The case of the missing returns

Over time, the Federal Board of Revenue (FBR) – the apex body responsible for collecting federal taxes – has earned notoriety in many areas: from missing assigned and revised targets to presenting excuses for not bridging the huge tax gap, from failure of reforms to mega scandals, from a lack of will in taxing elected members to the unauthorised leakage of their data to the media, from misreporting figures to bungling of funds, from corruption to highhandedness, from penalising honest taxpayers to granting amnesties and immunities to non-compliant tax evaders.

But another unnoticed, inexcusable and highly lamentable lapse is the FBR’s non-filing of tax returns since 2007 as required under the law. The FBR is no more covered under Article 165(1) of the constitution of Pakistan – its case falls under Article 165A of the constitution as it was established under an Act of Parliament.

The FBR was established through an act of parliament – the Federal Board of Revenue Act of 2007, repealing the Central Board of Revenue Act, 1924 (IV of 1924). Section 3 of the act says, “There is hereby established a Board to be called the Federal Board of Revenue, which shall consist of not less than seven members to be appointed by the Federal Government”.

As an independent board, established by an act of parliament, the FBR in terms of section 2(12) read with section 80(2)(b)(ii) of the Income Tax Ordinance, 2001, is to be assigned the status of “company”. Every ‘company’ under section 114(1)(a) of the Income Tax Ordinance, 2001 is bound to file tax returns whether it has taxable income or not. This provision of law is blatantly violated by the FBR vis-a-vis Article 165A(1) of the constitution which says:

“For the removal of doubt, it is hereby declared that Majlis-e-Shoora (Parliament) has, and shall be deemed always to have had, the power to make a law to provide for the levy and recovery of a tax on the income of a corporation, company or other body or institution established by or under a Federal law or a Provincial law or an existing law or a corporation, company or other body or institution owned or controlled, either directly or indirectly, by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income”.

It is clear from plain reading of Article 165A(1) and in the light of many cases decided by high courts that the FBR after 2007 was liable to tax and no more enjoyed blanket exemption given in Article 165(1) of the constitution, which says:

“The Federal Government shall not, in respect of its property or income, be liable to taxation under any Act of Provincial Assembly and, subject to clause (2), a Provincial Government shall not, in respect of its property or income, be liable to taxation under Act of Majlis-e-Shoora (Parliament) or under Act of the Provincial Assembly of any other Province”.

Since 2007, in view of Article 165A(1) of the constitution, the FBR was to file tax returns, even if earning no taxable income, but it did not bother to abide by the law that it enforces on others. The FBR ignored the judgement of Supreme Court reported as ‘Collector of Sales Tax and Central Excise, Lahore v Water & Power Development Authority and others [2008 PTR 86 (S.C.Pak.)]’ holding that exemption under Article 165 of the constitution is no more available to bodies like the FBR entrusted with both sovereign and non-sovereign functions by governments.

The way forward is for the FBR to get a National Tax Number (NTN) immediately and file the missing returns. Will the House Standing Committees on Finance & Revenue take notice of the glaring lapse of the apex revenue authority? The record shows they will never do so. The other office is that of the auditor general of Pakistan which can take cognizance under Article 170(2) of the constitution, which says:

“The audit of the accounts of the Federal and of the Provincial Governments and the accounts of any authority or body established by, or under the control of, the Federal or a Provincial Government shall be conducted by the Auditor-General, who shall determine the extent and nature of such audit”.

It is high time the auditor general of Pakistan ordered the audit of the FBR’s accounts and raised audit objections for non-complying with tax provisions as well as alleged overstating of revenues by blocking refunds of Rs200 billion, admitted by the finance minister of Pakistan on November 26, 2015 before the National Assembly’s Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatisation.

Will the auditor general of Pakistan fulfil his constitutional obligation? This is again a million-dollar question. On December 16, 2015 the current government finally accepted that it bypassed the accountant general of Pakistan Revenue in clearing the pending dues of the Independent Power Producers (IPPs) in 2013. But till today, there has been no action from the office of the auditor general of Pakistan. The same will be the case with the FBR.

In the meantime, many sceptics ask how democracy will work in Pakistan where accountability of institutions and persons holding public office is completely ineffective, except when the victimisation of a political adversary is involved.

The writers, tax lawyers, are visitingprofessors at Lahore University of
Management Sciences (LUMS).

Email: info@huzaimaikram.com