In recent years the collection of taxes has assumed enormous significance in Pakistan. There is a national consensus that our survival as a self-reliant nation now lies with rapid and substantial increase in tax revenues. The general public and businessmen always view the "zeal" and "enthusiasm" of the Federal Board of Revenue (FBR) in collecting taxes with suspicion and distrust.
There are a number of reasons for this reaction. Firstly, the highhandedness, maladministration, inefficiency, abusive behaviour and corrupt tax practices of the FBR's officials has created a general atmosphere of distrust between the taxpayers and the State. Secondly, the successive governments have failed to utilise the taxpayers' money in a transparent manner. The ruthless waste and plundering of public money by the rulers has forced the people to openly defy tax laws.
The present situation of antagonism between the State and taxpayers needs to be reconciled through a process of national consensus. A National Tax Commission, comprising judges, professionals, and representatives of the taxpayers and tax machinery, is the need of the hour. The goal of tax reform cannot be achieved through handpicked experts (mostly coming on donors' dictates) who are completely oblivious to the mundane realities of Pakistan.
The decision to reform the tax system and laws through the FBR-backed tax reform committees, in which assignments have been given to ex-bureaucrats (who are in fact responsible for the present state of affairs), is an ugly joke with the nation. The bad faith, antagonism and mistrust prevailing between the government and taxpayers can only be removed through a national reconciliation process.
A National Tax Commission, being a truly representative and competent forum, can provide a basis for a just and fair tax system in Pakistan in the near future. The process of national reconciliation on tax matters will certainly require some time. In the meantime, the Government in order to restore the confidence of the taxpayers should immediately promulgate the Taxpayers' Bill of Rights.
The provisions of the Bill must:
(a) safeguard and strengthen the rights of the taxpayers;
(b) ensure equality of treatment;
(c) guarantee privacy and confidentiality of their declaration;
(d) provide right to assistance by the state in tax matters;
(e) guarantee unfettered right of appeal through an independent tax appellate system;
(f) provide facilities for an independent judicial review of disputes with the tax authorities.
In recent years, both the United States and the United Kingdom, specifically enacted and implemented such laws to further strengthen their already highly developed tax cultures. The US Technical and Miscellaneous Revenue Act of 1998 contained a Taxpayer Bill of Rights. The UK Inland Revenue issued in 1996 a Taxpayer's Charter informing taxpayers of their rights in audit and the tax collection processes. In Pakistan, the State never bothered to educate the taxpayers about their obligations. They have been left at the mercy of the callous tax officials. The taxpayers have no specific Bill of Rights or Charter of Rights. Tax reform efforts will remain a cliché unless the State takes some fundamental steps to restore the confidence of the public in general and the taxpayers in particular and also convince them by concrete actions that their taxes are spent for the progress and welfare of the society.
Taxpayers are the most humiliated beings in Pakistan, although it is a fact that very few of them pay their taxes honestly. But when they have no protection of life and property, why should they pay the taxes? The common argument is that a government, which is incapable of protecting the life and property of its citizens, has no right to impose or collect taxes. Those who are not paying or paying negligibly with the connivance of corrupt tax officials command social status, societal respect and win elections. After every other year, the rulers announce a tax amnesty scheme to prove that the honest taxpayers are just "idiots". The forces of loot are hand in hand with the corrupt and both are flourishing in Pakistan. On the other hand, in the name of "reformation" (sic), the life of the ordinary people is becoming difficult with each passing day. For the rulers, the only purpose of "reformation" is to extort more taxes from the people. These taxes are ultimately spent on giving unnecessary perquisites to the rulers of the day.
The existing tax system itself is one of the worst expressions of colonial heritage. It is highly unjust. It protects the establishment and exploitative elements that have complete monopoly over economic resources. There is no political will to tax the privileged classes. The common man is paying exorbitant sales tax of 17% on the commodities he uses as a consumer, but the mighty generals, high-level bureaucrats, unscrupulous businessmen and corrupt politicians are paying no income tax/asset tax on their colossal income/wealth. Do our rulers know about the basic canons of taxation?
Adam Smith in his 1776 Wealth of Nations propounded the following four principles of taxation (commonly known as canons of taxation):
Equity: The tax payable should accord with ability to pay or taxable capacity.
[In Pakistan the poor are taxed although they have little or no ability to pay and the rich enjoy exemption notwithstanding taxable capacity. The Musharraf regime abolished wealth tax to safeguard the wealth of certain vested interests ie the people enjoying assets as a result of the loot, tax evasion, political bribes and gallantry awards.]
Certainty: The taxpayer should know exactly what is being taxed, how much he has to pay and when he has to pay it, meaning that the law should be clear and unambiguous and the tax authorities' interpretation of it should be readily available.
[In Pakistan, there is no certainty about taxes. The administrative authorities continue to play havoc with the tax laws through an avalanche of amendments every year through the Finance Acts/Ordinances and the infamous SRO system, while the taxpayers have been subjected to the amazing wilderness of confused laws, vulnerable to varied interpretations and the authorities' explanations adding to the existing confusion].
Convenience: The tax should be payable in a manner and at a time convenient to the taxpayer.
[The FBR makes it a point to make the taxpayers' lives miserable. The procedures for the collection of taxes in Pakistan are the most cumbersome and inconvenient].
Economy: Enforcement and collection costs should be reasonably proportionate to the receipts.
[Quite the opposite situation prevails in Pakistan. The FBR has reduced its cost of collection by shifting its substantial part to the withholding agents / businessmen and that too without giving them any compensation. Adding insult to injury they are penalised for insignificant lapses. In all civilised societies, tax authorities allow percentage deduction to withholding agents/businessmen to compensate for the cost of collection of taxes as agents, but in Pakistan, the FBR is taking forced labour from them in utter violation of Article 11(1) & (2) of the Constitution of Pakistan.]
There are flagrant and perpetual violations of the established principles of taxation by the State, yet the people of Pakistan, who are the most heavily taxed in Asia, are being harassed every day by the tax authorities. It is high time that the Government should show a conciliatory gesture by promulgating the Taxpayers' Bill of Rights. Economic prosperity and eradication of rising poverty depend in generating substantial taxes. All citizens of Pakistan who are liable to pay taxes should perform their national duty honestly and without any hesitation. The State must ensure them full protection of their rights, transparency in utilisation of taxpayers' money and implementation of a just, equitable and fair tax system.
We can learn from the experience of the United States [whose negative policies our government is following in letter and spirit but whose positive acts are never studied]. The following shows the experience of the US in implementing the Taxpayers' Bill of Rights.
The US 'Taxpayers' Bill of Rights' After a long-drawn struggle and resistance from the tax administration and certain vested interests, the Taxpayers' Bill of Rights became part of the Internal Revenue Code of United States of America. The Bill was adopted in the wake of numerous complaints to the US Congress of abusive behaviour by Internal Revenue (IRS) Agents. It is the product of hard work and courageous efforts by numerous people and organisations. This law has great relevance for the Pakistani scenario, where in the name of 'tax reform (sic) new tax obligations are being imposed on citizens but no rights are guaranteed through proper legislation. The abusive behaviour of Pakistani tax authorities is an admitted fact even by the top slot of the tax administration. We are presenting a brief history of the Taxpayers' Bill of Rights in USA, so that all the stakeholders can see the evolution from idea stage to Congressional passage. The stakeholders will also be able to see who the players were, what partnerships were formed, and who contributed and who didn't contribute to the process. Truly an interesting study in grassroots politics!
Summary of the US Taxpayer Bill of Rights After five years of consideration (1981 to 1988), the US Congress finally passed the Taxpayer Bill of Rights - the most significant piece of legislation protecting taxpayers from IRS abuses since the inception of the income tax system.
Credit goes to Senator David Pryor (D-AR), Chairman of the Senate Subcommittee on Oversight of the IRS, who led the fight for the passage of the bill, even though he encountered strong resistance from the IRS, which campaigned hard to defeat the bill and water it down. The Taxpayer Bill of Rights was included in the Technical and Miscellaneous Revenue Act of 1988, passed by Congress in the final hours before adjournment.
The major provisions of the bill are:
(1) Upon a taxpayer's request, the IRS is required to allow an audio recording of any interview at the taxpayer's own expense and with the taxpayer's own equipment. The IRS is also allowed to record the same interview.
(2) Before an initial interview, the IRS agent is required to provide an explanation of either the audit or collection process, and the taxpayer's rights under such process.
(3) Taxpayers are guaranteed the right to consult with an attorney, the CPA, or an Enrolled Agent, or other person at any time during any interview. And if requested by the taxpayer, the IRS must suspend the interview to allow the taxpayer the right to consultation.
(4) Taxpayers have the right to representation by a properly authorised representative and the IRS may not require a taxpayer to accompany the representative to an interview unless an administrative summons is first served.
(5) The IRS is required to abate any portion of any penalty or additional tax attributable to erroneous advice provided in writing by the IRS.
(6) The new law gives the IRS Ombudsman the authority to intervene in an enforcement action if the taxpayer is "suffering or about to suffer a significant hardship as the result of the manner in which the Internal Revenue laws are being administered."
(7) The IRS is now legally prohibited from evaluating employees based on their records of tax enforcement results. Supervisors will no longer be allowed to force their employees to make seizures for the sole purpose of gathering statistics, with the purpose of enhancing their enforcement quotas.
(8) For the first time in the history of the Internal Revenue Code, taxpayers are granted the opportunity to pay their taxes in instalments if such an arrangement will facilitate the collection of the liability. No longer will the IRS collectors be able to say that the Code doesn't allow instalment arrangements. Also, IRS collectors are bound to honour any instalment arrangements they enter into as if the arrangement has the force of a contract. The IRS may terminate an agreement only under certain stipulated conditions. This provision prohibits the arbitrary termination of agreements that have plagued many taxpayers.
(9) The law establishes the "Office for Taxpayer Services" under the supervision and direction of an Assistant Commissioner for Taxpayer Services. The effect of this provision is to prevent the IRS from de-emphasising the role of the taxpayer services within the organisation.
(10) Under the previous law, a taxpayer who is a "prevailing party" in a tax case in any Federal court may be awarded reasonable litigation costs if the position of the U. S. was not "substantially justified."
(11) Until the passage of the Taxpayer Bill of Rights, taxpayers did not have the right to sue the government for damages sustained because of unreasonable actions taken by an IRS employee. In another very important provision, taxpayers are now granted the right to sue the Federal government in the Federal District Court for damages, if in connection with the collection of any Federal tax, an IRS employee "recklessly or intentionally" disregards any provision of the tax code or any regulation promulgated under the code. Taxpayers may recover "actual, direct economic damages sustained" as a result of the IRS action plus the costs of pursuing the action to sue up to $100,000.
The Taxpayer Bill of Rights has expanded this right in a major way. Now any person who "substantially prevails" in any administrative or court proceeding brought by or against the U. S. in connection with the determination, collection, or refund of any tax, interest, or penalty may be awarded reasonable administrative costs incurred before the IRS and reasonable litigation costs incurred in connection with any court proceeding. A limitation requires that the prevailing party must first exhaust the administrative remedies available within the IRS.
The term "administrative proceeding" means any procedure or other action before the IRS. "Reasonable administrative costs" include reimbursement for fees of an attorney, CPA, or Enrolled Agent authorised to practice before the Tax Court or before the IRS. Probably one of the most significant rights ever written into the tax code, this provision goes a long way to protect defenceless taxpayers against arbitrary and capricious actions of IRS employees. No longer will taxpayers have to bear the financial brunt of proving their innocence. Far too many times in the past, taxpayers have agreed to pay more tax than they owed because they were advised that the costs of fighting the IRS exceeded the amount of the tax.
(To be continued)
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Hearings There were numerous hearings on
the Taxpayers' Bill of Rights
from 1981 to 1988
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1st Taxpayer Bill of Rights The 1988 Taxpayer Bill of Rights
2nd Taxpayer Bill of Rights The 1996 Taxpayer Bill of Rights
3rd Taxpayer Bill of Rights Taxpayer Protection and Rights
The Internal Revenue Service
Restructuring and Reform Act of 1998
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