APPRAISAL OF ALTERNATE DISPUTE RESOLUTION MECHANISM

APPRAISAL OF ALTERNATE DISPUTE RESOLUTION MECHANISM APPRAISAL OF ALTERNATE DISPUTE RESOLUTION MECHANISM By Huzaima Bukhari and Dr. Ikramul Haq, Advocates For the first time in the history of Income Tax Law in Pakistan, Alternate Dispute Resolution (ADR) option was provided by inserting section 134A vide Finance Act. 2004 which was aimed at extending the much-desired-for facility to taxpayers to avail administrative means for resolving disputes through mediation outside the ambit of convention appeal system. This provision required the Central Board of Revenue (C.B.R.) to notify procedures for (a) referral of disputes and (b) mediation of unresolved issues and (c) entering into binding agreements or offers in compromise. In the last 18 months this mechanism has failed to attract the actual potential that it entailed. This article attempts at analyzing the reasons for poor response. It also suggests certain ways to improve it. The main idea behind this new provision was to provide arbitration of unresolved/disputed issues. Unfortunately no public debate was initiated prior to its insertion. The C.B.R. (de facto law maker) did not bother to elicit opinion from the stakeholders and experts. It is sad that the C.B.R. is unilaterally pursuing the tax reform agenda (sic) without involving the taxpayers and public at large, who will later pay back the heavy loan of over US$100 million provided by World Bank and others for this entire exercise. Time and again we have emphasised that no reform agenda can succeed unless the entire nation is taken into confidence and their participation is ensured at the time of enactment of laws and not at the stage of implementation alone. The result of not consulting taxpayers, tax bars and other trade bodies is obvious: bad drafting of a well-intended law. The salient features of section 134A of the Income Tax Ordinance, 2001 [hereinafter "the Ordinance"] as amended till today are: Any aggrieved person [in rule 231C the scope is extended to "class of persons"] in connection with any matter of income tax pertaining to liability of income tax, admissibility of refund, waiver or fixation of penalty or fine, relaxation of any time period or procedural and technical condition may apply to the Central Board of Revenue in prescribed form [rule 231C of the Income Tax Rules, 2002] for the appointment of a committee for the resolution of any hardship or dispute mentioned in detail in the application. The Central Board of Revenue may, after examination of the application of an aggrieved person, appoint a committee consisting of an officer of Income Tax and one or two persons from a panel of Chartered or Cost Accountants, Advocates, Income Tax Practitioners or reputable taxpayers for the resolution of the hardship or dispute. The Committee will examine the issue and may, if it deems necessary, conduct inquiry, seek expert opinion, direct any officer of Income Tax or any other person to conduct an audit and make recommendations in respect of the resolution of dispute as it may deem fit. The Board may, on the recommendation of the Committee, pass such order, as it may deem appropriate. The aggrieved person may make the payment of income tax and other taxes as determined by the Board in its order under sub-section (4) and all decisions, orders and judgments made or passed shall stand modified to that extent and all proceedings under this Ordinance or the rules made thereunder by any authority or forum shall abate provided that, in case the matter is already subjudice before any forum or tribunal or the court, an agreement made between the aggrieved person and the Board in the light of recommendations of the committee shall be submitted before that forum, tribunal or the court for consideration and orders as deemed appropriate. In case the aggrieved person is not satisfied with the orders of the Board, he may continue with normal litigation process. Section 134A has the following inherent defects that need to be removed: 1. C.B.R. has been given the central role in all the matters that is from examination of application for ADR to passing of an order whereas informal dispute resolution mechanism should be implemented through an independent ADR Authority or office of Federal Tax Ombudsman (FTO). 2. For each and every case or at least for each major city, the C.B.R. appoints a committee consisting of an officer of Income Tax and one or two persons from a panel of Chartered or Cost Accountants, Advocates, Income Tax Practitioners or reputable taxpayers. The taxpayer will only come forward for ADR when they know that the ADR-Authority is a permanent and neutral body having members of impeachable repute and professional competence. 3. Conducting ADR through a committee, comprising a tax official, Advocate or Chartered Accountant or Cost Accountant, for each case is a costly, procedurally cumbersome as well as time-consuming exercise. The whole concept of fast track dispute resolution stands negated. 4. The C.B.R. has completely overlooked the fact that there already exists a provision in the Federal Tax Ombudsman Ordinance, 2000 i.e. section 33 which clearly provides informal resolution of dispute. An already established institution can be engaged for ADR mechanism, especially when statutory provision is available to this effect and infrastructure is available. It is strange that since the inception of the FTO office in 2000 neither the Tax Department nor the taxpayers thought of availing this vital provision of informal dispute resolution. The same fate is being faced by section 134A as the C.B.R., has failed to properly implement it and convince the taxpayers that it is meant for amicable settlement of disputes and not imposition of CBR's self-assumed judicial/administrative will. In the Sales Tax Act, 1990, a similar provision i.e. 47A was inserted as early as in 2002 but due to lack of proper infrastructure as discussed above and faulty perception of C.B.R. only a negligible number of cases came for resolution. It is pertinent to mention that section 134A is exact replica of section 47A of the Sales Tax Act, 1990. If section 47A of the Sales Tax Act read with rules 62 to 71 of Sales Tax Rules have failed to attract the substantial numbers of taxpayers for informal dispute resolution then how section 134A, which is ditto copy of the earlier enactment, could have been of any successes. There appears to be some fundamental flaw in the entire scheme which has not been realised by the C.B.R. to this date. Making the same mistake again and again has become C.B.R.'s favourite pastime. The C.B.R. has notified the Income Tax Dispute Resolution Rules [Rule 231C of the Income Tax Rules, 2002] in pursuance of section 134A(7) of the Ordinance. Since the law itself is badly drafted as shown above, the rules also portray many shortcomings as these do not provide swift procedure for fast track dispute resolution as is the case in many countries, lack detailed and comprehensive approach, fail to provide e-submissions of applications and on-line facility for conducting meeting of ADR Committee that are necessary to successfully execute this important facility made available to the taxpayers for the first time in the history of Income Tax in Pakistan. On the contrary, Internal Revenue Service of USA has notified Fast Track Programme (FTM) which contains explicit, detailed and comprehensive procedures covering each and every aspect of Fast Track Dispute Resolution Mechanism. The C.B.R. can learn a lot from this programme and after making some necessary changes to suit local conditions and environments easily implement it. The ADR can be made successful if:--‑ A permanent forum is established, independent of compliance functions, to efficiently prevent or resolve a dispute. If consider appropriate by the C.B.R., FTO Office under section 33 of FTO Ordinance, 2000 can be utilised for this purpose. Fast Track Dispute Resolution Mechanism is simple, cost-effective and reliable so that taxpayers can come forward with complete confidence and faith. Section 134A and rule 231C lack the correct perspective to provide: 1. Small businesses, self-employed taxpayers and tax officials the opportunity to mediate disputes through retired Judges and tax officials, who are ready to work in public spirit, as a neutral party. Serving tax officials and tax professionals should not be