There’s need for effective, harmonised ADR mechanism

The taxation of income and revenue is a complex subject with voluminous laws promulgated to attend to its regulation and implementation. It therefore comes as no surprise that tax matters are accompanied with a reasonable magnitude of litigation the fair resolution of which demands that taxpayers should be provided with at least one forum which is comparatively inexpensive, less time-consuming, less cumbersome and has a result-oriented approach.

Alternate Dispute Resolution (ADR) is an alternative mechanism to effectively resolve disputes outside the court of law. In the modern world, ADR is serving as a panacea, whereby the aggrieved person can obviate frivolous litigation. The common ADR processes include mediation, arbitration and neutral evaluation.

The need to practically effectuate such a mechanism becomes more exigent when a number of fiscal cases is pending litigation at different appellate forums, involving trillions of duties and taxes. ADR furnishes a swift, structured and dynamic negotiation forum, saving taxpayers and the tax machinery significant time, cost and tedious trials, in a not so traditional court set-up.

Having said this, while the ADR mechanism is in place in Pakistan, its implementation, on practical grounds, has been a challenge so far.

In the wake of the foregoing, the Finance Act, 2022 (the FA 2022) introduced certain amendments vis-à-vis ADR, in the Inland Revenue Laws, i.e., the Sales Tax Act, 1990, the Federal Excise Act, 2005, and the Income Tax Ordinance, 2001, to preclude mechanical, systematic and operational encumbrances. Through the said amendments, the scope and constitution of the ADR committee and the procedural formalities of the ADR mechanism, have been reformed in the Inland Revenue Laws.

The pertinent statutory provisions enunciate a similar methodology, phrasing and etymology for ADR whilst a dispute is under litigation in a court of law or before an Appellate Authority.

Now the question surfaces, whether these reformed amendments have been able to overcome the challenges for which they were initially posed or not? Further, no similar amendments have been made in the Customs Act, 1969 (the Customs Act), which was last amended vide the Finance Act, 2019 and has its own legacy features. So, the FBR, for customs and inland revenue laws, has two different ADR models.

The scope of the ADR under the Customs Act, without any pecuniary limit, covers any dispute under litigation pertaining to the liability of customs duty, admissibility of refund or rebate, waiver or fixation of penalty, confiscation of goods and relaxation of any period or procedural and technical condition.

The Customs Act also places a bar on the scope of the ADR for cases involving criminal proceedings and interpretation of questions of law involving larger revenues.

Under the Customs Act, the ADR Committee shall be constituted by the FBR within 30 days of filing of an application by the aggrieved person.

The committee, after satisfaction, shall decide the case by a majority vote within 90 days, which shall be binding on the Collector, subject to withdrawal of appeal(s) by the aggrieved person and once this fact is communicated to the Collector within 60 days of the date of order of the Committee. Otherwise, it will lose its sanctity. In case the committee fails to decide the case within 90 days, the FBR shall dissolve the committee.

Under the Inland Revenue laws, the ADR process can be initiated to the extent of waiver of default surcharge, penalty or for any other specific relief to resolve the dispute, and for cases having more than a PKR 100 million liability or refund amount, excluding the cases involving criminal proceedings.

The ADR facility is not available to the cases of less than the stated limit. In Inland Revenue laws, the initial proposition to resolve the dispute including an offer of tax payment along with the application is mandatory, which cannot be retracted.

The period of constitution of the committee by the FBR is 45 days. In contrast to the Customs law, the Inland Revenue laws mandate the communication of the order of withdrawal of the proceedings before the Court or Appellate Authority, within 75 days of the appointment of the Committee, which is a condition precedent to start the arbitration process. Any decision by the Committee is to be made within 120 days of its appointment, excluding the days of communication of withdrawal of appeal.

The decision must be made by a majority vote and has a binding effect on both the parties. Earlier, it was by consensus or unanimous holding, which ultimately buttressed unwarranted delays. If the decision is not made within the stated 120 days, the Committee shall stand dissolved by the FBR and such dissolution shall be communicated to the concerned parties and the relevant appellate forum. The court shall decide the subject matter within 6 months.

The harmonization of all the fiscal laws, especially those addressing litigation and arbitration resulting in provision of ultimate relief to the taxpayers is the need of the hour. Under the masquerade of various procedural requisites and formalities, the FBR has miserably failed to give one unique code of arbitration in all its fiscal laws.

The implementation side is also not showing encouraging results, including early constitution of committees or the early implementation of recommendations of the ADR committees. Further, maladministration and inordinate delays frustrate the legislative intent, altogether, and render the ADR mechanism a failure, where the parties to the dispute have no faith in any other option but to stick with the traditional trial courts.

For the proceedings to be functional, harmonization of the prescribed methodologies and procedures in the fiscal tax statutes is integral. When one statute offers certain remedies while others deny the aggrieved person the same, it creates havoc and uncertainty.

Hence, most of the provisions of the ADR in Inland Revenue laws, which are inconsistent and inapplicable, must be harmonized with the international best practices or at least with the prevailing provisions of the ADR in the Customs law, which seems more robust and taxpayer friendly.

These may include appropriate changes required in the parameters and scope of the ADR mechanism to invoke the ADR process in the Inland Revenue laws, along with removal of any pecuniary limits and provision of a reasonable timeframe to the ADR committees to decide the matters.

Finally, such amendments must be accompanied with removal of the conditions precedent to offer a tax amount for resolution of the matter and the conditions to withdraw appeals before commencement of the ADR proceedings.

The ultimate key to implementing an effective and successful ADR process in Pakistan is to reevaluate its design with a view to making the entire process more flexible, cost-efficient and time-effective, giving both taxpayers and the ADR committees more control over the process and its results.

Copyright Business Recorder, 2023