Recouping tax losses judiciously — I

“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 democracy—Justice 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) 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 have 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 lawmaker, 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 the 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 the 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 2643 as 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 a 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.

(To be continued)

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

Copyright Business Recorder, 2021