Money Bill Taxman and The Individual

MONEY BILL, TAXMAN AND THE INDIVIDUAL MONEY BILL, TAXMAN AND THE INDIVIDUAL [An Analysis of the Money Bill, 2010] By Mr. Zafar Iqbal, Advocate, Karachi INTRODUCTION The rule of law does not have a precise definition, and its meaning can vary between different nations and legal traditions. Generally, however, it can be understood as a legal-political regime under which the law restrains the government by promoting certain liberties and creating order and predictability regarding how a country functions.? In the most basic sense, the rule of law is a system that attempts to protect the rights of citizens from arbitrary and abusive use of government power.? In his book The Morality of Law, 1 American legal scholar Lon Fuller identified eight elements of law which have been recognized as necessary for a society aspiring to institute the rule of law. Fuller stated the following:--- (1) Law must exist and those laws should be obeyed by all, including government officials. (2) Law must be published.? (3) Laws must be prospective in nature so that the effect of the law may only take place after the law has been passed. For example, the court cannot convict a person of a crime committed before a criminal statute prohibiting the conduct was passed? 1. Fuller, Lon. The Morality of law: Yale, New Heaven: 1970. (4) Laws should be written with responsible clarity to avoid unfair enforcement. (5) Law must avoid contradiction? (6) Law must not command the impossible? (7) Law must stay constant through time to allow the formalization of rules; however, law also must allow for timely revision- when the underlying social and political circumstances have changed? (8) Official action should be consistent with the declared rule? Standing alone, these eight elements may seem clear and understandable. But they are actually difficult to implement in the real word because governments are often compelled to prioritize one goal over another to resolve conflicts in a way that reflects society's political choices. For example, making too many laws that are too detailed and specific may make the legal system too rigid. Inflexibility could cause the particular case. Additionally, instead of only applying prospectively, some laws are meant to apply retroactively, or to past conduct, because they were passed with the specific intent of correcting the conduct in question. Fuller recognized these conflicts suggested that societies should prepare to balance the different objectives listed above.? Keeping in view these issues in mind, an effort has been made in this essay to spell out areas which are wanting for the rule of law, and as an attorney, it is my duty to bring on record the structural weakness, in the proposed legislative possesses. Taxes and Externalities Before, I discuss the nature and style of legislative drawbacks, it would he appropriate to define taxes and externalities. Taxes are either direct or indirect. A direct tax is one that is demanded from the very persons who are intended or desired to pay it. Indirect taxes are those which are demanded form one person, in the expectation and intention that he shall indemnify himself at the expense of another, such as the excise or customs. Taxes may be laid on any one of the three sources of income (rent, profits, or wages); or a uniform tax on all of them.2 These taxes (when imposed) bring with them externalities3, transfer resources, 2. Wharton's Law Lexicon: Sterens and Sons Limited London: 2006. 3. Perfectly competitive market achieves an efficient allocation of resources if there are no public goods and externalities and if costs are not decreasing: obviously our markets are not perfectly competitive and give rise to externalities such as pollution or increased costs of production. See, Government and Economic Choice by Pogue, Thomas F and Sgontz, L.G., : University of Iowa Press: 1969 (form one segment to another segment of society), affect the prices (of goods and services), and decrease or increase the market demand of goods and services). Proposed Budgetary Measures The proposed budget4 emphasises a number of measures. First revenue generation, Second tightening the compliance requirements and Third introduction of more regulatory controls for the tax payers. And last but not the least expanding the base of presumptive taxes even at the cost of injuring the constitutional rights and intruding in the contractual transactions by violating the mutual rights of the parties5. We are thus in line with the general directions being followed in developing countries by approaching tax policy on ad hoc basis. That is why our system seems to lack a rational base, because conflicting objectives are being persued at random, and even particular objectives are being persued in contradictory ways. Resultantly, we propose incoherent and piecemeal changes rather than following a strategic design6. We are, in fact struggling to adapt to profound changes in the economy and social institutions in which we are operating. Zafar7 argues that policy tool which requires serious consideration is the fiscal policy, and it requires that the size of fiscal deficit must be manageable. Because, fiscal deficits cannot continue indefinitely without severely weakening the economy. We find that in the current budget fiscal deficit still remains large(5.1% is being suggested, but over the year it is expected to increase) and unmanageable8 economy, more is the growth. Unfortunately, we do not find directions for savings and investments in the money bill: 4. Finance Bill 2010: Available at www.fbr.gov.pk 5..."The shapes of the banking system, court systems, police and military, rule of law, and property rights are all critical. In the mid-1990s, these institutions collapsed in the USSR (now Russian Federation), resulting in the failure of the government's capacity to perform, its minimal responsibilities. The other interrelated institutional arrangements must work effectively if the country is to develop...": Azem, Zafar: Competing Choices: Aries Publishing House: 2007. Contra. 6. Dimension of Tax Policy Design: The Mirrlees Review: Oxford University Press: 2010. 7. Azeem, Zafar: Competing Choices: Aries Publishing House : 2007 8. Deficit financing at present has become an important method of financing the government expenditure. When the government cannot raise sufficient revenue through taxation and public borrowing, it resorts to deficit financing. In a simple way, it can be understood as filling, through the creation of new money, the gap caused by the excess of government expenditure over its receipts. Pakistan's Economic Survey 2009-20109 proposes a growth rate of 4.1 % in the economy, whereas our population is growing at a rate of more than 2%, it means that for maintaining the existing standards and quality of life, we are supposed to maintain a constant growth rate of more than 5%. The proposed fiscal measures are also not in harmony with the requirements of the economy. With the proposed measures, the economy will further slow down, and this slow rate of economic growth will affect the quality of life, decrease the living standards, and will lead to unemployment, more crimes and more violence. Changes proposed in the direct taxes can be termed as cosmetic changes, and these proposals will not bring any real effect on economy. Neither any serious effort has been made to increase the Tax - GDP ratio nor the tax base has been widened. For example, the proposed measure to increase the exemption limit of direct taxes will decrease the number of tax payers. Bird10 argues that a good tax policy requires to minimize unnecessary costs of taxation. To minimize costs, experience suggests three general rules: First tax base should be as broad as possible. Second tax rates should be as low as possible. Third from an efficiency perspective attention be given to tax on production. The measures being introduced through the current budget have failed to take into consideration these acts of wisdom. Banking Instruments and Services It may further be submitted that no step has been proposed to arrest the, ever increasing size of the black economy11, and the same will continue to increase. The proposal to bring into the tax net of various banking instruments and services may discourage the people to use the banking services and the user may prefer to opt for cash transactions defeating both the objects of documentation and limiting the unrecorded black economy.'2 For example, in the current scenario if bank account holder deposits Rs. 50000 in his account and wants to withdraw the same later on, he will not be able to get back his full amount, rather 9. Government of Pakistan: Economic Survey 2009-2010: Available at www.finance.gov.pk 10. Bird, Richard; Zolt, Erie M.: Introduction to Tax Policy Design and Development: Draft Course on practical issues of Tax Policy in Developing Countries, World Bank, April 25 Through. May 1, 2003. 11. Unofficial business or trade, etc. involving payment in cash or kind and not declared for tax purposes. 12. Proposition is disputed one though, still literature supports it. he will only get Rs. 49500, the rest gone into presumptive taxes what we are doing? we are becoming immoral - immoral because we are not honouring the terms the bank and account payee.13 This may amount to confiscation of citizen's money by the state, and the same is against the elements of rule of law. The concept of withholding taxes is usually restricted to businesses and government agencies. Individuals in their capacity as employees and consumers are usually excluded since they are too numerous and not sufficiently capable as a class to be suitable agents.14 We arc however experiencing an ever large application of withholding taxes in our country. The operational system for implementing withholding taxes is not only faulty but cumbersome too and such practices lead to slow down of the economy affecting the businesses, industries and individual household:15 Half hearted efforts to tax financial services may slow down the rate of economic growth and savings; and resultantly, the financial market will be more volatile. The question here arises whether or not the act of state remains an act of state by levying taxation or amounting to confiscation of depositor's amount. If it is confiscation, then the act of state will be violative of the fundamental rights:16 I may submit here, that the legislature does not have the power to tax to a point where the act of taxation becomes an act of confiscation.17 Musgrave18 argues that for an effective tax system cardinal principles of taxation are simplicity, certainty and cost effectiveness. 19 In 13. The Government is responsible for functions such as the formation of contracts, protection of property rights and enforcement of law. A legal system that is trusted by people and corresponding institutions are needed by every country in order to settle commercial disputes between the parties. Credit is uncertain, where property rights are uncertain, and property markets do not function because of which investment is damaged. A workable system of tax collection is also needed. Even more development path needs a court system that works. Securities laws that facilitate investment, banking regulations that secure deposits, and legitimate relations between federation and provinces are all necessary for a country to grow. 14. p-5, Id. 15. p-5, Id. 16. Constitution of Pakistan 1973: Articles 4, 18 and 25; see also the dictum of Supreme Court in Elahi Cotton Mills case contra. 17. sssMessevs Elahi Cotton Mills Ltd versus Federation of Pakistan: PLD 1997 SC 582. 18. Musgrave, Richard A. Public Finance in Democratic Society: Collected papers of Richard A. Musgrave, Vol.I: Social Goods, Taxation and Fiscal Policy (New York: New York University Press, 1986). 19. Consideration such as allocation, distribution and stabilization refer to economic steps required for consideration. this regard, we may however, find a dismal picture in the current budget, where the said canons of taxation have completely been ignored. Attention is drawn towards the existing exemptions available in the Sales Tax regime. These exemptions are distorting the allocative, distributive and stabilizing efforts required for a balanced economy. It may be noted, rather than curtailing the exemptions, the existing high rates have further been increased. This increase in Sales Tax rates will prove to be counter productive; and will increase the prices of goods and services, slow down the economy, obviously it will result into diminishing demands of the consumers in the market. Judicial Scrutiny of Taxation Measures Taxation measures came for a judicial scrutiny in the well known case of Elahi Cotton Mills(Supra), and their lordships of the Supreme Court observed that: "....any legislation whereby either the prices of marketable commodities are fixed in such a way as to bring them below the cost of production and thereby make it impossible for a citizen to carry on his business or tax is imposed to such a way so as to result in acquiring property of those on whom the incidence of taxation fell, then such legislation would be violative of the fundamental rights to carry on business and to hold property as augmented in the constitution...." Ex Post Facto Measures Another extraordinary measure being proposed is to entrust the Commissioner of IRS to reopen finalized cases of assessments even after a lapse of six years, though they may have been settled by a competent courts or authority.20 Such measures can only be exercised through a supra constitutional legislation.21 In a federal system, governed by a written constitution, this step appears to be beyond the general principles of governance.22 The measures also violates the provisions of Article 13 of the constitution,23 and is against the principle of rule of law as retrospective effect is being given. Taxes.---have always been opposed by the common man as being a coercive act of the State. I still remember a story by a master 20. Amended Section 122(5) of the Income Tax Ordinance, 1979. 21. Nazir Ahmed v. Abbas All Khan PLD 1977 Kar. 777. 22. Khan, M.A. The Constitution of Islamic Republic of Pakistan: Pakistan Publishing House: 1986: ppsi, topic 23. The principle of autrofois convict and autrofois acquit has been stated in the form of rule against double jeopardy and has embodied in Article 13 of the Constitution of Islamic Republic of Pakistan. story writer namely, Fredric Forsyth. In one of his stories, the hero is so fearful from the taxmen that he drowns his total wealth in the sea with sole the purpose that same should not fall in the hands of taxman. GATT Code of Valuation Another structural defect in law making to note is that administration is cleverly defeating the siprit of GATT Code of Valuation.24 Indexed and fixed prices, are being applied for assessment purposes, and mischievously trading groups are being allowed to use these fixed prices for group under- invoicing, thereby seriously hurting the principles of equity.25 Common Man's Apathy Taxes.---have always been opposed by the common man as being a coercive act of the State. Unfortunately, developing countries have been experiencing continuous authoritarian regimes since long. These regimes have blurred the idea of democracy and rule of law to an extent that civilian rulers are finding it difficult to revert back to a civilian regime. The existing machinery engaged in distribution of services to the masses is not aware how to run a civilian democratic rule. Resultantly, their failure is apparent from the defective law making initiated by them. The proposition gains support from the growing litigation between the common man and the State. The legal maxim that `State is a noble litigant', is looking blurred nowadays. I still remember a story written by Fredric Forsyth in which the hero of story drowns his wealth (in the form of gold) in the sea only to avoid a tax-man.26 Another book describes the working of American IRS. The book starts with an ugly scene: a man is writing a letter to his wife before 24. Part-I of Article VII of GATT Articles defines customs valuation. Article 1 through 7 of the Agreement provides the methods for determination of customs value in a sequential order of application. Article 1 defines the primary method of valuation, which must be used whenever the conditions of Article 1 are met. When the conditions of Article 1 are not met, customs value will be determined by proceeding sequentially through the determined. Except as provided in Article 4, it is only after the customs value cannot be determined under a particular Article that the provisions of the next Article are to be used. WCO: Customs Valuation Compendium: WCO Brussels: 2008: Thomas & Meyer: The New Rules of Global Trade: Carswell: 1997. 25. The concept of minimum values being practised by member countries of WTO in Pakistan has been declared to be violative of the GATT Code of valuation, in a recent decision, by the WTO dispute settlement commission in the case of Panama vs. Columbia: WTO: DSC: Case against Columbia: Dispute Settlement Commission Report: April 2009. 26. Forsyth, Fredric: Tales: Penguin Books: 1970. committing suicide. He tells his wife that hawks of the tax department are following him and they will ultimately catch him, so he has decided to commit suicide. He advises his wife how to safeguard their well earned money for the welfare of their children.27 The character of taxman as portrayed in the said stories is that of a coercive force. The lesson is that taxman must be prudent while taxing the subjects. Tax Policy and History It will be interesting to note here that rise and fall of Empires has among many things primarily been dependent on the attitude and treatment of taxman. Paul Kennedy, a well known historian in his best seller work: "The Rise and Fall of Empires'28 Has singled out the tax policy as being the sole factor for the downfall of empires. Gibbon in his renowned book: Rise and Fall of Roman Empire29 too has singled out the tax policy as being the most relevant factor for downfall of the empires. The apathy of the relationship between citizen and State has been agitated by these authors. Conclusions In my view, for a good tax system in an open economy * Taxes be used to finance desired public spending in a non inflationary way and also to ensure that the burden of paying for such spending is fairly distributed. While necessary, taxes impose real costs on society. Good tax policy seeks to minimize those costs.30 * Tax policy should also reflect political factors, including concerns about fairness. In many countries, increased economic growth has increased the disparity between the rich and the poor. Taxes influence the before-tax distribution of income by changing economic incentives. They also influence the after tax distribution of income through, for example, progressive income taxation. There should be a balance in such decision making.31 * Finally, regardless of what State may want to do with its tax system, or what it should do with respect to taxation from one perspective or another, it is always constrained by what it can do. Tax policy choices are influenced by a country's economic 27. Campbell, R: The Law Unto Itself: Norton Books. 28. Kennedy, Paul: Rise and Fall of Great Powers: Penguin Book: 1990. 29. Gibbon: Rise and Fall of Roman Empire: Casstell Book: London 2002. 30. p-2, Id 31. :p-2, Id structure and its administrative capacity. These factors may reduce the tax policy options available to the State.32 Having said that, I will propose that present money bill is wanting in many areas, and requires reconsideration in the light of opinions expressed in this paper.