Tax Structure in Pakistan
Tax structure in Pakistan is a bit complicated with the country having different demographic regions and ever-changing political snapshots.
Tax Laws History Income tax law (Act of 1922) inherited by our country remained on the statute books for 32 years and was replaced by an Ordinance promulgated without much of homework.
Components of Tax Structure
- Tax Laws
- Tax Administration
- Tax Judicial System
Tax Laws History – Tax Structure in Pakistan
India also inherited the same law and replaced it with a parliamentary enactment after 14 years. This law was based on 12th report of Law Commission and an Enquiry Committee.
When the 1979 Ordinance had somewhat settled down in 22 years it was thoughtlessly replaced with another Ordinance in 2001 without any homework or consultation whatsoever. The story of other taxation laws is no different
Tax Laws Problems in Pakistan
Amendments in federal tax laws originate from FBR and go through the parliamentary process without any proper examination. The Finance Bill is exposed to the public but comments which do not suit the FBR are invariably ignored.
There are 3 stakeholders to taxation laws namely the taxpayer, the tax collector and the intermediaries.
If any one of the intermediaries is virtually entrusted with making and amending tax laws it will result in unbalanced and harsh laws.
Tax Laws – the Solution
There is thus need for formation of an independent body to frame and amend tax laws after getting feedback from all the 3 stakeholders:
- carrying out extensive research;
- benefiting from the experience of other countries similarly placed; and
- original intellectual enterprise for necessary local adjustments.
This body should submit its report and the draft law or its amendment (sufficiently before the Budget) to the Standing Committee of Senate for Finance, Revenue, Economic Affairs, Statistics and Privatization which should be debated by the Parliament before enactment.
The body should be created through an enactment giving it necessary powers. It should comprise of legal experts and fiscal economists. It should liaison with the Ministry of Planning, Development & Reform and also have access to its econometric models.
The body thus formed should also be entrusted with overseeing the performance of FBR regarding meeting its targets and other areas of operation. It should submit an independent and objective quarterly report on the above to the Senate Committee including actionable remedial recommendations.
Tax Administration in Pakistan
Federal tax administration is entrusted to FBR. Due to years of poor oversight this body of some 32,000 people has become sick and perhaps incorrigible. Induction of professionals at key positions could provide the cure.
In case the cure does not work serious consideration should be given to replacing it with a new body which could be entrusted not only with federal but provincial and local taxes as well.
Developing Human Resource for FBR
To develop human resource required in the tax administration and to practice tax laws there is a need for establishing a Chartered Institute of Taxation. This body should regulate the examination, training and professional conduct of its members.
Some modification to the universal self-assessment procedures are required to avoid its misuse. A desk audit of the returns filed need to be carried out to check apparent incompleteness and claim of tax payments.
An assessment order after the desk audit should be issued which should be subject to amendment or rectification after discovery of facts through collation.
All taxpayers should be subjected to audit on a cyclical basis once in 3 to 5 years depending on the size and nature of business. Audit of corporate taxpayers should be assigned to firms of chartered accountants
Federal Tax Ombudsman (FTO)
Federal Tax Ombudsman (FTO) was established to check maladministration by functionaries administering tax laws. As originally done retired judge of a high court need to be appointed as the FTO. Advisors of the FTO who actually conduct investigation should never be persons who have served the FBR.
Representation to President by the Revenue Division against the recommendations of the FTO need to be properly processed before orders by the President. Through an erroneous enactment the FTO has been rendered powerless and is at present handling tax refund cases only.
After the amendment no court or authority shall assume jurisdiction in respect of any matter pending with or decided by an ombudsman. Firstly no court should have been debarred from assuming jurisdiction. Secondly there is no justification to debar even authorities to act after a decision by an ombudsman.
First appellate forum against orders by tax functionaries is a Commissioner who is subordinate to a member of FBR. This forum is thus more of an illusory nature. At times it has proven to be more harmful for a taxpayer rather providing a relief. An example in the case is silence on applications for stay of tax demand.
Tax Judicial System in Pakistan
Second appellate forum is also substantially manned by officials on deputation from FBR. Such officers quite naturally have a bent of mind to protect revenue rather than to provide a bona-fide relief to taxpayers.
The second appellate forum is under the administrative control of Ministry of Law which is under strong influence of FBR. There is no appeal against orders of the second appellate forum. A reference lies against orders only on questions of law and not facts. Heavily delayed response to these references are more of an academic nature.
The first appellate forum need to be abolished and the first appeal should lie before a Tribunal.
No member of the Tribunal should be selected from Revenue Division. A Division Bench of the Tribunal should ordinarily comprise of two judicial members.
In case an appeal requires accounting skill it should be placed before a Bench comprising of a Judicial and an Accountant Member. Accountant members should only be members of ICAP or ICMAP with requisite experience.
In place of reference against the orders of the Tribunal an appeal both on questions of facts and law should lie before the Supreme Court. To provide independence to the Tribunal it should be placed under the administrative control of the Supreme Court.
An independent Advance Ruling Authority (ARA) is also necessary. It should be created through a separate enactment. ARA may be headed by a retired judge of the Supreme Court and comprise of 3 members being retired judges of the High Court.
Decisions of ARA should be binding on both the applicant and FBR. Appeal against decision of ARA should directly lie with the Supreme Court by either parties. In India the appeal lies first to High Court then Supreme Court which lengthens the process and defeats the purpose.