WHITHER FEDERAL TAX OMBUDSMAN ORDINANCE, 2000

WHITHER FEDERAL TAX OMBUDSMAN ORDINANCE, 2000 <!--[if gte mso 10]> WHITHER FEDERAL TAX OMBUDSMAN ORDINANCE, 2000 By Professor Masood Ahmed Abbasi 1. The very fact that by its very nature and character, the office of the F. T. O., enjoys no utility at all for overseeing the administration of INDIRECT TAXES being the Federal Customs/Excise Duties and Sales Tax. These indirect taxes nave no direct concern with the people at large who in fact, through chain of distribution, bear the real burden. They are confined in their charge and operation to the privileged class of business--magnates who import/export, manufacture/produce and distribute goods and services and are by themselves mighty and strong enough to take cudgels with the Legislature, enacting these laws, the Government and C.B.R. administering them and their employees directly coming in contact with them. This segment of economy is too powerful to need further free help and assistance of F. T. O. and thus unnecessarily add to the cost of collection of taxes. 2. Thus even academically speaking the office of the F.T.O. could be of some practical utility to those millions of taxpayers who are charged tax on their hard-earned income year after year and render continuous and regular painful conscious sacrifice. It :gains its meagre justification to exist if, as against serving the interest of the same affluent and mighty wealthy taxpayers, it succeeds to grant some relief readily and redress its grievances promptly for which remedies are not otherwise available within the hierarchy of Income Tax Ordinance and on account of which this vast majority of taxpayer:, has to suffer at the hands of die-hard, dishonest tax-collectors who maladminister the law of income tax with ulterior motives to harass the innocent taxpayer and extract illegal gratification from him. 3. From its very inception centuries ago the office of the Ombudsman was carved out and continues to serve the Rulers to ensure rule of Law and even handed justice between man and man and protect the masses from the clutches of wealthy influential elites of the Society exploiting them by corrupting the public servants. It is very pertinent to refer to an exhaustive article titled 'ANALYTICAL SURVEY OF FEDERAL TAX OMBUDSMAN ORDINANCE 2000., published in PTD April, 2003 p. 137 to comprehend the background of this Ordinance # XXXV of 2000. 4. The President being conscious of the limitations of this Office superimposed on federal taxes, was well advised to determine the status and functions of this Office as merely a Complaint Cell in President House to remain in direct touch with the performance of C. B. R., which as an autonomous institution, had by this time earned tarnished name both in public and private sector. Basically the intention of the President appears to alarm the C. B. R. employees that they were being physically overseen by an independent external agency and let them, therefore, not behave like a `spoiled-child' of the State. The President, in the meanwhile, did not wisely like to duplicate the administration of Federal Taxes by empowering the overseer to start administering the Federal Tax Laws himself. 5. A delicate balance was skillfully attempted to be drawn in keeping the administration intact, strictly on the basis, extent, mode and manner, provided in the tax statutes themselves and yet keep the tax employees frightened of maladministering the Tax-Laws, through inefficiency, dishonesty or ever lapses. The term `Maladministration' is therefore defined inclusively as well as exhaustively so liberally that no other term in any other law could have ever been defined. The jurisdiction of the F.T.O., is, therefore, expressly circumvallated and curtailed, with equal vehemence so as to leave practically nothing administratively and judicially material for him to do. In short the President was pleased to create a Staff Officer for himself with lot of ceremonial trappings and trimmings provided to his office. 6. Perchance the first F. T. O. employed under section 3 happened to be a retired Judge of Supreme Court of Pakistan who authored some leading judgments on Federal Taxes brought before him for interpretation. While stepping down from that august office of the Judge of Supreme Court to the paltry office of F. T. O., he has throughout found it mentally and intellectually cumbersome to downgrade himself from that lofty status and top position to this down-to-earth investigator's job. He has realized that interpreting law at the highest level of Constitutional judicial authority and examining most enlightened and refined judgments delivered by High Courts below, is one thing, and to himself personally enter into the shoes of an investigator to scrutinize the mismanagement misdeeds and malpractices of Tax Officials, at the behest of deeply interested and motivated taxpayers involved, was entirely another. 7. Confronted with his functions and limitations of his jurisdiction, he, living up to his life-long judicial career, endeavouring most to expand and extend his truncated jurisdiction under the assumption of superior Courts authority, his own vast knowledge and experience of statutory and Court-law, making undue use of Beneficial Interpretation of Statutes, made neck breaking efforts to render the nature, character and effectiveness of his jurisdiction more material and fruitful. Besides heading in that direction, in the discharge of his duties and performing his functions, he also publicly and outwardly tried to make use of pressure groups like Businessmen's Chambers and other Stakeholders, to help him in expanding and extending his jurisdiction so that he could root out maladministration from Federal Taxes. He received lot of substantial help in holding seminars and parties in his honour and showering all praises over him not indeed to support his latent pious desire of uprooting the corruption, but to make use of his office freely and liberally to coerce the C. B. R. employees to dance to their tune, and grant them relief in collection as well as refunding taxes at their convenience. Little did the F. T. O., having remained seated in the glass-room of Superior Courts all his life, realize that he was becoming an additional tool in the hands of these pressure-groups, more than serving the President by streamlining and purifying the Federal Taxes-maladministration and thus failing to justify the additional expenditure that is being incurred on his costly establishment. 8. Had the F. T. O. thoroughly studied and analyzed the STRUCTURE OF CORRUPTION and inter se distribution of LOSS OF REVENUE caused to the exchequer, by dint of maladministration, as published in the article under reference and reproduced hereunder, he must have realized that his real scope and field of functions lay elsewhere as specifically described in section 9(4) of the Ordinance. TAX EVASION INCOMETAX SALESTAX CUSTOMS TOTAL TAXPAYERS 38% 28% 23% 89% TAX COLLECTORS 16% 11 % 15% 42% TAX PRACTITIONERS/ 10% 06% 10% 26% MIDDLEMEN TOTAL 64% 45% 48% 157% 9. Now eventually, as admitted by the Ombudsman himself in his public statement that while presenting his report to the President, he has requested him to Expand and Extend his Jurisdiction, to enable him to freely and liberally intervene into the entire administration of Federal Taxes, so that he could do even-handed instantaneous justice to the complainants. He has realized that his Judicial exercise in doing so within the existing statutory provisions of section 9(2)(b) of the Ordinance, it was not possible for him to do what he had taken upon himself to do, by bringing into aid theory and concept of Welfare and Beneficial Jurisdiction. He has eventually conceded that such theories are not proper to be applied in interpreting the Fiscal Statutes and even the Statutes, being auxiliary, ancillary and subordinate to fiscal statutes, as his own statute is. The Superior Courts have ruled that even the Laws that stand to repeal the Tax Laws are subject to the same principle of 'strict interpretation' of statutes to which the fiscal laws themselves are. 10. In his drive to expand/extend, amend and modify the existing provisions of F. T. O. Ordinance, relating to his jurisdiction, the entire business community, being a perpetual beneficiary, has embarked upon supporting and advocating his cause. To scrutinize the validity of this attitude, it is advisable to study the background, nature and character of the Laws of Income Tax. This Law of Income Tax finds the trace of its birth in the remote history of England. While introduced for the first time, as a regular permanent annual tax, in British India, by virtue of Income Tax Act, 1922, it was structured in a manner that it could be administered smoothly in an altogether alien society and atmosphere. The onus of administering the entire Law of Income Tax was laid on the shoulders of an Officer, termed as Income Tax Officer, vested with all the vast and coercive powers necessary to impose and collect such a pinching direct tax from the subject, which was neither used to bear such direct burden, nor had any voice in the Government to which it had to obey and comply. 11. Two Supervisory Officers were placed over him to control his judgments and orders, the one on Judicial side, known as A.A.C. and the other on Administrative side known as I.A.C. This triangular structure of Income Tax has since sustained the administration of this Tax in British India as well as its two offspring, Hindustan and Pakistan, for the last eighty years. On careful analysis of the situation, it would be seen that the office of the F.T.O. introduced in the year 2000, tends to redouble the functions of an I. A. C. 12. The basic function of I. A. C. was to polish, refine and reform the assessment work of the Income tax Officers on the Original side. It was further to have a physical check over the inordinate, improper and corrupt performance of the entire work of the Income Tax Officers. While he was charged to prevent under assessment of income causing loss of revenue by the Income Tax Officer advertently or inadvertently, either through misunderstanding or misapplying the law to the facts of the case before him, or being hands in glove with the assessee sharing the tax evasion with him, he was equally responsible for discouraging and checking over-assessment of income causing harassment to honest taxpayer. This he would do through the administrative process of calling for `Approval' of draft assessment orders made by the I.T.O. in revenue-potential large-cases, and random checking of assessment and collection of tax in ordinary cases, as a matter of routine. Even in Pakistan, till the standard and quality of administration of British India were still in vogue, the writer is a personal witness to the IAC refusing Approval to a draft assessment-order in which the I.T.O. discarding the Past-History, which is sacrosanct in the Law of Income Tax, had tried to enhance the applied rate of Gross Profit only by one percent of the turnover, the draft-assessment-order returned thrice with the instructions that "the ITO must bring on record some substantial evidence and particulars justifying deviation from the past history". The conjectures and surmises introduced one after the other three times by the ITO did not find favour with the IAC., and the ITO was eventually obliged to apply the old rate of Gross Profit. It would thus be seen, that whereas ONE APPEAL before AAC., second Appeal before Tribunal, the third Reference before the High Court and fourth Appeal before the Supreme Court was allowed to the aggrieved assessee/taxpayer, only one authority was provided to IAC to safeguard the loss of revenue on the one hand, and prevent and cure Malpractices in the administration of Income tax, on the other. 13. The overall and collective downfall finding place in the entire Governmental services, Income Tax Department also could not escape the brunt. Assessment and Collection of Tax could not keep pace with the growth of economy, and the corruption, being beneficial to both the assessor and assessee alike, became rampant in this service too. The corruption became more congenial as Income Tax Proceedings were declared confidential to all outsiders, and the exercise of `assessment' and `collection' was carried out behind closed doors, providing complete security to erosion of moral character. To retrieve loss of revenue caused in spite of all such administrative checks and controls provided, the Legislature vested further Judicial Powers into the IAC to reopen the Orders already made by the ITOs causing loss of revenue by erroneously making under assessment of income. In larger cases now corruption started travelling upwards from the level of the ITO to the once inaccessible level of IAC and corruption thus caused loss of revenue in the proportions shared by the stakeholders as investigated by a private agency, produced in Para 8 above. In India such power to reopen under assessment lies in C. I. T. 14. In this background let us now study the justification, propriety and efficacy of the Office of the Federal Tax Ombudsman as provided in Ordinance, 2000, and see as to how many tax payers, the tax-collectors and other stakeholders derive any benefit out of it. On examination of its Objective Clause incorporated in its Preamble reading: "Whereas it is expedient to provide for the appointment of the Federal Tax Ombudsman to diagnose, investigate, redress and rectify any injustice done to a person through maladministration by functionaries administering tax laws;" read with the express provisions of section 9(1), it would be observed that the President desired to create an external agency, as its Staff Officer, to assist him in checking corrupt practices in the administration of federal taxes by the C.B.R. employees on the one hand, and to report and recommend means and devices to be introduced to raise revenue, avoid evasion of tax, and bring reforms beneficial to the revenue and public alike, on the other. It is nowhere visible from any word used in the entire Ordinance that the office of the Federal Tax Ombudsman was created to function as a parallel agency duplicating the assessment & collection work or embark upon "adjudication" of genuine & valid controversies arising within the fiscal statutes. His jurisdiction, ab intio is confined to Bad Management and does not, and should not, therefore, extend to Good Management. 15. From the foregoing discussion it emerges that the functions of the FTO are almost identical to those of the IAC, who having failed in the discharge of his functions and losing his own identity, and utility, compelled the President to introduce an external agency in the name of FTO. Once again the students of public administration would observe that though the Diagnosis of the disease of corruption remaining in vogue causing loss of revenue on the one hand and giving cause for grumbling and grudging to the tax-payer, on the other, was correct, the Prescription of creating a new post of F. T. O. as remedy to the vice, was equally incorrect. While it could be fair to assign objectives provided in subsection (4) of section 9 to a regular external institution of F. T. O., it was equally awkward to provide him access to individual administrative lapses to any extent and for any purpose as generalized in subsection (1) and specialized in subsection (2) of section 9. It provides an incentive for it to make excesses and seek more scope to justify its own existence. 16. This happened all the more when the small investigative office of the FTO was filled by a person none other than the Judge of the Supreme Court. Even though retired, how could a person having all his practical life enjoyed the highest Judicial unlimited and unfettered jurisdiction all over the country, could survive within the suffocation of the paltry inferior office of the FTO, whose entire investigative and diagnostic Jurisdiction, both in theory and practice, is confined to `Advice' and `Recommendations'. Being competent, honest and assertive, the position of the incumbent FTO was exploited by proverbial pressure groups thriving in our economy on `monopoly' `cartels' and virtually economic mafias, by coaxing him to transgress into an area which was not basically carved out for him. 17. Let us examine who are the real beneficiaries of his jurisdiction hitherto exercised by him. I intend to use as a sample his own (ORDERS) as published by him in PTD for the month of January, 2004, on the' pattern of Judgments and Opinions of the superior Courts and Tribunals. PTD JANUARY, 2004 Federal Tax Ombudsman High Courts S.No. Status Page No. S.No. Status Page No. CUSTOMS 1 Company 1 1. Company 21 2 Company 100 2. Company 26 3 Non-Company 119 3. Company 38 4 Non-Company 129 4. Non-Company 94 5 Company 133 5. Non-Company 136 6 Company 161 6. Company 315 7. Company 235 S.No. Status Page No. S.No. Status Page No. INCOME-TAX 1 Non-Company 57 1. Company 30 2 Company 96 2. Non-Company 31 3 Company 145 3. Non-Company 62 4 Non-Company 164 4 Company 122 5 Non-Company 171 5. Non-Company 295 6 Company 184 6. Company 318 7 Non-Company 185 7. Non-Company 330 8 Non-Company 194 8. Company 9 Non-Company 200 10 Non-Company 224 11 Non-Company 233 12 Company 244 SALES TAX 1 Company 35 Nil Nil Nil 2 Company 75 3 Company 141 Looking to the personal assertiveness and influence the sitting FTO commands, it is pertinent to mention that against 14 judgments of Superior Courts published in PTD, 22 FINDINGS/DECISIONS relate to the FTO. Out of 22 orders, 12 relate to the complainants enjoying the Status of Limited Company (Corporate Sector), 10 Complaints emanate from non-companies, almost all of whom are high-slab-income earning businessman and professionals. 18. It is thus seen that the real beneficiaries of the jurisdiction of the FTO, in fact are the most powerful, mighty business magnates and professionals, who even otherwise have complete dominion over the Government policies through IMF and WORLD BANK, and Assessing Officers through BAR ASSOCIATIONS and other, similar institutions and organizations patronized by them to reduce their brunt and burden of tax. The Office of the Federal Tax Ombudsman, the much trumpeted office, has been another pleasant addition to these institutions for the exclusive benefit of business tycoons and capitalists having complete grip and control over the entire urban economy of the country. The awful CORPORATE SECTOR substantially constituted by MULTI-NATIONAL COMPANIES, shouts from the top of the roof for contributing lion-share to our Public Exchequer, without disclosing the proportion of tax, due under law, safely and securely evaded by it. The foregoing chart in para. 8 reflects a little on lion share they enjoy in tax evaded., through corrupt practices in collusion with tax-collecting machinery, and much more than that still remaining undisclosed, without taking the tax-collection machinery into confidence at all, through their own ingenuity and sophisticated devices. 19. The utility of the Office of the FTO is heretofore discussed with reference to the centuries old supervisory jurisdiction of I. A. C., having remained operative from 1922 up to 2001 till the Income Tax Ordinance, 1979 is repealed and succeeded by another Income Tax Ordinance, 2001, having emerged like Phoenix out of its own ashes. The new law of Income Tax is revolutionary in the sense that it has for the first time converted the departmental assessment of income to the Universal Self-Assessment of income by the assessee himself, and secondly it has demolished the centuries old structure of income tax authorities mainly by abolishing the supervisory jurisdiction of the IAC over the performance of the DCIT and further down-grading the CIT from heading the field staff to the position of a Ranger watching and warding the boundaries of assessment crossed by the tax payers. More than 80% of the tax being collected through automatic deduction at source under Presumptive and Withholding Taxes and the remaining 20% left to the Universal Self Assessment, where is the scope for Maladministration left ,for the F.T.O. to rectify. The scope for maladministration is narrowed down, if not evaporated altogether in thin air. If the new Income Tax Ordinance, 2001, having become effective from 1-7-2003, takes it roots in our economy, the need for Judicial Remedies provided within the Ordinance would also be eliminated. It is high time that President would assign the Federal Tax Ombudsman Ordinance promulgated in 2000, also for the opinion of same author of the Income Tax Ordinance, 2001 to answer two Questions: (a) Whether he provided in-built mechanism and methodology within the Ordinance to undo maladministration? (b) Whether there is any scope for creating a new external agency like the FTO, and if so, what should be his field of activities to avoid duplication of same work? 20. While creating the Office of FTO, the President must be congratulated to have selected the best from amongst the available Superior Judiciary to fill the post keeping a keen eye on `ability' and `integrity' both to bring credibility and prestige to this newly-carved out office. Unwittingly the third aspect of `assertiveness' of the incumbent escaped sight. Little did he realize that he was confining the proverbial GIANT into the BOTTLE and the two could not co-exist for long, for one of them must give way to the other; either the giant must demise or the bottle must explode. That is exactly what is happening now with the office of the FTO. It is strictly my personal opinion that let the bottle explode instead of the giant dying. It is common knowledge that the august Jurisdiction of the FTO is being utilized on facts without cost, by the same elite who profusely utilize the Superior Court's Constitutional Jurisdiction of WRIT on Law, at their pleasure, of course on payment of costs. How long will the state of Pakistan continue to groan under the heavy load of the cruel rich shorn of conscience. 21. In all sincerity I urge upon the President to place both the Federal Tax Ombudsman Ordinance, 2000 as well as Income Tax Ordinance, 2001, for standing the public scrutiny of Parliamentarian debate instead of privileged pressure groups. 22. Let me conclude this article on sounding the note that the soul-stirring pleasant winds of change have started blowing on Eastern Horizon in the Legal concept of Public Finance and Taxation, by mending the old Western legal dictum "Avoidance of Tax being legally permissible against Evasion of Tax being punishable", as upheld in: Aruna Group of Estates v. State of Madras (1965) 55 ITR 642-648 Per Jagadisan, J. reading: "AVOIDANCE OF TAX IS NOT. TAX EVASION AND IT CARRIES NO IGNOMINY WITH IT, FOR, IT IS SOUND LAW AND CERTAINLY, NOT BAD MORALITY, FOR ANY BODY TO SO ARRANGE HIS AFFAIRS AS TO REDUCE THE BRUNT OF TAXATION TO A MINIMUM" by the deeply learned and patriotic observations made in the noble judgment delivered by Mr. Justice Chinnapa Reddy in (1986) 157 ITR 77 SC reading: "We think the time has come for us to depart from the Westminster principle (followed in India in CIT v A. Raman & Co. (1968) 67 ITR 11 (SC) and CIT v. BM Kharwar (1969) 72 ITR 603 (SC) (see notes, ante) as emphatically as the British Courts (in Ramsay, Burmah Oil and Dawson) have done and to dissociate ourselves from the observations of Shah, J. (in the Supreme Court cases referred to above) and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, in a welfare State like ours. Next, there is the serious disturbance caused to the economy of the 'country by the piling up of the mountains of black money, directly causing inflation. Then there is `the large hidden loss' to the community (as pointed out by Master Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between tax avoider and his expert team of advisers, lawyers and accountants on the one side and the tax-gatherer and his perhaps not so skillful advisers on the other side. Then again there is the `sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last, but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability on the shoulders of the guideless, good citizens from those of the `artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said `Taxes are what we pay for a civilized society'. `I like to pay taxes with them I buy civilization'. But surely, it is high time for the Judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the Judgment of Desai, J. in Wood Polymer Ltd. In re & Bengal Hotels (P) Ltd. in re: (1977) 47 Comp. Cas. 597 (Guj.), where a learned Judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax".