Huzaima Bukhari and Dr Ikramul Haq
It is now well-established that there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when a major shift was made by introducing presumptive taxes (indirect taxes in the garb of income tax) and VAT-type sales tax. Since 1991, the burden of taxes on the poor has increased by 38 per cent whereas on the rich it stands reduced by 18 per cent.
The lack of judicious balance between direct and indirect taxes has pushed an overwhelming majority of Pakistanis towards the poverty line. Their number is now more than 60 million. The Federal Board of Revenue (FBR) claims that the share of direct taxes is increased to 40%. It is incorrect. From income tax collection, if presumptive taxes are excluded, its share in total collection will hardly be 25% or even less. It confirms that present taxation system is highly regressive. The international lenders are least pushed about the inequitable character of our tax system, under which the burden of taxes is less on the rich and more on the poor. They are merely interested in getting their money back with interest and rightly so.
Over the period of time, our tax system has become rotten, oppressive, unjust and target-oriented. There is a dire need for discussing the philosophical framework, principles of equity and justice, which should be the main concern of our tax policy; not simply achieving of targets. Our fiscal managers want to meet budgetary targets through oppressive taxes, shifting incidence on the poorer segments of society and exempting the rich. We must enforce income tax and reduce progressive taxes. Undoubtedly, 17% sales tax (on many items over 35%, e.g., on some petroleum products) has proved inflationary and its impact on business and industry has proved destructive.
The following amendments are also urgently needed and should be considered in the forthcoming budget:
In Pakistan, under the repealed Income Tax Ordinance, 1979 (until assessment year 1995-1996), three specific characteristics were the hallmarks of advance tax, viz.
1. Advance tax was paid by the taxpayer on the basis of last declared/assessed/estimated income for that assessment year;
2. Credit for any advance tax collected for an assessment year was accounted for in that year and not the year of collection; and 3.6% mark-up on the amount retained as advance tax was paid to the taxpayer at the time of assessment thereby compensating his cost of funds or opportunity cost for the period his money remained with the government.
The above should be revived by suitably amending section 147 of the Income Tax Ordinance, 2001.
Presently, refunds of billions are stuck. This issue needs a systemic analysis. The refunds should be as expeditiously as demands are collected. The following should be made effective and mandatory through statutory provisions so that no one can exercise discretionary powers:
* Income and sales tax refunds should be issued without application within 90 days of their becoming due.
* There should be automatic payment of compensation if any refund is issued after 90 days.
* The officer responsible for incurring compensation should be made liable to pay the amount from his salary.
* There should be zero tax regime for exporters to avoid refund accumulation.
The recovery should be after the decision of the Tribunal and not before that. Banks accounts should not be attached without prior notice to the taxpayer and after seeking approval in writing of Commissioner in the light of reply submitted by the taxpayer.
Independent Tax Justice System
In developing economies like Pakistan, one of the biggest problems is 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.
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 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 remove 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.
To make Tribunal a truly independent forum, it is imperative to:
1. Replace existing 4-tier appeal system under the tax laws—direct and indirect—with two-tier system. The Customs Tribunal and Appellate Tribunal Inland Revenue should be merged into singular National Tax Tribunal. Like the Services Tribunal this too should work under direct supervision of the Supreme Court. Appeals against its decisions should go directly to the Supreme Court.
2. After merging Appellate Tribunal Inland Revenue and Customs Tribunal, the new entity should be renamed as National Tax Tribunal. Appeals against the 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.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)
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