When the government of General Pervez Musharraf decided to promulgate a new income tax law in 2000, we, amongst many others, opposed it strongly. Our main objection was that his regime had no mandate to enact any such law. The rule, "No taxation without representation", was stressed by us and others. This cardinal constitutional rule is embodied in Article 77 of the Constitution of Islamic Republic of Pakistan but being usurper, the military dictator was least pushed about it. Strangely and disturbingly even the elected governments since the exit of Musharraf have been showing complete apathy towards enacting a new income tax law and other tax codes that conform to fundamental rights and public policy guidelines contained in the Constitution.

During the Musharraf era, it was argued that the dictator lacked the mandate to enact Income Tax Ordinance, 2001 repealing Income Tax Ordinance, 1979, which was also promulgated by a military dictator, General Zia-ul-Haq. It was demanded that he should leave this work for the future elected government. Unfortunately, the law was promulgated and thereafter all elected parliaments, including the present one, have never bothered to review it.

We do not enact tax laws through consultative process, which is a prerequisite of democratic polity. Tragically, the repealed Income Tax Ordinance, 1979 was also promulgated by a military dictator, and the existing Income Tax Ordinance, 2001, is reminiscent of undemocratic rule of General Musharraf.

The Supreme Court of Pakistan aptly observed in CIT v Eli Lily (Pvt) Ltd [(2009) 100 Tax 81 (S.C. Pak)] as under:

"Since the creation of Pakistan we have not been able to frame any Income Tax Act duly debated in the Assembly. Both the Ordinances were promulgated during the Martial Law Regime otherwise the Constitution has prescribed a four month life of an Ordinance in case the Ordinance is not be placed before the Assembly and it shall be enacted as an Act then the Ordinance will automatically cease to exist. This aspect also reveals that the Constitution has cast duty upon the legislative body to frame the laws within the parameters prescribed under the scheme of the Constitution".

The Income Tax Ordinance, 2001 is highly complex law and badly drafted. During the last 17 years [it was made effective from tax year 2003] and despite the fact that over 3000 amendments were made, it has generated enormous litigation. The Apex Court noted in (2009) 100 Tax 81 (S.C. Pak) noted:

"The fact that the Ordinance in question was issued and various amendments were incorporated before and even after the enforcement of the Ordinance 2001 raises the controversy that the Ordinance in question was promulgated without meticulous debate on the subject due to which taxpayers and concerned departments were compelled to agitate the issues in different courts".

We have been pointing out since its inception, various errors of drafting and concepts (see Law & Practice of Income Tax, Volume I, pp 1-14) but the Federal Board of Revenue (FBR) did not bother to consider these and ultimately lost revenue of billions of rupees when Supreme Court vindicated our viewpoint in (2009) 100 Tax 81 (S.C. Pak) as under:

"It appears that the Ordinance was drafted in post haste and the draftsman omitted to incorporate this important provision. This observation is supported from the fact that the Ordinance was subjected to speedy, successive and large scale amendments, particularly at its very inception". It may be seen that section 238 provided that the Ordinance shall come into force on a date to be appointed by the Federal Government by notification in the official gazette. Accordingly, vide notification (SRO No. 381(I)/2002) dated 16.6.2002, the Ordinance came into force with effect from the first day of July 2002, but with more or less 1000 amendments inserted by the Finance Ordinance, 2002, as calculated by the learned counsel for the respondents.....Had the un-amended provision of subsection (1) of section 239 continued on the statute book, no difficulty would have arisen regarding the treatment of assessment orders passed in respect of the assessment year ending on 30th June 2003. In such eventuality, the assessments up to the said period would have been governed under the repealed Ordinance, while the assessments of the post enforcement period of the Ordinance of 2001 would be governed under the latter Ordinance".

In para 53 of (2009) 100 Tax 81 (S.C. Pak), the Supreme Court has categorically held:

There is a need to review the language, content and scope of the power to amend and further amend an assessment, the power to revise an assessment and the power to rectify mistakes envisaged in these sections so as to make it in line with the legislative intent of consolidating the law relating to income tax so as to make it easily comprehensible to the convenience of the taxpayers".

This judgement was passed on June 22, 2009 and till today neither FBR nor the Parliament has implemented the command of the Supreme Court. The FBR has lost and is still losing cases involving substantial revenue because of conflicting and confused provisions of the Income Tax Ordinance, 2001, but tax bureaucrats are least pushed to request the Parliament to amend the law as suggested by the Apex Court or enact a new one that is more suitable to our conditions.

It is about time the Parliamentary Standing Committee on Taxation & Finance of National Assembly initiated the process of drafting and adoption of a new income tax law rather than further amending the Income Tax Ordinance, 2001 that is simply impractical. Services of experts should be elicited for this task. We can never ensure the birth of a tax culture unless tax laws are made simple and easy to comply with.

All citizens should be taxed fairly that is according to their ability (all the presumptive and minimum tax regimes, concessions and exemptions given in the existing law should be abolished). The taxpayers should be given rights through legislation (Taxpayers' Bill of Rights) that taxes collected would be spent for public welfare and not for the luxuries of the elites-militro-judicial civil complex and politicians in power-andthat their cases shall be adjudicated expeditiously through an independent tax appellate system. Efforts are needed to have an income tax law:

(a) ensuring taxation on the basis of ability to pay as enshrined in Article 3 of the Constitution;

(b) providing uniformity of tax treatment as far as possible for various categories of taxpayers;

(c) reducing dependence on withholding taxes;

(d) encouraging voluntary compliance through deterrent provisions;

(e) minimizing tax exemptions;

(f) reviewing the existing tax appellate system; replacing it with National Tax Court completely independent of FBR and Ministry of Law; and

(g) removing distortions and anomalies to make the law coherent and consistent;

New Approach

It is an inescapable conclusion that income tax law, as it exists, is a most undesirable piece of legislation. Direct tax system intends to achieve the twin aims of maximizing revenue as well as utilizing revenue for achieving socio-economic objectives. In actual practice, our tax system has failed to achieve either of these objectives. In fact, the complex regime of incentives and disincentives built into the direct tax law cannot but lead, per se, to difficulties in enforcement and to the opening of opportunities for tax-dodgers/evaders. At the operational levels, this has resulted in undue bureaucratization, corruption and harassment of the citizens. Undoubtedly, time has come to resolve these contradictions and to completely convert direct tax regime into simple tax law. The new approach should aim at generation of resources besides achieving some limited but important economic objectives like promotion of savings, encouragement of new investments and conservation of energy.

Equity in taxation

For any meaningful change, solutions have to be found for those issues that have been sidetracked for years. One problem that affects personal taxation significantly relates to presumptive taxes, minimum taxes, tax brackets, exemption limits, tax rates and fairness of the system of indexing for inflation. On the eve of each year's budget exercise, these issues are raised but avoided rather than solved, by an appeasement policy of giving tax amnesty, asset-whitening schemes, more exemptions for the powerful segments, raising deductions, re-arranging tax brackets and making hanges in tax rates. The case for adjusting the structure of personal income tax to inflation, to retain the same levels for taxation and collections in real terms, should receive the first priority in any future tax reform to enhance the credibility of the system.

Broadening tax net

We, in Pakistan, have been running after small fry to broaden the tax net. For example, a widows or pensioners are subjected to 10% flat tax on income earned from Bahbood Certificates and pension accounts. They also pay advance adjustable income tax on mobile use even if income is below taxable limit. Such erratic taxation is highly lamentable. Salaried persons having no other source of income have to pay advance tax not only on salary but also when paying fee of their children and mobile bills. They have to file tax returns and then claim refund of excess payments made to FBR, which they seldom receive. This exercise generates tremendous infructuous, unproductive and wasteful workload without any significant gain to the revenue. It strengthens the feeling that the government, unable to tackle the hardened tax evaders (for example sharks in real estate speculative business and at stock exchanges), is unduly harsh on salary and wage earners. A feeling goes around that they are made to bear the major burden of taxes. The consequence is that ordinary people who generally think of themselves as honourable and honest end up in participating or advising others to practice evasion of taxes!

(To be continued)

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