A VIABLE taxation system is essential for a vibrant economy, particularly in the opening horizons of world trade. Present tax laws of different countries are, however, not mutually compatible. The fiscal system growing with the progress of socio-economic conditions of a society is a firm foundation for sustained development.
In underdeveloped countries, there is a wide gap between the measures of taxation and social requirements. The major role, to keep pace with the changing times, has to be played by representative institutions by updating relevant statutes. The courts, too, play a vital role in the development of tax laws.
The development in taxation has a positive correlation with social development. The profound impact of taxation on socio-economic development may be appreciated from the history of Value Added Tax (VAT). In the case of European Union, VAT had to replace Custom Duty because borders were losing significance in the Union. Value addition is evenly taxed in the member states and tax on value loss is refunded to the traders.
Thus even field and equal prices have successfully evolved a common market. On the other hand, the former Soviet Union also adopted VAT, but no compensation was paid for value loss – resulting into bankruptcies and shrinking market. We saw how tax measures assumed the role of steering wheel of history.
In Pakistan, tax law design and drafting as well as tax law administration have not kept pace with time. Representative institutions have not contributed much in fiscal policies. Income tax has been administered through ordinances over the last twenty-five years.
Recurring amendments in the Sales Tax Act, 1990, have made the tax procedure too cumbersome to run a business smoothly. A large number of tax cases are pending adjudication in Tax Tribunals and courts. Decisions of such cases after a long time dilute justice and hamper business activity. A need for judicial reforms, particularly, in tax matters, can’t be denied.
The present courts are administering criminal law and adjudicating civil cases, requiring application of defined law to past events. On the other hand, tax laws have to reckon with indefinite future tendencies as well. Tax laws are increasingly subjected to a kind of “economic” interpretation which is not applicable to other areas of law. Adherence to literal interpretation may deviate from practical realities.
Apprehension of exercise of subjective application of law prompted preference for the principle of literal interpretation. The principles of purposive interpretation in the context of overall design of a tax, too, may be equally objective.
We may benefit from the experience of European Court of Justice supplemented by the Court of First Instance since 1989. These courts are functioning in the vanguard of socio-economic changes and deciding tax matters before it is too late. The brilliant success of the Union’s economy owes a lot to the Court of Justice. The Court has preceded the common constitution of the Union.
We inherited the judicial institutions of pre-partition India. After adoption of federal constitutions, need arose for courts to deal with federal subjects. The High Courts have to deal with subjects assigned to provinces.
Litigation pertaining to federal subjects was, too, retained in the jurisdiction of Provincial High Courts. Resultantly, not only disposal of the original and appellate work in civil and criminal cases is impeded but also disposal of tax cases gets over delayed mostly rendering such cases fruitless.
Besides, Federal Taxes were, many a time, interpreted differently by Provincial High Courts – making harmonious implementation of such laws uncertain. Retention of advisory jurisdiction of tax references also multiplied proceedings – appeal remaining pending with the tribunal till the reference was decided by a High Court.
After decision of the reference application, matter again gets revived in the Tribunal and has to be decided in conformity with such advice. The cumbersome remedy unduly delays justice.
In the British legal system, reference jurisdiction was a necessity i.e. even the Privy Council exercised advisory jurisdiction and it was the King/Queen who was supposed to pass the final judgment. The concept of advisory jurisdiction is repugnant to the principle of separation of judiciary from executive. Due to the aforesaid factors, the need for changes of jurisdiction in tax matters has come to sharp focus. India passed the National Tax Tribunal Ordinance, 2003 and transferred tax cases from State High Courts to the National Tax Tribunal. This has been followed in the proposed Federal Court Bill in Pakistan.
The proposed Federal Court Bill does not envisage a court which may curtail litigation. Not only, reference jurisdiction has been retained but an additional intra court appeal has also been provided.
According to the proposed bill, the judges of the proposed court will be selected from retired judges of the Supreme Court and High Courts, persons eligible to be the judges of a High Court and bureaucrats of grade 21 and above. But with the same jurisdiction, can the same judges bring about any revolutionary or even a meaningful change only because such judges will sit in a different building?
Five stages of litigation have been envisaged instead of existing three appeals and a reference. For similar reasons, the proposal of federal court is being opposed as it would be another Federal Tax Tribunal – further delaying justice. Appeal before the departmental authorities should be abolished. The first appeal should lie in the Appellate Tribunals for Direct and Indirect Taxes. Second appeal before a division bench or a full bench of the proposed court should be provided. Final appeal on a question of law may lie in the Supreme Court.
The judges to be appointed in the Federal Court should have special exposure to tax designing, international taxation and commercial systems. The need of the time is a new court with fresh approach in opening horizons.
Judges and lawyers should be equipped with the dynamics of the age. It will, on one hand, enable existing High Courts to devote more time to other areas of law and on other hand tax matters will get special attention in the new Court. Thus, justice will be expedited in all areas.
To safeguard independence of the new Court, it should function under the supervision of the Supreme Court and be subordinate to it. The judges of the proposed Federal Court should be made eligible for elevation in the Supreme Court.
The criteria of eligibility and age for appointment in the proposed court should be determined in consultation with Bar Councils and Bar Associations. Facilities should be provided to the judges of the new courts for interaction with the international institutions. The judges may be removed from office only according to the recommendation of the Supreme Judicial Council.
The proposed bill is not well conceived. The inclusions of laws like the Works of Defence Act, 1903, the Charitable and Religious Trusts Act, 1920, the Cantonments (House Accommodation) Act, 1923, the Islamabad Consumers Protection Act, 1995, make the proposed Bill entirely arbitrary. There is no direct correlation of the aforesaid subjects with the requirements of international trade or economic development? Such uncalled for additions in the schedule of subjects may give special treatment to certain departments without any justification – eroding the credibility of the Court.
The need for a separate Federal Court has arisen due to objective considerations. Tax law design needs special expertise. The design, drafting and administration of tax laws are specialised fields. Strict literal interpretations are giving way to interpretations in a wider sense by the teleological or analogical method. The issue of precedence of substance of a transaction, over its legal form is more pressing in tax administration.
There is a complex and continuing evolution of application of tax doctrines as the subject of taxation deals with the flux of commercial life. Economic substance of a transaction is maintained in tax matters in spite of its nullity under civil or commercial law. There is an ongoing battle of wits between tax avoidance and tax administration. Each case may present its peculiar problems not amenable to literal interpretation. Sooner or later, we will have to apply dynamics of space-time continuum in all fields of national life, particularly in fiscal matters – economic miracles are not caused by accidents.
