Enigma of Tax Litigation and FBR’s failure

Enigma of Tax Litigation and FBR’s failure

The labyrinthine world of tax litigation in Pakistan has long been a subject of acute professional scrutiny and debate. The introduction of the Tax Laws (Amendment) Bill, 2024, by the Pakistani Parliament ostensibly seeks to expedite the resolution of a staggering Rs 2.7 trillion currently mired in the quagmire of income tax tribunals and higher courts.

This initiative surfaces against a backdrop where the Federal Board of Revenue (FBR) appears embroiled in a continual cycle of deferral and diversion, ostensibly to sidestep more profound and far-reaching reforms within the organization.

The quantum of litigation that the FBR claims to be entangled with is a contentious issue. Many tax professionals argue that the proclaimed figures are grossly inflated, largely speculative, and not anchored in tangible data. Indeed, there is evidence suggesting inconsistency and perhaps even duplicity in the FBR’s reporting. For instance, the FBR has been known to release varying figures regarding the extent of pending litigation and purportedly frozen revenue, hinting at possible double counting and statistical manipulation.

A typical example of the convolution inherent in these disputes can be observed in the routine operations at the FBR. Suppose a tax assessing officer issues an aggressive and highly pitched assessment order, resulting in a tax demand of Rs 700 million. Concurrently, if the taxpayer is due a refund of Rs 200 million, this amount is adjusted by the tax officer, leaving a net demand of Rs 500 million. When this taxpayer appeals to the Commissioner (Appeals), who, upon reviewing the merits of the case, might annul the initial tax demand. This cancellation reinstates the taxpayer’s Rs 200 million refund, which then enters a bureaucratic limbo, as the appeal effect orders are notoriously delayed. This delay is compounded further if the FBR contests the Commissioner’s decision at the Tribunal level, further entangling the Rs 500 million in bureaucratic red tape.

Beyond these tangled litigations, another pressing concern is the FBR’s chronic inefficiency in processing and issuing tax refunds. Despite statutory mandates specifying the timeframe for processing such refunds—60 days for income tax and 45 days for sales tax under the respective laws—the reality is starkly different. The FBR’s own performance report from 2023 suggests that the average processing time for income tax refunds is an alarming 459 days. According to reliable estimates from tax professionals in 2023, unprocessed refunds at the FBR amounted to approximately Rs 223 billion for income tax and Rs 185 billion for sales tax, with additional substantial amounts pending at the field level.

Given these entrenched procedural delays and the vast sums ostensibly ‘stuck’ in litigation, the Tax Laws (Amendment) Bill, 2024, has emerged as a crucial legislative proposal. However, it raises significant concerns about whether the FBR has adequately considered the necessary manpower and infrastructure to establish additional tribunal benches or the transparent recruitment of tribunal members. At the Karachi Appellate Tribunal Inland Revenue, for example, the shortage of both courtrooms and accountant members starkly illustrates the existing resource constraints, which are echoed in other cities as well.

Moreover, certain provisions of the proposed bill, such as subsection 2 of section 130, appear to override existing laws, including the Federal Public Service Commission Ordinance, 1977. This could potentially foster perceptions of non-transparency and favoritism in the appointment processes within the FBR, undermining the integrity of the tax adjudication system.

Furthermore, the proposed amendments to section 133, granting the executive branch of the government powers that could interfere with the judiciary’s independence, are particularly controversial. This potential overreach contradicts fundamental constitutional principles, as seen in the historical interpretation of similar issues by the Supreme Court of Pakistan.

Critically, the consultation process—or the apparent lack thereof—with key stakeholders such as tax consultants and taxpayers before drafting the Bill has been another point of contention. The fear among these groups is that, rather than streamlining and expediting the tax appeal process, the Bill might exacerbate the existing chaos.

In conclusion, while the Tax Laws (Amendment) Bill, 2024, aims to address the monumental backlog of tax litigation, it is imperative that it be thoroughly scrutinized and debated. Questions about the true scale of litigation, the veracity of FBR’s reported figures, the efficacy of the Alternate Dispute Resolution mechanisms, and the general oversight of appeal processes must be addressed. Only through such rigorous examination and adjustment can the Bill hope to truly refine and enhance the tax litigation landscape in Pakistan.