'Someone other than me' syndrome: Sales tax

The essential hallmark of any tax is its compulsory exaction from any taxpayer. However, it is perennial desire of almost every taxpayer to avoid the burden of tax under any pretext, including any concession, exemption or exclusion, which is contrived under the cloak of some notification. Under the prevailing sales tax system in Pakistan, it is the consumer, who is to bear the ultimate burden of any tax liability. The potential taxpayers endeavour to hide their identity and try to be 'off the fiscal radar' as by joining regular sales tax regime they may be exposed to many other tax liabilities as a result of cross match of chain of documents, e-commerce, and the overall documentation of the economy.
The tax collectors are statutorily required to collect the sales tax during the entire supply chain, beginning right from the stage of first purchase or import to the stage of final supply, however, the taxpayers try to frustrate this endeavour at each stage of production and manufacture in order to slash the tax-induced price of various commodities and adopt all nefarious tactics to kill the spirit of law.
There is no cavil to this proposition that tax exemptions are not to be granted for an indefinite period of time, however owing to deliberate act, collusion or slackness on the part of tax administrators that such tax exclusions remain in the field without any interruption. There is no solid system to determine or gauge its concomitant effects at macroeconomic level. The tax concessions and tax exemptions are not disturbed due to likely opposition from the strong business associations, the business magnates or the business tycoons, who wield their undue influence to continue with such fiscal benefits for an indeterminate period, rather attempt to expand its beneficial scope. There is no effective evaluation system or empirical evidence which could ascertain the precise effects on the national economy. The taxpayers covet that their baggage of tax liabilities should remain light as far as possible. Such 'fiscal whales' try to pass on the buck of tax liability to someone else and they themselves want to enjoy the benefits of fiscal favouritism at the expense of tax-compliant people. This state of affairs is not conducive for the development of a tax culture in Pakistan.
Presently, the Sales Tax Act, 1990 is an amalgamation of various taxes under the umbrella of sales tax. This hodgepodge of taxes include VAT mode of taxation, tax on production capacity of plant, tax on retail price, tax on item-to-item basis and tax on fixed rate basis and finally zero-rated local supply as well as for exports. The rates and items are kept on changing through various schedules appended with the Act. There are nine schedules which have changed the whole complexion of sales tax rather they have seriously eroded the certainty and nature of the tax.
If we go back to the history of sales tax in Pakistan, we may conclude that it remained chequered since its very inception of promulgation of the Sales Tax Act. The policymakers of taxation were and are still ambivalent to any certain mode of taxation. The history of sales tax has been staggering from one form of taxation to another, even the jurisdiction of this levy was changed from provinces to the Federation of Pakistan.
Sale tax was a provincial levy before Independence. The Sales Tax Act, 1947 was promulgated in Sindh as a provincial levy and turnover was the taxing event. Thereafter, the Pakistan General Sales Tax, 1948 was introduced and its scope was extended to all the provinces. However, turnover remained the basis of the chargeability of the tax.
The business community was dissatisfied with this mode of taxation. A committee was formed to re-examine the entire sales tax system. The committee suggested certain improvements in the then prevailing sales tax system. In the light of these suggestions and proposals, the Sales Tax Act, 1951 was promulgated. This tax system had imposed tax upon the unlicensed persons and the rate of tax was fixed at 10% of the value of goods. 'Partly manufactured goods' were excluded from the chargeability of the Sales Tax Act, 1951. Through an ad hoc arrangement, the income tax officers were vested with the powers to act as officers of the sales tax. This system remained in the field for a long period of time, however, it could not earn acceptability among the public in general and the taxpayers in particular. The lack of popularity and approval among the public prompted to revisit the situation and forced the government to introduce a new system of sales tax in a concealed manner.
The federal government had to introduce Sales Tax Act, 1990 as a part of the Finance Act, 1990 through a shortcut procedure of a money bill instead of any regular legislative procedure. The said Finance Act replaced the entire Act, 1951 in a novel and queer way and Section 13 of the Finance Act, 1990 substituted all the chapters from chapter I to XVI of the Act, 1951. Now, the federal tax is chargeable on production and distribution of taxable supplies and is also made applicable on import of goods coming into Pakistan.
Assessment of this tax is made after the issuance of a show cause notice by the assessing authority in order to determine any tax liability or fix any violation of law. The taxpayer has a right to contest the notice by submitting a reply thereto. In case, the adjudicating officer is not satisfied with the reply he may pass any order as he deems fit under the circumstances of the case.
In case any person excluding Sales Tax Department is dissatisfied with the decision, he may file an appeal before the Commissioner (Appeals) Inland Revenue. In the scheme of appellate forums, the Sales Tax Department has been consciously excluded from the category of aggrieved person. It is understandable that there is hardly any need to provide the sales tax department an opportunity to file an appeal before Commissioner (Appeal) as an aggrieved person.
It is only at the stage of Appellate Tribunal from where onwards, the taxpayer and the officer of sales tax department have been allowed an opportunity to file an appeal before the Tribunal. The constitution of the appellate forum is such wherein the taxpayer may expect a fair and impartial treatment from this quasi judicial forum. Similarly, the taxpayer and the sales tax department both can file reference before the High Court on the basis of questions of law in relation to the impugned order only.
In addition to the hierarchy of appellate forums, there is another form of dispute resolution known as Alternate Dispute Resolution (ADR). This forum works on the basis of formation of a committee system which is consisted of eminent tax figures, high calibre personages and impartial persons belonging to legal fraternity and/or technical field of taxation and audit. These persons are required to be competent enough to understand the intricacies of the tax matters. They are also required to be well-equipped with the art of negotiation with the concerned parties to arrive at an amicable solution. The criteria for selection of persons are highly demanding and the chances of availability of such persons are very thin. The persons who meet these requirements are hardly interested to join the ADR system on account of their own professional commitments.
The ADR system could not deliver as good results as were expected from this forum of dispute resolution, as both sides could not show the required dedication to make this system a successful forum. There is a lack of commitment on the part of persons to resolve the matters as swiftly as possible and could prove this system efficacious and effectual vis-a-vis the traditional judicial system.
It is an avenue of quick resolution of tax dispute that can provide an edge over the time-consuming judicial procedure. The ADR system could not prove itself time-efficient which is the salient feature and the basic raison d'etre and precise rationale of establishing this system. It may lose its existence for all practical purposes if it could not deliver the desired results timely and efficiently. The FBR also remained reluctant to set any enviable precedent to attract maximum numbers of the taxpayers and perhaps it considers this system a threat to their vested interests.
We need to re-examine the situation and explore the reasons of slow response of the taxpayers to the ADR system. It is a harsh reality that any good database and analytical foundation are the lifeblood for arriving at the right conclusion about any system. It is suggested to form a committee for the reformation of the ADR system. This could be a recipe of success in the present scenario. We need to develop a culture of earning through business and not gaining financial benefits by means of any financial gimmick, tax evasion and tax avoidance. No doubt, in tax evasion, the letter of law is killed whereas in tax avoidance, the spirit of law is killed in a skilful manner. In either situation, the state revenue adversely suffers and a country like Pakistan cannot afford the massive revenue leakage which is struggling to become less poor.
(The writer is an advocate of Supreme Court of Pakistan)