Malice Towards None & All: Fixing The Tax Appellate System

It is imperative that all judicial and quasi-judicial authorities working in the tax appellate system should be merged into a National Tax Tribunal, and regulated or supervised by Supreme Court of Pakistan as is the case with the Federal Service Tribunal.

Malice Towards None & All: Fixing The Tax Appellate System

In any society, the administration and dispensation of justice should be the top most priority. A society without a sound, reliable and speedy judicial system, not ensuring effective dispensation of justice, is destined for doom. The administration and dispensation of justice under various tax laws in Pakistan is in need of serious attention. There is an urgent need to ensure “justice,” “rule of law,” “fairness,” “equity” and independence of appellate authorities from the control of administration.

The present tax dispute resolution system, based on conventional appeal and review system under various tax statutes, is on the verge of collapse. Everybody is totally dissatisfied with it. Those imparting justice complain about the lack of facilities and huge number of cases, the complainants crying for early orders but are forced to wait for years, and the revenue authorities are persistently concerned about the blockade of colossal amounts of money in the litigation process.

The present pathetic state of tax administration can be measured from the fact that every year about 85,000 writ petitions/appeals/references are filed in Pakistan against tax laws and amendments made by the National Assembly, and orders and actions of the tax authorities. Litigants have to wait for years to obtain orders. On the contrary, in civilized countries, only a few cases go for litigation to higher courts. A case in point is the United Kingdom, where the number of income tax filers is around 35 million out of a population of 67.8 million, whereas appeals reaching the Lord Chancellor in a year are hardly 30. This confirms the tremendous public satisfaction with the credibility of system and good governance by fiscal administration.

In Pakistan, ‘Active Taxpayers Lists’ of income tax and sales tax (updated every Monday on FBR’s website), as on October 23, 2023 showed income tax filers at 4,926,527 (less than 5 million and only 45% paid any tax with return) out of a population of 242 million and 202,418 sale tax registered parsons (only about 34,000 paid any tax and the rest filed NIL/NULL returns). However, the number of appeals and references filed annually is in thousands.

Appellate authorities, as a matter of law and principle, should be independent in the true sense of the word. The Supreme Court of Pakistan has elaborated this principle in Government of Baluchistan v Azizullah Memon PLD 1993 SC 31 by holding that “separation of judiciary from executive is the cornerstone of independence of judiciary.”

The right of access to justice to all is a well-recognized inviolable right enshrined in Article 10A the Constitution of Pakistan which says: “For the determination of his civil rights and obligations or in any criminal charge against him a person shall be entitled to a fair trial and due process.” The due process amongst others includes “the right to be treated according to law, the right to have a fair and proper trial and right to have an impartial court or tribunal. Justice therefore can only be done if there is an independent judiciary which shall be separate from executive and not at its mercy or depend on it”— Abdul Majid v Abdul Ghafoor PLD 1982 SC 146.

It is a matter of record that none of the Government in Pakistan, military or civilian, has ever followed directions of the apex court in making tax appellate system independent of the Executive. In the given Pakistani milieu, it is imperative that all judicial and quasi-judicial authorities working in the tax appellate system should be merged into National Tax Tribunal and regulated or supervised by Supreme Court of Pakistan as is the case with Federal Service Tribunal. This is the only way to ensure independence of tax justice system in its true substance and constitutional requirement as per Article 203 of the Constitution.

In developing economies like Pakistan, one of the biggest problems is higher tax rates on a relatively small tax base and the reluctance of ordinary people to file tax returns and thus submit themselves to scrutiny of their affairs by the tax administration. 

Tax codes of Pakistan—Income Tax Ordinance, 2001, Sales Tax Act, 1990, Federal Excise Act, 2005 and Customs Act, 1969—provide grievance redressal mechanisms for taxpayers against the orders of tax officials and appellate authorities. The right of appeal against orders of the first appellate authority [Commissioner of Appeals or Collector of Adjudication] is available to the tax administration as well, because it is not uncommon that tax authorities are aggrieved at the relief granted by the appellate authorities to taxpayers, and a higher appellate forum to examine the correctness of relief so given by an appellate authority is justified.

The appellate mechanism under the tax codes provides right to appeal before the Commissioner of Appeals/Collector Adjudication in case a taxpayer is aggrieved by orders passed by the revenue authorities. In case the taxpayer or even the Commissioner or Collector is aggrieved by the decision of the Commissioner (Appeals)/Collector (Adjudication), the aggrieved party can carry the matter further in appeal before the Appellate Tribunal Inland Revenue (ATIR) or Customs Appellate Tribunal as the case may be. Income Tax Tribunal in the subcontinent was established on 25th January, 1941. On 28th October 2009 it was renamed as the Appellate Tribunal Inland Revenue (ATIR) through a Presidential Ordinance in Pakistan in the wake of amalgamation of income tax and sales tax into one unified group.  ATIR is not only an appellate forum for the taxpayers, but it is an equally important forum for FBR aggrieved by any relief given to the taxpayer by Commissioner (Appeals), who is incidentally a member of the Inland Revenue Service.

In developing economies like Pakistan, one of the biggest problems is higher tax rates on a relatively small tax base and the 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 professes faith in the effectiveness of legal remedies against an unjust tax levy or unjust action of the taxation authorities, he would be more likely to be truthful to the taxation authorities, and willing to accept a reasonable levy of tax. 

The degree of taxpayer satisfaction would consequently increase which, in turn, is a sine qua non for better voluntary compliance resulting in greater resource mobilization. While on the surface a tax judiciary inherently deals with the involuntary collections enforced by the tax administration, an efficient tax judiciary actually creates a conducive atmosphere for better voluntary compliance by taxpayers and, thus, for greater resource mobilization by the State. A tax administration which disposes of appeals promptly and speedily reaches a fair and final settlement is itself entitled to be classified as a tax incentive.

Officers from FBR having little or no experience of appellate work should not be made part of ATIR.  The quality of pure judicial work and understanding of matters required at Tribunal level is compromised by appointment of such officers. 

For any 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 a pending litigation in relation to a particular tax levy, there is a natural, and quite understandable, desire on the taxpayer’s part not to pay the disputed amount during pendency of litigation. An efficient tax judiciary resolves disputes quickly, quashes demands which are not legally sustainable, and thus segregates serious tax demands from frivolous tax demands, as also giving finality to legitimate tax demands. This in turn ensures that taxpayers 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 genuine tax demands by the State, which, once again, results in greater resource mobilization. An effective tax judiciary does not only settle tax dispute between a taxpayer and the State, but it also lays down principles on the basis of such resolved disputes which provide guidance for the future. These decisions, which have precedence value in the sense that same decision has to be taken on materially identical facts, also have normative effect thus helping in correcting the judicial course. This way, an effective tax judiciary also contributes to smooth functioning of the tax machinery.

The powers of the ATIR are exercised by benches comprising Judicial and Accountant Members. 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, the 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 the Finance Bill 2012 reduced the condition from 5 to 3 years. The amendments made in 2007, 2010 and 2012 were highly undesirable.

Officers from FBR having little or no experience of appellate work should not be made part of ATIR.  The quality of pure judicial work and understanding of matters required at Tribunal level is compromised by appointment of such officers. Their induction should also be through Public Service Commission of Pakistan. In order to make Tribunals a truly independent forum, it is even imperative to recruit Chartered Accountants as Accountant Members through Federal Public Service Commission. Officers from FBR coming as Accountant Members should possess a minimum of 20 years of experience, having served at least two years as Commissioner of Appeals.

The following points should seriously be debated for effective and efficient resolution of tax dispute:

An existing 4-tier appeal system under the tax laws—direct and indirect—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.

The government has borrowed millions of dollars from the World Bank and other donors for tax reforms, but no effort has so far been made to revamp the ailing tax appellate system for rapid disposal of tax disputes and reduction in unnecessary litigation.

The first appeal under the prevalent 4-tier appellate system lies before the Commissioner of Appeals/Collector Appeals working under the administrative control of Federal Board of Revenue (FBR). It is a travesty of justice. An aggrieved taxpayer is to seek relief from the departmental authorities.

The FBR-appointed and controlled appellate authorities act as helping hands for their brothers in service for collection of irrational and harsh demands to meet budgetary targets. The Annual Confidential Reports (ACRs)—vital for further promotion in the service—of these “appellate” (sic) authorities are written by their bosses in FBR. Due to this constraint, they cannot impart justice even if they want to do so. The first-tier of appeal in view of this fact alone should be abolished immediately.

The second tier i.e. Tax Appellate Tribunal (one dealing with Customs and second with all other indirect and direct taxes) is under the Federal Government [Ministry of Law] which is against the principle of "independence of judiciary" [highlighted in Para 5, page 12 of National Judicial Policy 2009].

Working as single, double or full (in special cases) benches, members are chosen from the legal fraternity or judicial services (Judicial Member) and the tax department (Accountant Member or Technical Member).

Accountant/Technical Members work with heavy heart as they are mostly sent against their consent. They are the “dumped ones”—not liked by the Department hence condemned to go on deputation to Tribunals. They do, however, get double salary, courtesy the FBR that is bent upon wasting billions of borrowed rupees on perks and perquisites rather than for any productive purposes. On the contrary, salary of a Judicial Member is even lower than that of a civil judge. 

Tribunal is the final fact-finding authority and no further appeal lies to the High Court unless question of interpretation of law is required. Such an important forum dealing with federal statutes is financially dependent on Federal Government.

The Customs Tribunal and Appellate Tribunal Inland Revenue should be merged into singular National Tax Tribunal. Like the Services Tribunal this too should function under direct supervision of the Supreme Court. Appeals against its decisions should go directly to the Supreme Court.

After merging Appellate Tribunal Inland Revenue and Customs Tribunal, the new entity should be renamed as National Tax Tribunal (a draft is available as Appendix E, page 125 in Towards Flat, Low-rate, Broad and Predictable Taxes, PRIME Institute, November 2020). Appeals against orders of the Tribunal should lie with the Supreme Court alone. Members for Tax Appellate Tribunal should be recruited in the same manner as judges of High Court. 

The pay, perquisites and salary structure of Chairman, members and staff should be at par with the Judge of a High Court, Sessions Judge and staff of the lower judiciary respectively.

Tax codes are federal statutes but references against orders of the Tribunal go to the High Court that operates within provincial jurisdictions. A person filing reference in Lahore High Court may get a different order on an identical issue filed in Sindh High Court. On identical issues, there is no certainty of uniform orders at the level of High Courts for example in recent cases related to section 4C and 7E of the Income Tax Ordinance, 2001.

In order to make Tribunals a truly independent forum, it is even imperative to recruit Chartered Accountants as Accountant Members through Federal Public Service Commission. Officers from FBR coming as Accountant Members should possess a minimum of 20 years of experience, having served at least two years as Commissioner of Appeals.

It is hence advisable to place Tax Appellate Tribunal directly under the Supreme Court. Presently, thousands of tax references are lying in different High Courts of the country for years, even decades. This forum having advisory jurisdiction takes years and years for taxpayers to get the first hearing—what to talk of final decision that may take more than ten years as normal routine.

The final court of appeal—as for all other matters—is the Supreme Court that ends the tumultuous journey of taxpayer or government on any disputed legal issue requiring interpretation of law. If National Tax Tribunal is established, there will be drastic reduction in litigation.   

Without any iota of doubt, the four-tier appellate tax structure discussed above has become outdated and ineffective—fraught with innumerable encumbrances. Replacement of the entire system as suggested above—in line with prevailing judicial remedies in other departments of the government—is the only way out. 

To quote an example, one can easily refer to the Civil Services Act of 1973 under which government employees can approach the Services Tribunal to settle all disputes pertaining to their service matters. Appeal against any order of the Services Tribunal lies directly to the Supreme Court.  This should also be the case for tax matters. First appeal should lie with Tribunal and for final adjudication, before the Supreme Court. If 2-tier tax appellate system is implemented, the following benefits and advantages will emerge.

Existing Tax Tribunals after their conversion into National Tax Tribunal and selection of members by the Supreme Court will be better equipped to give quality and speedy decisions.

The High Courts would be relieved of the continuously rising number of tax cases that remain undecided for many years because of the huge backlog of other civil/criminal cases and non-availability of specialized tax judges. Very few tax cases would go to the apex court where leave to appeal is granted in which important issues of legal interpretation are involved.

The tax reforms must start from making tax tribunals (inland revenues and customs) truly independent and effective judicial forums not working under the Ministry of Law. The tax appellate system—like all other judicial institutions—should be independent in the true sense of the word.

The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)