“A tax system’s function should be solely to raise enough revenues in order for the government to perform its requisite tasks. While all taxes are bad, some taxes are worse than others. So, what you want your government to do is to collect taxes in the least damaging way possible, but still be able to raise the requisite amount of revenues for the government to function effectively. In addition, because of the damaging consequences of taxes, the government should spend as little as possible in achieving its objectives. Efficiency in government spending is essential for economic prosperity”—Dr. Arthur Laffer, Keynote address at ‘Africa 2025’ Conference.
On September 13, 2001, the duo of General Pervez Musharraf [seized power in a military coup on October 12, 1999, and resigned on August 18, 2008, from the presidentship to avoid impeachment] and Shaukat Aziz [served as Prime Minister of Pakistan from August 20, 2004, to November 15, 2007 as well as the Finance Minister from November 6, 1999 to November 15, 2007], decided to promulgate a new income tax law on the dictates of International Monetary Fund (IMF).
The new law repealed the time-tested Income Tax Ordinance 1979 after 22 years, when it attained acceptability and stability after binding judicial pronouncements by high courts and the Supreme Court. Before the needless enactment of the new law, many professionals opposed it on two main grounds. Firstly, the Musharraf regime lacked legitimacy—it could not enact a new income tax law violating the well-established and widely-accepted principle, ‘no taxation without representation’. Secondly, it contained numerous typographical errors, conceptual inconsistency, dichotomies, and complexities.
Ignoring the valid objections, General Musharraf promulgated the Income Tax Ordinance 2001, following the footsteps of General Zia-ul-Haq, who promulgated the Income Tax Ordinance 1979. Income Tax Ordinance, 2001, even after thousands of amendments since 2002, is still full of drafting blunders—complicated, obscure, and convoluted.
The compelling reason for the hurried promulgating of the Income Tax Ordinance, 2001, without even removing typographical errors and conceptual blunders, was a precondition imposed by the IMF that the last tranche of Stand-By Arrangement (SBA) of U$131 would not be released unless a new income tax law, drafted by an Australian, Lee Burns, then Assistant Professor, was promulgated. It was a naked and crude blackmailing.
On September 6, 2001, the then Central Board of Revenue (CBR) formally placed a request to the Cabinet Division to include the draft Income Tax Ordinance, 2001 in the agenda of the next Cabinet meeting. The Ordinance was to be enforced in July 2002, but promulgated on September 13, 2001, two days after the New York tragedy [9/11].
Had the Government waited for some more days, it could have avoided the promulgation of an obnoxious law. After General Pervez Musharraf joined the Bush Camp to support the military attack/occupation of Afghanistan to usurp resources in the name of the ‘war on terror’ (sic), the IMF released the last tranche without any hassle.
The Musharraf-gifted Income Tax Ordinance, 2001 remains in operation without any debate in the Parliament. Three major political parties that assumed power in 2008, Pakistan Peoples Party Parliamentarians (PPP), Pakistan Muslim League Nawaz (PMLN), and Pakistan Tehreek-i-Insaf (PTI), claiming to be champions of democracy, never bothered to replace this controversial and notorious law. What a mockery that an ugly legacy of a military dictator, validated under Article 270AA(2) of the Constitution of the Islamic Republic of Pakistan [“the Constitution”], still haunts the nation!
The self-suiting and self-serving laws of increasing salaries and perquisites of parliamentarians (sic) and even amendments in the supreme law of the land—the latest one Constitution (Twenty-sixth Amendment) Act, 2024 [26th Amendment]—since 2008, were passed in hours in National Assembly and Senate. However, an oppressive income tax law adversely affecting the lives of millions of underprivileged Pakistanis and dampening business growth from the era of a military dictator is retained—it exposes tall claims of undoing the legacy of military dictators.
The Income Tax Ordinance, 2001 is such a badly-drafted law that it has been amended (for the worse) nearly 3000 times since 2002!
Finance Act, 2003, and the Finance Ordinance 2002 made 661 changes in the Income Tax Ordinance, 2001. This became a unique law, amended horrendously, even before the taxpayers could file their first returns of taxable income in September 2003!
Income Tax Ordinance, 2001 is a mockery of legislation—a sad reflection on our late commando General (sic), who shamelessly bowed before the IMF. However, it is equally appalling that four elected (sic) parliaments since then could not undo the legacy of a military dictator by enacting a new income tax law as an Act of Parliament as mandated by Article 77 of the Constitution, after thorough public debate, discussion in Parliament, and by adopting a democratic process.
The apathy, on the part of our elected representatives (sic), in not enacting income tax law as per Constitution, is highlighted by the Supreme Court of Pakistan in CIT v Eli Lily (Pvt) Ltd (2009) 100 Tax 81 (S.C. Pak) as under:
“Since the creation of Pakistan, we have not been able to frame any Income Tax Act duly debated in the Assembly. Both the Ordinances were promulgated during the Martial Law Regime otherwise the Constitution has prescribed a four-month life of an Ordinance If the Ordinance is not placed before the Assembly and it shall be enacted as an Act then the Ordinance will automatically cease to exist. This aspect also reveals that the Constitution has cast duty upon the legislative body to frame the laws within the parameters prescribed under the scheme of the Constitution”….
The fact that the Ordinance in question was issued and various amendments were incorporated before and even after the enforcement of the Ordinance 2001 raises the controversy that the Ordinance in question was promulgated without meticulous debate on the subject due to which assessees and concerned departments were compelled to agitate the issues in different courts”.
The Income Tax Ordinance, 2001 is such a badly-drafted law that it has been amended (for the worse) nearly 3000 times since 2002! It has been perpetually generating enormous litigation since its inception.
Since the Parliament and the Federal Board of Revenue (FBR) have failed to remove the inbuilt contradictions in the Income Tax Ordinance, of 2001, the nation has lost revenue worth billions—the hemorrhage will continue unless the law is repealed and reenacted. The Supreme Court in (2009) 100 Tax 81 (S.C. Pak) further pointed out:
“It appears that the Ordinance was drafted in post haste and the draftsman omitted to incorporate this important provision. This observation is supported by the fact that the Ordinance was subjected to speedy, successive, and large-scale amendments, particularly at its very inception.” It may be seen that section 238 provided that the Ordinance shall come into force on a date to be appointed by the Federal Government by notification in the official gazette.
Accordingly, vide notification (SRO No. 381(I)/2002) dated 16.6.2002, the Ordinance came into force with effect from the first day of July 2002, but with more or less 1000 amendments inserted by the Finance Ordinance, 2002, as calculated by the learned counsel for the respondents…..
Had the un-amended provision of subsection (1) of section 239 continued on the statute book, no difficulty would have arisen regarding the treatment of assessment orders passed in respect of the assessment year ending on 30th June 2003. In such eventuality, the assessments up to the said period would have been governed under the repealed Ordinance, while the assessments of the post-enforcement period of the Ordinance of 2001 would be governed under the latter Ordinance”.
In the above case, the Supreme Court categorically held: “There is a need to review the language, content, and scope of the power to amend and further amend an assessment, the power to revise an assessment, and the power to rectify mistakes envisaged in these sections so as to make it in line with the legislative intent of consolidating the law relating to income tax so as to make it easily comprehensible to the convenience of the taxpayers”.
The new income tax law should aim at the generation of resources besides achieving some limited but important economic objectives like the promotion of savings, encouragement of new investments, and conservation of energy
The above judgment (passed on 22 June 2009), binding under Article 189 of the Constitution, has not been implemented even after a lapse of 16 years! This shows the level of disrespect on the part of Parliament and FBR of the highest court of the country! FBR has failed to enforce effectively tax obligations because of conflicting and confusing provisions of the Income Tax Ordinance, 2001. It is high time that the government along with the federal budget for the fiscal year 2025-26 introduces a Bill in the Parliament for a new and simple income tax law.
There is a consensus that existing income tax law is a most undesirable piece of legislation. The direct tax system intends to achieve the twin aims of maximising revenue as well as utilising revenue for achieving socio-economic objectives—both of which remain unfulfilled because of our present outdated, anti-growth tax system. In fact, the complex regime of incentives and disincentives built into the direct tax law cannot but lead, per se, to difficulties in enforcement and to the opening of opportunities for tax dodgers/evaders.
At the operational level, the existing income tax law has resulted in undue bureaucratisation, corruption, and harassment of the citizens. Undoubtedly, the time has come to resolve these contradictions and to convert the direct tax regime into simple tax law as suggested by the Tax Reforms Commission (TRC) in its final report submitted to then Finance Minister, Muhammad Ishaq Dar, in 2016, but not made public after he marked it “secret”!
The new income tax law must tax all citizens according to their ability (abolishing all existing presumptive and minimum tax regimes, concessions, and exemptions). Taxpayers should be given assurance through the Taxpayers’ Bill of Rights that taxes collected from them would be spent for public welfare and not for the luxuries of the ruling parasitic elites and that their cases shall be adjudicated expeditiously through an independent national tax court. We need to have an income tax law that:
(a) ensures taxation as provided in Article 3 of the Constitution;
(b) provides uniformity of tax treatment as far as possible for various categories of taxpayers;
(c) reduces dependence on excessive indirect taxes;
(d) forces compliance through deterrent provisions and an effective fully automated Tax Intelligence System;
(e) eliminates all kinds of taxation through statutory regulatory orders (SROs);
(f) minimises tax concessions and exemptions, especially to the rich and mighty;
(g) establishes National Tax Court, working directly under the Supreme Court; and
(h) removes distortions and anomalies to make the law coherent and consistent.
The new income tax law should aim at the generation of resources besides achieving some limited but important economic objectives like the promotion of savings, encouragement of new investments, and conservation of energy. The recommendations by 2016 TRC remain largely unimplemented due to the apathy of the successive governments. The report of TRC should be made public for open debate.
A draft of simplified income law is available in Taxation [April 2014 issue]. It escaped the attention of TRC, FBR, and other stakeholders. All concerned—members of Majlis-e-Shoora, tax administrators, trade and professional bodies, taxpayers, tax professionals, and the public at large—may debate it, suggest improvements, and highlight shortcomings and deficiencies. The adoption of this simple law after a meaningful public debate and appropriate amendments/modifications can accelerate economic growth leading to better income tax collection—the potential is as high as Rs. 18 trillion if levied judiciously and collected diligently through a professional, automated federalised tax agency.