Feisal Naqvi

Parliament’s abdication

In Uncategorized on November 14, 2012 at 4:14 am

I was asked recently by a distinguished economist whether I would consider filing a petition in the Supreme Court against our system of taxation, and more specifically, against the whole SRO system.

My response to the distinguished economist was threefold. I told him first that he was right and that the SRO Raj was probably illegal. Second, I told him a petition would be a waste of time since there are too many judgments to the contrary. And third, I told him that it didn’t matter.

Let me explain why.

To begin though, we must start with a segue into bureaucratese. The term “SRO” is an acronym for the phrase “Statutory Regulatory Order”. In other words, an order issued by the executive branch of government under powers delegated to it by Parliament can be — and often is — called an SRO.

So far, the reader must be thinking, what’s the big deal? Well, SROs are a big deal because of the way our tax laws are structured.

In practically all countries of the world, rates of taxation are determined by the legislature. This is because the power to tax is the most fundamental economic power of the state and as such, its exercise is normally entrusted to the highest and most powerful body of each country. In most countries, the “highest and most powerful body” is the legislature. In Pakistan, that body is the Ministry of Finance.

How can that be, you may ask. After all, Article 77 of the Constitution is titled “Tax to be levied by law only” and further expressly states: “No tax shall be levied for the purposes of the Federation except by or under the authority of an act of Parliament.” How then can taxes be levied by unelected bureaucrats?

The short answer to this conundrum is that our tax system is set up in reverse. The various tax laws consist of framework statutes, which impose a standard artificially high rate (e.g., 50 per cent) on every good or service within their purview. At the same time, the vast majority of those activities and services then get either wholly or partially exempted from the tax rate specified by the parent statute. And the legal instrument, which is used to notify those exemptions is a numbered and dated SRO. The net effect of the system is thus to take the power to tax away from Parliament and put it in the hands of the bureaucrats issuing the SROs.

According to the distinguished economist, there are more than 4,700 different tax regimes in Pakistan. What he means is that each and every industry has, over the years, worked out its own special deal with the tax authorities. These deals are then enshrined in SROs. Not surprisingly, the combination of discretionary power and very high financial stakes means that SROs are often rumored to be issued for other than sound financial reasons. In fact, getting dodgy SROs issued is such a cliché that it is a crime punishable under the NAB Ordinance!

Fine, next question: why is this unconstitutional?

The reason the SRO system is unconstitutional is because it amounts to a complete abdication by Parliament of its constitutional function to make laws. In simple terms, Parliament cannot pass a law which says that whatever Nathoo wants is law (because that would amount to “excessive delegation”). By the same token, Parliament cannot pass a law which says that the rate of sales tax shall be whatever Nathoo thinks it should be (or whatever the Ministry of Finance thinks it should be).

Which brings us to the next question: if our tax laws are so obvious an example of “excessive delegation”, why won’t the courts declare them to be unconstitutional?

The ostensible answer is that the demands of a modern state are so complex, so multifarious and so unpredictable that it is impossible for a legislature to anticipate all of the contingencies state officials may have to face. As such, the legislature is permitted to delegate part of its powers of legislation, provided the statute contains clear guidelines.

There is some considerable truth in this argument. At the same time, this argument has been abused to such a great extent — especially in financial cases — that it has now developed into an omnibus rationale, capable of justifying anything and anything. For example, in Banarsi Das v. State of Madhya Pradesh, AIR 1958 SC 909 a five-member bench of the Supreme Court of India held that the rate of tax, the rate of exemption and the identity of the goods being taxed could all be left to executive discretion. In simple terms, excessive delegation is a loser argument, especially in tax cases.

The more honest answer is to be found in history. Lest we forget, our political and constitutional system did not arrive fully formed, like Athena from the head of Zeus. Instead, this system gradually emerged from the protective womb of the British Raj and power was doled out to the popularly elected representatives in small doses over decades. Partition may have ostensibly speeded up this process but as shown by the tax laws, real power remained very much in the hands of an unelected bureaucracy. Our elected representatives have thus forever remained the equivalent of children given bikes with training wheels.

This brings me to the last question: why doesn’t it matter?

The reason why judicial acceptance of the SRO system doesn’t matter is because the SRO system is doomed: there is just too much money involved in determining tax policy for Parliament to let the bureaucracy continue in power.  Sooner or later, our elected representatives are going to realise that life will be oh so much nicer (and more democratic!) if the industry groups seeking exemptions and benefits are forced to petition Parliament rather than the Ministry of Finance. That development has already taken place in India. And it is only a matter of time before it happens here.

Parliamentary committees in charge of taxation — such as the House Ways and Means committee in the US — are generally renowned for their corruption. As and when the National Assembly takes over tax policy, our system is unlikely to be any different. But it will be more transparent. And it will be more democratic.

Published in The Express Tribune, November 13th, 2012.


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