Tax Act, 1990, section 34A of the Federal Excise Act, 2005 and section 196 of the Customs Act, 1969, no court (except the Supreme Court) shall have, or be entitled to exercise, any jurisdiction, powers or authority in relation to matters in respect of which appeals would lie to the Appellate Tribunal under section 14.

27. Transfer of pending cases. (1) Every suit, appeal or other proceeding pending before any court or other authority or the Income Tax Appellate Tribunal, Customs, Excise and Sales tax Appellate Tribunal, immediately before the appointed day, being a suit, appeal or other proceeding which would have been within the jurisdiction of the Appellate Tribunal, if it had arisen after such day, shall stand transferred on that day to the Appellate Tribunal: Provided that nothing in this sub-section shall apply to any appeal and or reference pending as aforesaid before a High Court.

(2) Where any suit, appeal or other proceeding stands transferred from any court, tribunal or other authority to the Appellate Tribunal under sub-section (1), the Appellate Tribunal may, on receipt of such records, proceed to deal with such suit, appeal or other proceeding, so far as may be, in the same manner as in the case of an appeal under section 18 from the stage which was reached before such transfer or from any earlier stage or de novo as the Appellate Tribunal may deem fit. 

(3) Any person, who immediately before the appointed day, is an advocate or authorised representative entitled to practice in any court or other authority or Income tax Appellate Tribunal, or the Customs, Excise and Sales tax Appellate Tribunal and was authorised to appear or to act in any proceedings transferred from the said court, other authority or Tribunal to the Appellate Tribunal under this section shall have the right to appear or to act, as the case may be, before the Appellate Tribunal in relation to the said suit, appeal or other proceeding.

28. Proceedings before the Appellate Tribunal to be judicial proceedings. All proceedings before the Appellate Tribunal shall be deemed to be judicial proceedings within the meaning of sections 193, 219 and 228 of the Pakistan Penal Code (45 of 1860).

30. Act to have overriding effect. The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any law other than this Act.

31. Power to make rules. (1) The President of Pakistan may, by notification, make rules to carry out the provisions of this Act.

(2) Without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:– (a) the salaries and allowances and other terms and conditions of service of the President and other Members under section 10; (b) the financial and administrative powers which the President may exercise over the Benches under section 12; (c) the salaries and allowances and conditions of service of the officers and other employees of the Appellate Tribunal under sub-section (3) of section 13; (d) the form in which every appeal to the Appellate Tribunal shall be filed and the manner in which such appeal shall be verified under sub-section (4) of section 18; (e) the rules subject to which the Appellate Tribunal shall have power to regulate its own procedure under sub-section (1) of section 19 and the additional matters in respect of which the Appellate Tribunal may exercise the powers of a civil court under clause (e) of sub-section (2) of that section; and (f) any other matter which has to be, or may be, prescribed by rules under this Act.

(3) Every rule made under this Act shall be laid, as soon as may be after it is made, before both of Houses of Parliaments, while it is in session, for a total period of thirty days which may be comprised in one session, or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rule or both Houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule.

33. Power to remove difficulties. (1) If any difficulty arises in giving effect to the provisions of this Act, the President may, by order published in the Official Gazette, make such provisions, not inconsistent with the provisions of this Act as appear to it to be necessary or expedient for removing the difficulty: Provided that no such order shall be made after the expiry of a period of three years from the appointed day.

(2) Every order made under this section shall, as soon as may be after it is made, be laid before each House of Parliament.


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

[1] Overcoming fragmented tax system, Business Recorder, October 19, 2018

[2] Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018 and ‘Doing business under scattered taxation’, Business Recorder, September 7, 2018

[3] https://www.canada.ca/en/revenue-agency.html

[4] https://www.skatteverket.se/servicelankar/otherlanguages/inenglish.4.12815e4f14a62bc048f4edc.html

[5] Roadmap for tax reforms, The News, February 12, 2017 & Need for National Tax Authority, Business Recorder, October 20, 2017

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