Tax Reform Era --- Role of Professionals

1. Tax Reform Era --- Role of Professionals BY Younus Rizwani Sheikh President APTBA at Asia Pacific Tax Conference 2006

2. I would like to take this opportunity to thank the organizers of the seminar for inviting me to express my views on the Tax Reforms Era – Role of professionals. From the time Income Tax Act, 1922 was promulgated in undivided India, Professionals have always played a major role in the implementation of the tax laws. When Pakistan achieved independence in 1947 the tax machinery of Pakistan was in its teething state and was looking to eminent tax practitioners who had practicing tax before pre-partition days for assistance in the collection of the taxes by the new Government. At his juncture, these tax practitioners motivated the business community to pay their due share of taxes so that a strong foundation can be laid. The Income Tax Bar Association, Karachi was established in 1956 by a group of eminent tax professionals a numbers of whom like Mr. Iqbal Naeem Pasha, Mr. Masood Ahmed Abbasi, Mr. H. Shaban are still present in our midst and are playing their role in the tax development in Pakistan.

3. From the time ITBAK was formed the bar took itself the task of apprising the government in power with the needs and the difficulties being faced by the tax payers and the members of the Bar, and every year proposals were sent to the government for amendments in the I.T.Act /ordinance and critical evaluation was made and sent to the Government authority in respect of the amendments to be made in the I.T statutes. The role of professionals was not only appreciated in Pakistan but also in India where huge crowds used to gather to listen to the comments of that great tax practitioner Pakiwala’s comment on provisions of the Finance Acts. In both these countries the governments had also recognized the potential of the tax professionals and were inducting them in various committees & task forces formed to initiate and evaluate various tax reforms.

4. In Pakistan, stalwarts like Mr. Iqbal Naeem Pasha, Mr. Rehan Hassan Naqvi, Mr. E.U.Khawaja, Mr. Siraj-ul-Haq Memon, (Late) Mr. Z.H.Jafri were inducted into various committees and now no committee formed by the government on tax legislation is considered to be complete unless it includes my fellow panelist Syed Shabbar Zaidi. All these professionals had voluntarily and without any honorarium devoted considerable time and input for the effective completion of the assignments entrusted to these committees. Legislation of tax laws though is a major part of taxation but the development of the tax laws can not be complete without its effective interpretation by the courts, and a number of professionals have played a major role in assisting the courts in the implementation of the tax laws.

5. The decades of 60 & 70 were dominated by tax wizards such as Late (Justice) Noor-ul-Arfeen, Late (Justice) S.S.Nusrat and Mr. Ali Ather. In 80s & 90s the trio of Mr. Iqbal Naeem Pasha, Mr.Rehan Hassan Naqvi, who can also be called as Baba-e-Writ and Mr. Siraj-ul-Haq Memon have played a major role in the development of tax laws. I will be failing in my duty if I fail to give credit to that Honorable Judge who during his tenure of judgeship in High Court & Supreme Court authored approx 150 trend setting judgments in which most of the thorny issues of taxes were settled. He is none other then my lord Justice Saleem Akhtar who has recently retired as a Federal Tax Ombudsman. Presently my lords Justice Nasim Sikandar of the Lahore High Court & Mr. Justice Mujibullah Siddiqui of Karachi High Court are laying new precedent in the field of taxation

6. The concept of taxes in Pakistan underwent a drastic change when the mantle Finance Ministry was adorned our Prime Minister Mr. Shaukat Aziz. His tenure is now regarded as a tax reform Era and these tax reforms began to be efficiently implemented when the present incumbent of the post of Chairman CBR Mr. Abdullah Yousuf took over his office. The Income Tax Ordinance, 2001 is based on the concept of voluntary compliance backed by strong audit. The provisions of this Ordinance and the amendments made by Finance Act, 2004 have come as a very pleasant surprise and have strengthened the faith in the credibility of the Government and its intention to the taxpayers to carryon a taxpayer friendly policy.

7. A number of proposals, which the various associations were craving for a number of years have been incorporated in the new Finance Act. For a change instead of nullifying the judgements of the Superior Courts an amendment has been made to give effect to the judgement of the Lahore High Court Rawalpindi Bench. The rate of Sales Tax, additional tax and penalties under the Sales Tax Act, 1990 which to start were very high and arbitrary have been rationalized. The process of Sales Tax Registration has been simplified, anomalies have been removed from section 73 and other controversial sections. The Custom Tariff has also been rationalized. The Post Finance Act 2004 era has also been full of surprises. Refunds, which were deemed to be un-recoverable are being received by the taxpayers through mail.

8. Communication between the taxpayers and the tax collectors are restricted to correspondence only and no direct communication is being made. Tax Education and Tax Facilitation are at their incredible best and for the first time the taxpayers are being given their due respect. This is a clear indicator of the Government’s efforts to make tax payer friendly reforms. There are definite positive vibes emanating from the Government’s action and I hope the taxpayers will respond to the positive vibes emanating from the action of the Government and start fulfilling their national obligation in true national spirit.

9. At this point, I am reminded of the following couplet of Khumar Barabankvi: SUNA HAI QAYAMAT QARIB AAH RAHI HAI KHUMAR AB MASJID KO JANAY LAGAY HAIN And note that Khumar has started going to Masjid it is the bounden duty of us, professionals to play our role to ensure that Khumar i.e. CBR continues on its reform agenda which is only possible if the visit to Masjid results in acceptance of his prayers i.e. enhanced collection of revenue.

10. The government has laid a great trust on the tax payer and under the provision of section 120 of this Ordinance, the return filed by a taxpayer unconditionally is converted into an assessment order and the only tools available with the department are either amendment of the assessment under the provision of sub-section (5) & (5A) of section 122 or selection of case for audit under the provisions of section 177. Despite the fact, that the procedure of finalization of the assessment has been simplified but due to complex form of return more than 75% of the tax payers still prefer to get their returns prepared and filed through tax professionals. The preparation and filing of the return casts a very heavy responsibility on the professionals preparing the return. Since, the department is committed to unconditionally accepting the return filed by the taxpayer and converted automatically into an assessment order it becomes the sacred duty of the tax professionals to assume their role of a

11. tax assessor in addition to his role as a tax advisor and motivate his client to file a true and correct return of income as under the new law there is no possibility that a correct return will be rejected and arbitrary assessment will be made, which acted as a deterrent in the pre-reform era for the taxpayer to reveal their true state of affairs. I therefore, feel that in this post reform era the role of the tax professional has not been minimized but has been enhanced to a large extent. In the pre-reform era, the avowed intention of the revenue was to eliminate the professionals whom they insultingly referred to as the middleman and establish direct contact with the taxpayer. However, the amendments made in the Ordinance and the measure introduced by various Finance Ordinances to practically implement the government reform policies, a number of roles have been provided to the professionals for the implementation of the tax laws.

12. Vide Finance Ordinance, 2004 the concept of Alternate Dispute Resolution (which is now invoked in all over the world for settlement of legal disputes) was introduced in the Income Tax Law by incorporation of section 134A similar amendments were also made in the Sales Tax Act, 1990, the Customs Act, the Federal Excise Act and the repealed Wealth Tax Act, 1963. As pointed out above, this concept has been incorporated in all the revenue acts and the revenue authorities are encouraging the taxpayers to resolve their disputes and hardships through mediation through the alternate dispute resolution committee. Great importance has been attached to the professionals and in almost every ADR committee consisting of maximum three numbers. One to two members are almost always from the selected panel of professionals like chartered accountants, advocates and tax practitioners.

13. In this way, the professionals have been saddled with the very important responsibility of mediating the disputes between the revenue and the taxpayer and submitting their recommendations to the Central Board of Revenue for resolving the dispute and hardship. Despite the fact, that under the law, CBR is not bound to accept the recommendations of the alternate dispute resolution committee but practically it has been seen that in more than 80% of the cases, the recommendations made by the ADRC have been accepted by the CBR and appropriate orders on the basis of these recommendations have been passed, which have been implemented by the department. Therefore, the role of the professionals is no longer limited to tax planners and advisors but has been extended that of adjudicator and therefore, now he is required to look at both sides of the problems and sort it out in accordance with his conscience and provide even handed justice.

14. I am sure that my fellow professionals will handle their assignments as members of the ADRC impeccably and within a few years more than 90% of the disputes and hardships will be mediated and disposed-of by the ADRC. In almost all the revenue laws including the Income Tax Ordinance and the Sales Tax Act the revenue authorities have been authorized to appoint a firm of Chartered Accountants or Cost and Management Accountants to conduct special Income Tax audits and Sales Tax audit. . This audit is different from a normal audit of the accounts as in this audit, the auditor is also expected to point out the discrepancies in the accounts as far as they relate to the infringement of the provisions of Income tax Ordinance and Sales Tax Act and also recommend to the tax authorities the action to be taken to retrieve the loss of revenue, if any.

15. I am of the view that while conducting these audits, the professionals enjoy immense power to conduct all sorts of enquiries and inspection and examination required to arrive at the correct state of affairs. I would advice my colleagues to conduct these audits in a judicious manner without fear or favour and finalize the recommendations on the basis after carefully considering the provisions of the act / ordinance under which they have been assigned this audit. However, at this juncture had been frankly concede that the tax reforms initiated by the government may result in complete elimination of those professionals whose main assignment consisted of preparation and filing of return and finalization of assessment on routine and mechanical basis.

16. Let me warn my fellow professionals that in the post reform era when less and less documents are required to be filed the process of assessment has been minimized to negligible extent. Only those professionals would survive who are well versed in the taxation and revenue laws and are capable of advising and opinions on various provisions of tax laws and conducting cases before the department where returns are selected for audit or where amendment is sought to be made u/s 122. I apprehend that the profession of the Income Tax practitioner will become a seasonal profession like in other countries specially USA, where tax professionals are engaged by companies during the season of preparation and filing of returns. To protect the interest of my fellow professionals, I recommend that it should be made complusory that every return filed should be certified by an Advocate or chartered accountant or income tax practitioner. By making this recommendation, I expect that my fellow

17. fellow professional will respect this trust if it is imposed on them by government and only certify the return only after examining and ascertaining its authenticity. I would also request the government to make a law like the one in the legal practitioners and bar council act that every tax payer declaring an income of above certain limit must compulsorily appoint a tax retainer. As pointed out by me in earlier part of this paper, the association of tax practitioners have a major role to play even in this post tax reform era these associations have initially to play the role of a watch dog which means that these associations should be monitoring the implementation of the tax policy of the Federal Government and ensure that the Federal government does not back out of its commitments.

18. We should however, not hold brief for the tax evaders and the dodgers and should never recommend any proposal which may need to ramped tax evasion. Another important area in which these associations should function is to act as a lion between the tax payers and the tax collectors. We should bring the genuine difficulties and problems faced by the taxpayers to the notice of the tax collectors and recommend measure by which these difficulties problems can be dissolved. We must also propagate any policy of the government, which according to us the continuation of the reform process and will be mutually beneficial and lead to the economical development of the country and motivate the tax payers to say LAB-BAIK and assist him in implementation of that.

19. In return, we must also be continue our old job of presenting proposals for positive amendment in the revenue laws and critically review the amendments made in the revenue laws by the government. We should also be advising the government on how to attract foreign investment and want incentive offer to foreign investors, which may result in economic development of the country. In return, we expect that the doors of the revenue authorities would always open for us and our proposals are thoroughly examine before their acceptance or rejection and any criticism made by us on the government policies may be taken in correct spirit. I would also recommend that professionals should be more in the efforts to promote foreign investment and should be a part of all the delegations and committees, which are interested with the task of soliciting foreign investment.

20. I would like to ensure the federal government if the recommendations made by me through this august forum are implemented in later and spirit and the role of professionals is broadened it may lead to a substantial broadening of a tax base, which I regret to say is one target the CBR has failed to achieve in last 59 years despite all the resources at their command. I would urge all the stakeholders, the revenue department, the professionals and the taxpayers to unite so that we may achieve what should be the ultimate goal of all of us un-presented economic growth of our beloved country. I would once again thank the organizers of Asia Pacific Tax Conference for inviting me to make this presentation and would like to admit that it gives me immense pleasure to communicate with such a elite audience .