Hoodwinking Dar – I

The Federal Board of Revenue (FBR) has managed to hoodwink the government of Nawaz Sharif by including in the Finance Act 2013 a number of unconstitutional provisions – in many cases the courts have already admitted writ petitions under Article 199 of the Constitution. The most serious violation of the supreme law of the land is amendment in section 130 of the Income Tax Ordinance, 2001 providing for appointment of department officials as ‘judicial members’ in the Appellate Tribunal Inland Revenue (ATIR).

Ishaq Dar, who is self-claimed expert of finance and economics, at the time of giving nod to the tax proposals, could not even understand what the tax babus (bureaucrats) of FBR were up to. The Cabinet and Parliament that just acted as rubber stamp for passing the Finance Bill 2013 were also guilty of committing violation of Constitution at the hands of FBR’s stalwarts (sic). They used elected representatives as an instrument to destroy the independence of a judicial organ of the State and committed a grave violation of the instructions of the superior court in utter disregard of Article 189 and 201 of the Constitution of Pakistan.

FBR, cleverly taking benefit of the elected members’ ignorance of tax laws, got inserted in the Finance Act 2013 [earlier in 2012 as well], a number of amendments that are bound to cripple the already ineffective tax appellate system – appointment of tax officials as Judicial Members is aimed at converting ATIR into a ‘camp office’ of FBR. The officialdom of FBR wants affirmation of arbitrary and unlawful orders passed by taxation officers to meet budgetary targets. All tax bars agitated against this amendment, yet it was approved by Parliament.

Throughout its history of 72 years, the qualification for appointment as Judicial Member has been the same as for the appointment of a High Court Judge, and only well experienced and competent people from the legal profession and judiciary have to be selected-though unfortunately many political appointments were also made of mediocre persons. For Accountant Members, the Ministry of Law selects people nominated by FBR. But in 2013, FBR destroyed this legacy of over 70 years.

FBR wants both Accountant and Judicial Members from Inland Revenue Service – this is patently against 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.” Thus a challenge to the new amendment by All Pakistan Tax Bar before the Supreme Court is necessary. One wonders why there is still no action by this august body.

Historically, Account Members, coming from FBR, were officers in Grade 21 (Chief Commissioners) or Commissioners in Grade 20 with 5 years’ experience. The Finance Act 2012 reduced this condition to 3 years’ experience. This facilitated induction of junior officers who could be influenced by FBR in the hope of better postings on their return to the parent department. But the amendment by Finance Act 2013 to have Judicial Members in Grade 20 [Finance Bill 2013 proposed Grade 18 officers!] from FBR with law graduation is totally unlawful and shameful. If such inductions are made it would further destroy the already ailing 4-tier tax justice system [see ‘Need for National Tax Court’, Business Recorder, May 6-7, 2011].

The setting up of the Tax Tribunal in 1941 brought about a paradigm shift in the system of redressal of grievance. 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. It is obvious that FBR views independence of Tribunal with displeasure.

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 regular division benches, comprising 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. FBR wants all input from tax officers by virtue of amendment made in section 130 of the Income Tax Ordinance, 2001 through Finance Act 2013.

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. Then the Finance Act 2012 reduced the condition of 5 years to 3 years. The worst amendment came through Finance Act 2013 providing for appointment of IRS officers as Judicial Members. Adverse amendments made in respect of ATIR through Finance Acts of 2007, 2010, 2012 and 2013 are highly undesirable, aimed at crippling a prestigious institution have a cherished history of over seven decades. The officers from FBR with little experience or no experience of appellate work – having biased attitude towards taxpayers – should never be permitted to be part of ATIR as Accountant Members, what to talk of becoming Judicial Members, which is like destroying the very basis of this institution and denying justice to taxpayers.

In India, only 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 Chartered Accountants, 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 insertion of clause (c) in section 130(3) by Finance Act 2013, insertions of words in section 130(5) “and, except in special circumstances, the person appointed should be a judicial member” and amendment through Finance Act 2012 to lower the service period requirement of Commissioner to be Member of the Tribunal to three years [section 130(4)(ii) are against the principle of independence of judiciary.

The original position of law that only a judicial member can be Chairman of the Tribunal must be restored. In fact, the ATIR should not be under the control of Ministry of law and should be placed directly under the judiciary. It is imperative to make the ATIR a truly independent and effective judicial forum. No person from Inland Revenue Service should be part of ATIR. Accountant Members should be Chartered Accountants (CAs) and/or Cost and Management Accountants (CMAs), having tax experience of at least ten years, recruited through written examination and interview. Judicial Members should be people of integrity and competence from legal fraternity having qualifications provided in Constitution to become a Judge of High Court. This is necessary to make the Tribunal an independent appellate body [it should be renamed as National Tax Court].

The following points merit consideration for converting Tax Tribunal into National Tax Court for speedy settlement of tax disputes:

1. 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.

2. The first appeal under the prevalent 4-tier appellate system lies before the Commissioner of Appeals/Collector Appeals working under the administrative control of FBR. This is mockery of justice and against the principle of independence of judiciary.

3. The second tier of appeals is Tribunal (Customs Tribunal and Inland Tribunal) working under the Federal Government [Ministry of Law], which is against the principle of “separation of judiciary from administration”. 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 tax statutes is financially dependent on the Federal Government.

The Customs Tribunal and Appellate Tribunal Inland Revenue should be merged into single National Tax Court. This Court must be under direct superintendence of Supreme Court like that of Services Tribunal. Appeals against its decisions should go directly to the Supreme Court.

4. Members for Tax National Tax Court should be recruited in the same manner as judges of High Court.

5. The pay, perquisites and salary structure of Chairperson, members and staff of National Tax Court should be the same as that of a Judge of a High Court Judge and their staff.

6. Tax codes are federal statutes but references against the orders of the Tribunal go the High Court that work within the provinces. 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. It is advisable to place Tax National Tax Court directly under the Supreme Court. Presently thousands of tax references are lying pending in the High Courts of the country. It takes taxpayers years and years at this forum to get the first hearing – what to talk of final decision that may take more than ten years as normal routine.

7. The final court of appeal – as for all other matters – is the Supreme Court that ends the tumultuous journey of taxpayer of government on any disputed legal issue requiring interpretation of law. If National Tax Court 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, 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 Service 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. The first appeal should be directly to National Tax Court, with Inter Court Appeal (ICA) option, and then final adjudication before the Supreme Court. If this 2-tier tax appellate system is implemented, the following benefits and advantages will be obtained:

— Appeal Commissioners will be relieved and made available for field work.

— Existing tax tribunals after their conversion into National Tax Court and selection of members as per provisions of the Constitution will be better equipped to render 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 pendency of other civil and criminal cases and non-availability of specialised tax judges.

— If the above reforms are implemented, there will be very few tax cases going to the apex court as only those will be heard where leave to appeal is granted in which important issues of legal interpretations are involved.

Tax Appellate system – like all other judicial institutions – should be independent in the true sense of the word. The apex court of Pakistan has elaborated this principle in Government of Balochistan v Azizullah Memon PLD 1993 SC 31 by holding that “separation of judiciary from executive is the cornerstone of independence of judiciary”. This should be equally applicable to tax appellate system.

(To be continued tomorrow)