LITIGATION in the US is like a luxurious hotel, open to all but affordable to few. This is true for Pakistan as well. Article 37 of the Constitution guarantees that inexpensive and expeditious justice is the state’s responsibility. While the state has provided multiple judicial forums at various levels, millions of cases are pending adjudication.
A large chunk of cases in litigation pertains to tax matters which are unpleasant for both the taxpaying business communities and the tax authorities. A tax notice results in parties resorting to stepping on to the judicial ladder to avail the statutory right of appeal. Here, the real ordeal starts ie ‘the litigation’ which is like a game of snakes and ladders. Be it civil, criminal or tax litigation, the state has to play its role while providing access to justice for all.
Public-sector development budgetary allocations and debt servicing depend on revenue collection. Time is money and this concept is crucial to aggrieved parties hit by protracted tax litigation. In such a scenario, problems may be addressed through the informal settlement of disputes.
Dispute settlement here does not involve a trial. Instead, it deals with negotiation, mediation, conciliation and arbitration — quite simply the alternative dispute resolution (ADR) mechanism.
ADR benefits could ensure the expeditious settlement of tax disputes.
With assured confidentiality, the tax authorities and taxpayers interact in an informal environment. It goes without saying that the benefits of ADR are high and ensure the expeditious and cost-effective settlement of disputes. Parties save on court fee and court visits as well as the hefty amounts that lawyers demand. Without the usual procedural hiccups, interim relief is swiftly provided. A quick dispute settlement mechanism is always an attraction for international investors and provides an impetus to the country’s economy.
Countries like the Netherlands, US, Belgium, and UK have adopted the ADR in tax litigation. Diligently adopting this international best practice may help ease the burden on our courts. In our case, the ADR mechanism remains a less-explored option in tax litigation.
Tax litigation is different from regular litigation in that the adjudicator himself/herself is party to the case. The issues involved are of a fiscal nature and involve technicalities of liability, customs duty, the admissibility of refunds and rebates, default surcharge, penalty, fines and confiscation of goods etc. In tax cases, additional vertical adjudicating forums extend an already prolonged and cumbersome process. A dedicated study may be required to ascertain the percentage of litigation in tax cases.
Currently, eight different statutes encompass tax litigation provisions at the federal and provincial levels. Unfortunately, the tax ADR provisions barely meet the formalities of these tax-related statutes. Likewise, the principles of inclusion and empowerment of the taxpayer have not been incorporated appropriately. For instance, in Inland Revenue cases, the power to choose mediators from a designated panel lies only with the department, not the taxpayer.
Due to lack of provisions for the establishment of independent ADR centres, the power balance remains tilted in favour of the tax department which may contribute to mistrust. Similarly, unlike civil litigation, an equitable referral system is conspicuous by its absence. Taxpayers (and not the tax department) can only opt for mediation, and that too at the appellate stage.
Legislative interventions for evolving a referral system — for the facilitation of both taxpayers and the department — are sorely needed. Thresholds and categorisation of cases may be incorporated in line with the ADR Act 2017 (ICT), the Punjab ADR Act 2019, and the Khyber Pakhtunkhwa ADR Act, 2020. The current uni-referral arrangement must be replaced with binary referrals. For instance, the assessing officer should also be empowered to refer to mediation, alongside the taxpayer, at the stage of issuance of the show cause notice. Fears of unjust accountability may be allayed through parliamentary sanction. Harmonising all fiscal laws and taking on board all stakeholders, including taxpayers, collectors, adjudicators, and lawyers, may bridge the trust deficit.
Obviously, mediation won’t plug all the gaps but it could prove a viable option to change the way the authorities operate. If there can be a voluntary compliance scheme then why not a voluntary settlement scheme for dispute resolution? Mediation can do marvels by pushing up the revenue curve and curtailing tax litigation. An open-mind and open-heart approach is needed to seriously consider mediation.
The writer is a civil servant. The views expressed are his own.
Published in Dawn, April 18th, 2021