In the Finance Bill 2012, a number of changes have been proposed that can cripple the already ineffective tax justice system-amendments if approved by Parliament would render office of Commissioner of Appeals ineffectual and that of Appellate Tribunal Inland Revenue (ATIR) a 'camp office' of the Federal Board of Revenue (FBR).
These amendments are aimed at obtaining confirmation of arbitrary and unreasonable orders passed with the aim to meet budgetary targets. Karachi and Lahore tax bars have already agitated against the proposed amendments by writing letters to the Minister of Law seeking his interference in the matter to ensure independence of the tax appellate forumsi. The Finance Bill 2012 has proposed the following amendments that could be extremely detrimental for dispensation of justice to taxpayers:
a) The Commissioner of Appeals has been allowed to give stay only for one month. There is no mandatory provision to pass the order within the same period. Thus after one month, the Department will force recovery through coercive measures. The higher Courts time and again have held that a taxpayer should not be forced to pay any demand contested by him unless his appeal is decided by an independent forumii ie ATIR. The Department is flouting these verdicts and forcing recovery by attaching accounts of taxpayers even during pendency of appeals. Recently, they have showed utter disrespect towards ATIR and in some other cases, even orders of restraint passed by High Courts.
b) At present in the ATIR, Account Members, coming from FBR, are officers in Grade 21 (Chief Commissioners) or Commissioners in Grade 20 with 5 years' of experience. The Finance Bill 2012 proposes to reduce this condition to 3 years' experience. This means induction of junior commissioners who could be influenced by FBR in the hope of better postings on their return to parent department.
c) The Chairman of ATIR is elevated from the Judicial Members, usually the senior most. At present, the Accountant Member can become Chairman but only if extraordinary circumstances exist. The Finance Bill wants to relax this condition, which would pave the way for total control on ATIR by the FBR. The above changes, if implemented, would further destroy the already ailing 4-tier tax justice system [see 'Need for National Tax Court', Business Recorder, May 6-7, 2011]. This system already 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.
In developing economies like Pakistan, one of the biggest problems is 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 has faith in the effectiveness of legal remedies against an unjust tax levy or unjust action of the taxation authorities, he is more likely to be truthful and honest to the taxation authorities, and to accept a reasonable levy of tax. The degree of taxpayer satisfaction does therefore go up which, in turn, is a sine qua non for better voluntary compliance resulting in greater resource mobilisation. While on the surface, a tax judiciary inherently deals with the involuntary collections enforced by a tax administration, an efficient tax judiciary actually creates conducive atmosphere for better voluntary compliance by the taxpayer aiming at greater resource mobilization for the State. A tax administration which disposes of appeals promptly and speedily reaches a fair and final settlement can itself 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 pending litigation in relation to a particular tax levy, there is a natural, and quite understandable, desire on the part of the taxpayer not to pay the pending disputed amount. An efficient tax judiciary resolves disputes quickly, quashes demands which are not legally sustainable, and thus segregates serious tax demands from frivolous tax demands, while also giving finality to legitimate tax demands. This in turn ensures that the taxpayer 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 tax demands by the State, which, once again, results in greater resource mobilization.
An effective iiitax judiciary does not only settle tax disputes between the citizen and the State, but it also lays down guiding principles on the basis of which future disputes with materially identical facts, are easily resolved. This way, an effective tax judiciary also contributes to smooth functioning of the tax machinery. The setting up of the ivTribunal in 1941 brought about a paradigm shift in the grievance redressal system. The scheme of things in the Tribunal envisaged complete functional independence of the institution, a high degree of legal and technical expertise of the Members manning the benches, user friendly, simpler and informal procedures, and inexpensive and quick justice delivery. Over the decades, the vTribunal has been strengthened with changes made to cope with the increasing burden of cases and growing complexity of disputes.
The powers of the ATIR are exercised by the benches [section 130 of the Income Tax Ordinance, 2001]. Cases in which amount of tax or penalty does not exceed Rs one million can be heard by a single member bench, either by a Judicial Member or an Accountant Member. Majority of the cases are heard by division, or regular, benches which must consist of one Judicial Member and one Accountant Member. There is no ceiling on amount of tax involved or income assessed in the cases to be heard by such division or regular benches. Special benches, of three or more Members, of which at least one Member must be a Judicial Member and one Member must be an Accountant Member, are formed on issues on which either division benches have expressed conflicting views or on issues which are of considerable importance. It is thus ensured that the decision of each of the regular or larger bench has the benefit of inputs from both a Judicial Member and Accountant Member.
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, 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 now the Finance Bill 2012 proposes reduction from 5 to 3 years. Amendments made in 2007, 2010 and those proposed in Finance Bill 2012 are highly undesirable. The officer from FBR having little experience or no experience of appellate work should never be permitted to be part of ATIR.
In India, accountant members are selected from amongst senior officers of Indian Revenue Service and from amongst chartered accountants having at least 10 years of practice in taxation. Thus, every bench has the unique advantage of examining issues from the point of view of a trained legal expert as also from the perspective of a mature revenue person or CA, who has knowledge and understanding of real life tax and business realities. Normally, one of the Members in the bench is sufficiently a senior person with reasonable exposure to the varied situations dealt with in the cases. While, on the factual aspects, a decision of the Tribunal is final, on substantive questions of law, jurisdiction of the High Court can be invoked. Interference by the High Court and the Supreme Court, however, is more of an exception than the rule.
The proposal through Finance Bill 2012 to lower the service period requirement of Commissioner to be Member of the Tribunal to three years [section 130(4)(b)] needs to be reconsidered. Junior Commissioners who may have never even worked as Commissioners of Appeal would lack skills to work as Accountant members. The technical quality of work and understanding of matters required at the Tribunal level would be highly compromised by appointment of such Commissioners.
Amendment proposed in section 130(5) that is deleting the words "and except in special circumstances", is to facilitate an Accountant Member to become the Chairman of ATIR. This is against the principle of independence of judiciary. A person having lien with FBR (an executive authority) cannot perform the functions of Chairman as it would be in utter violation of Para 5 of the National Judicial Policy 2009 which says:
"All special courts/tribunals under the administrative control of Executive must be placed under the control and supervision of the Judiciary, their appointments/postings should be made on the recommendation of the Chief Justices of concerned High Court" [Page 12]
Thus the original position of law that only a judicial member can be Chairman of the Tribunal must be maintained. In fact, the ATIR should be freed from the control of Ministry of law and should be placed under the judiciary [Bill for this was prepared by us; see 'Need for National Tax Court', Business Recorder, May 6-7, 2011].
To make the ATIR a truly independent and effective judicial forum, it is imperative to provide for recruitment of Chartered Accountants (CAs) and Cost and Management Accountants (CMAs), having tax experience of at least ten years, as Accountant Members through Federal Public Service Commission (FPSC). As far as officers from FBR are concerned, the rank should be Chief Commissioner or Commissioner with five years of experience, having served at least two years as Commissioner of Appeals. They should also be inducted for good in Tribunal through FPSC with no lien to go back to FBR. This is necessary to make Tribunal an independent appellate body. Ideally, for recruiting Accountant Members, there should be an independent 'All Pakistan Tax Appellate Service' in which officers from FBR and tax professionals (FCAs and FCMAs) should be selected by FPSC through a transparent procedure, advertising the posts widely on national level.
The writers, tax lawyers and partners in Huzaima and Ikram (Tax and Pakistan), are Adjunct Professors at Lahore University of Management Sciences (LUMS)
i The following is the text of letter sent by Lahore and Karachi tax bars:
"We are writing this letter to seek your urgent intervention and bring to your kind notice proposed amendment introduced vide Finance Bill 2012 in respect of Appellate Tribunal Inland Revenue (ATIR), As you are aware, ATIR is the final appellate forum provided under the provisions of Income Tax Ordinance 2001 and Sales Tax Act, 1990, especially on facts. ATIR consists of judicial members and accountant members.
a) There has been an age old tradition since introduction of Income Tax Act, 1922 that the Chairman of the ATIR has always been a judicial member, and this was ensured through provision of law in the Income Tax Ordinance, 2001.
b) In the present Income Tax Ordinance 2001, section 130(5) provided that the Chairman of the Tribunal shall be a judicial member except in special circumstances an Accountant member may be considered for this post. In the Finance Bill 2012, an attempt is being made to remove this requirement, thus paving the way for any Accountant Member being an officer serving either in Grade 20 or 21 [Inland Revenue Department of Federal Board of Revenue] to become a Chairman. Our Bar members have serious reservations on this proposed amendment as we strongly feel the ATIR being a judicial forum should be Chaired only by a senior Judicial member. We request your urgent intervention in this matter.
c) As per section 130(3) of Income Tax Ordinance 2001, the prescribed qualification to be a judicial Member of ATIR is that the person should have exercised powers of District Judge and is qualified to be a Judge of High Court OR has been an Advocate of High Court and is qualified to be Judge of High Court.
Whereas as per section 130 (3) of Income Tax Ordinance 2001 the prescribed qualification s for an Accountant Member of ATIR was that the person shall be an officer of Inland Revenue equivalent to the rank of Regional Commissioner OR a Commissioner Inland Revenue or Commissioner Inland Revenue (Appeals) with at least FIVE years' experience as Commissioner.
This requirement of Commissioner having at least FIVE YEARS experience is now vide proposed amendment in law through Finance Bill 2012 being reduced to a Commissioner having at least THREE years' experience. This Bar has serious reservations on this proposed change of lowering the experience requirement of Commissioner to THREE years and we seek your urgent intervention in the matter. We feel with ATIR being the final tax forum on facts, a Commissioner with at least FIVE Years of experience should be appointed as Accountant Member.
In order to have an impartial and judicious Appellate Tribunal, we also may add that test of Seniority as held by the Hon'ble Supreme Court in Al Jehad's case may also be put as condition precedent. We, therefore, earnestly request you to kindly intervene in the matter and use your good office to have both the proposed amendments in section 130(5) and 130(3) of Income Tax Ordinance 2001 withdrawn from Finance Bill 2012. We request you to ensure the independence of this judicial forum of ATIR".
ii It is trite law that taxpayers cannot be forced to pay a disputed tax demand unless the matter is decided by an independent forum that in case of income tax, sales tax, federal excise duty is Appellate Tribunal Inland Revenue. The following cases are authority on this:
i) Sunrise Bottling Co (Pvt) Ltd v Federation of Pakistan etc (2006) 94 TAX 140 (H.C. Lah.)
ii) Punjab Provincial Co-operative Bank Ltd, Lahore v DCIT 2002 PTD 2799
iii) Riaz Bottlers (Pvt) Ltd v CIT (2008) 98 TAX 295 (H.C. Lah.)
iv) PTCL 2010 CL 460
iii In the Sub-continent, income tax was introduced by the British colonial rulers in the year 1860, but for its first eight decades of existence, grievance redressal mechanisms left much to be desired. There was no separation of administrative and appellate functions, and the very Assistant Commissioners and Commissioners, under whose supervision and guidance, tax assessments were done by the Income Tax Officer, were the first and second appellate authority against the order of the Income Tax Officer. There was thus a clear clash of interest between the administrative and appellate functions of the tax authorities. A Commissioner, on one hand, had revenue targets to achieve, and while deciding appeals of the taxpayers, who perceived their tax assessments to be unjust and unfair, application of the taxpayer, refer the points of law for the opinion of the High Court. If the Commissioner so declined to state the case at the request of the taxpayer, the taxpayer could approach the High Court and seek a writ of "mandamus" requiring the Commissioner to state the case. This system of grievance redressal of the taxpayer was not very user friendly, there was no independent adjudication by anyone outside the tax administration on the question of facts, and the costs involved in the legal process, ie before High Courts, were very high. This system was perceived to be oppressive and undemocratic. There was so much resentment against this system that the Government had to give in to the public pressure and, by Income Tax (Amendment) Act, 1939, bring about two important reforms-first, that judicial and administrative functions of the tax authorities were separated; and-second, an independent body, the Income Tax Appellate Tribunal was created to hear appeals against orders of the first appellate authority on all questions of facts and law. That is how that Income Tax Appellate Tribunal was set up in the Sub-continent in 1941.
iii The setting-up of the Tribunal in 1941 was welcomed by the public at large. The then Leader of Opposition in the Legislative Assembly, Mr Bhulabhai J. Desai, welcomed the proposal by stating on the floor of the Assembly as follows: "with the intervention of such a Tribunal, a substantial step has been gained from the point of view of the taxpayer, that so far as any injustice will be done to him either by misapplication of law or by a wrong finding of facts by the official hierarchy, he will have now redress from an independent body with sufficient legal and accountancy qualifications....."
v Incidentally, the Income Tax Tribunal was the first Tribunal set up in the Sub-continent, and it was this successful experiment which resulted in setting up of many more Tribunals.