In Pakistan, tax disputes between the Federal Board of Revenue (Tax Collector) and taxpayers have become increasingly common, leading to a heavy burden on courts and a delay in the delivery of justice. Traditionally, these disputes are handled through lengthy and complex legal processes, which not only increase costs for both sides but also cause frustration among the public. In recent years, the concept of Alternative Dispute Resolution (ADR), particularly mediation, has been recognised as an effective tool for resolving tax-related conflicts more efficiently and amicably. It is done with the belief that a more cooperative approach could help both taxpayers and tax authorities come to a mutual understanding without dragging each other into long court battles.
In many countries, such as the United Kingdom, the United States, South Africa, and Bangladesh, mediation has been successfully used to resolve tax issues. These countries have developed strong frameworks to support ADR, and Pakistan can benefit from studying and adopting similar systems. Alternative dispute resolution (ADR) lacks much traction and often takes a backseat in Pakistan, as court litigation has become standard practice for settling disputes. People are often hesitant to use ADR as a court because litigation is usually used in Pakistan for resolving disputes. Litigation has been used as a medium to resolve commercial disputes. Nevertheless, there are certain things that ultimately increased the use of ADR: the adverse effects of litigation, the unfolding environment for work, laws supporting ADR, and the support from the judiciary.
In the case of COMMISSIONER INLAND REVENUE VS M/S RYK MILLS, Honourable Justice Mansoor Ali Shah held in a tax dispute that "A show cause notice can also be viewed as being akin to alternative dispute resolution(“ADR”) as it provides a pre-litigation opportunity for the recipient to present their position and show cause. By doing so, the matter can potentially be resolved before it escalates and requires any adjudication. This not only saves time and resources but also encourages the efficient resolution of disputes, acting as an effective mode of resolving disputes outside of the traditional legal framework. Thus, while acting as a means to ensure due process and fair trial by allowing the recipient to explain their position and respond to the allegations before any legal action is taken, the issuance of a show cause notice also acts as a tool to resolve the issue in the prelitigation stage, similar to the objective of ADR."
Pakistani courts are overburdened because of the large number of pending cases in courts. The number of cases has increased, which ultimately delays the justice system. The increase in cases and the delay in the justice system create room for implementing ADR. There is a report by Business Recorder that shows that at the end of 2023, RS 2.88 trillion was present before the Appellate Tribunal Inland Revenue (ATIR) in unclaimed pending cases. The report mentioned that 98,956 litigation cases involved approximately RS. 3.673 trillion.
In this total amount, Rs. 1.46 trillion was tied up in 65,255 pending cases at the appellate tribunal, which shows the highest figures. While Rs 1.427 trillion was associated with 20,618 pending litigation cases at the commissioner appeals, a division of the FBR.
There is another report that showed that there were 2881 pending cases of Rs 91.6 billion that were yet to be disposed off in the Supreme Court of Pakistan and 5506 cases of a total amount of Rs 299.913 billion that were still pending in the Lahore High Court. Moreover, the document highlighted that 3,335 cases in the Sindh High Court amounted to Rs163.106 billion that were still pending.
The Pakistani government formally introduced ADR into tax laws through the Finance Act of 2004. This move allowed taxpayers to approach the Federal Board of Revenue (FBR) with a request to form an Alternative Dispute Resolution Committee (ADRC) to resolve their issues. The ADRC includes representatives from the FBR, independent experts, and sometimes tax professionals. However, the system faced several problems. The procedures were not clearly defined, decisions often took too long, and there was confusion about whether the committee’s recommendations were binding or not. As a result, the original goal of reducing litigation and promoting out-of-court settlements was not fully achieved. Another outstanding aspect that led to the failure of this regime was the procedural change in the settlement of disputes that required the creation of the ADR Committee (hereinafter to as the Committee) by the Federal Board of Revenue.
In the Finance Act 2024, last year, there was a suggestion, according which, some of the provisions of the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, and the Federal Excise Act, 2005 should be amended in the following ways, To reduce the appellate forums to three and the process of the cases to be quick, and among these three suggestions, ADR was involved. It proposed that ADR be given immunity from suit, prosecution, and any other legal proceedings; that the tribunal must make the taxpayer aware of the ADR at the very first instance; that the SEOs resolve the dispute through ADR; and that the threshold of ADR be reduced from RS.100 million to RS.50 million.
This year in January, a devastating update was given to Prime Minister Shabaz Sharif. He was told about the tax-related cases that will be heard in different courts and tribunals across the country, which number 33,522 and whose value is Rs. 4.7 trillion. This huge amount gives the room for implementing a resolution mechanism. If even a small portion of these disputes can be resolved through mediation, it would greatly help the national economy.
The use of the Alternate Dispute Resolution Committee (ADRC) to navigate the excess cases would be a significant step not only for FBR and taxpayers but also for the national treasury. It would make the procedure simple and productive and build a strong relationship between the government and the citizens.