Major Reasons

for

Increased Tax Litigation

A fresh spate of litigation cases has been seen in the recent past against the actions of the Directorate General of Intelligence and Investigation (Inland Revenue), which was established during the tax year 2012 to take stringent action against tax evasion and money laundering. The Directorate General initiated prosecution against many tax-evaders on the basis of definite information of tax evasion in the form of records resumed from the business premises under the provisions of tax laws. However, the Lahore High Court (LHC) held that determination of civil liability is prerequisite for initiation of prosecution. Hundreds of such cases are pending before the Supreme Court of Pakistan (SCP) for final verdict. Recently, the LHC declared the powers and functions of the Directorate General illegal and against the Constitution on the ground that the establishment of the Directorate General was not approved by the federal government. Many cases initiated by the Directorate General are pending in the HCs on this issue. Other reasons for the increased tax litigation and huge pendency of cases at the appellate fora and at various courts could be:

Tax authorities
As Pakistan’s economy is largely informal, it is difficult for the tax authorities to trace money trail and to establish definite information concerning tax evasion. Most of the assessment orders are passed ex parte and without bringing on record definite information concerning tax evasion. Almost all of such assessment orders are being challenged in the appellate fora and are being contested up to the courts.

The assessment orders especially in the cases hitting statutory time limitation are being passed without affording sufficient opportunity of hearing. All such assessment orders are being challenged in the appellate fora and the courts on the ground of non-affording opportunity of hearing which against natural justice and violate the fundamental right. The SCP held that no one can be punished unheard.

The tax authorities repeatedly pass assessment orders on the legal provisions, which are declared ultra vires the Constitution by the courts.

Important cases involving considerable tax revenue are not being pursued actively and on priority basis, thus depriving the national exchequer of tax revenue for years.

Taxpayers
The taxpayers file appeals in the appellate fora and petitions in the courts on the issues which are either already decided by the courts or which are frivolous in nature.

The taxpayers do not always cooperate with the tax authorities by providing records during tax audits. Tax audits concluded ex parte with huge tax demands are always challenged by the taxpayers.
The taxpayers do not attend hearing intentionally and when assessment order or any other order is passed, they challenge such orders on the ground that they were not provided opportunity of hearing — though they produce relevant records before the appellate fora.

There is an increasing trend among the taxpayers to file petitions in the courts rather to participate in the proceedings and to seek relief through the appellate fora. Notices of initiation of tax proceedings and of recovery of tax are being frequently challenged in the courts to seek stay of proceedings and recovery instead to participate in the proceedings and to pursue the matter with the tax authorities.

Appellate fora
The Commissioner (Appeals) and the Tribunals do not always follow the deadline prescribed in the tax legislation for making decisions and the litigation cases continue piling up.
The Commissioner (Appeals) and the Tribunals also entertain appeals, which are beyond their jurisdiction.
The offices of the Commissioner (Appeals) and the number of Tribunals are not sufficient to deal with large number of litigation cases.

There is excessive workload on judges due to limited number of judges in the courts. With the current pendency of 38,342 cases in the SCP and 295,745 cases in the HCs, there is an average load of 2,396 cases per judge in the SCP and of 2,444 per judge in the HCs.

The courts observe the summer and winter holidays in addition to the official national holidays. This practice coupled with strikes of lawyers reduces number of working days. Otherwise the judges will be in a position to decide more cases that will result in significant reduction of pendency.

The HCs liberally grant interim relief by way of stay of proceedings or by way of demand suits. This practice encourages taxpayers to file more petitions.

The courts seldom impose costs on the parties in case of appeals and petitions involving issues of frivolous nature.

There is no mechanism at the level of courts concerning segregation of important cases, which remain pending for years. For example, the case of Taj International (Pvt.) Ltd. etc. V The Federal Board of Revenue, etc. wherein the LHC gave decision in 2013 that determination of civil liability is prerequisite for lodging prosecution proceedings against the tax fraudsters is still pending in the SCP. There were 340 large taxpayers in this case.

The quality of representation before the courts is not satisfactory due to lack of expertise among the public prosecutors (legal advisors) in the taxation matters and also because fee structure for them is not competitive vis-à-vis private sector.

Conclusion
Tax litigation is increasing and the pendency of the cases at the appellate fora and the courts is considerably high. It takes many years for cases to be finally decided by the SCP. In order to reduce tax litigation and to ensure speedy and affordable justice to the taxpayers, the following measures are being suggested.

Standardizing business practices so that the tax authorities can seek guidance from these standards while finalizing assessments;
improving quality of assessment work of the tax authorities by providing them periodic training of tax laws;

reviewing the assessment work of the tax authorities and assigning the audit work to the tax officers and officials who are competent and skilled in the area of auditing;

simplifying the existing tax laws and removing anomalies and inconsistencies;
increasing the number of courts as well as the number of judges;

simplifying courts’ procedure for disposal of cases involving same issue together, including technical member having experience of tax matters in the benches of the courts;

strengthening ADR mechanism;
making extended use of technology for better management of litigation cases;

imposing costs on the parties instituting appeals or petitions on tax issues of frivolous nature; and
improving skills, knowledge and expertise of the legal advisors through trainings and encouraging them to participate in the seminars, workshops and writing papers.

In addition to above, there is a need to restructure the entire tax appellate system.

The author is serving as Additional Commissioner Inland Revenue at Federal Board of Revenue, Pakistan. He can be contacted at bilal.hassan@fbr.gov.pk