SHC strikes down “unconstitutional” super tax

The Sindh High Court (SHC) on Thursday struck down up to 10% super tax – terming it “discriminatory” and “ultra vires to constitution” – in a move that will strip the government off of Rs247 billion in revenues and has also exposed the poor working of the tax machinery.

The provincial court has issued a short order in which it barred the government from charging the 1% to 10% super tax for the tax year 2022, which ended in June this year, even before the new budget was implemented. The court also termed the government’s decision to charge 10% super tax from 13 selected sectors as “discriminatory”.

“Sections 4C of the Income Tax Ordinance (ITO) 2001, is read to reflect that the levy shall be applicable from the tax year 2023,” reads the SHC short order. The government had imposed the super tax with effect from tax year 2022. Now, the first payment of the super tax under the new order will be due in September or December next year, depending upon the annual year cycle of the company.

Section 4C of the ITO 2001 deals with the super tax on high earning persons, stating that “a super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on the income of every person.” The section is one of three major tax sections that were introduced in June, but are currently under scrutiny of various courts due to serious constitutional questions. These steps had been taken in haste, without proper legal examination, or by ignoring the advice of the Law Division. The other major tax measure that the courts are scrutinising is section 7E – a levy of income tax on immovable properties – which under the constitution is a provincial subject.

At the time of the budget, the government had hoped to collect Rs215 billion to Rs247 billion via super taxes.

The Federal Board of Revenue (FBR)’s lawyer had informed the SHC that the total impact of the super tax is Rs247 billion. The staggering figure will now adversely impact the annual tax collection target of Rs7.470 trillion. Out of Rs247 billion, the FBR had estimated to collect Rs180 billion in December. And out of Rs180 billion, Rs87 billion were expected to be paid by the government owned companies this month.

According to the SHC short order, “Notwithstanding the foregoing, the first proviso to Division IIB of Part I of the First Schedule to the Income Tax Ordinance 2001 is declared to be discriminatory, hence, ultra vires to the constitution.”

The first proviso had been inserted in the law to charge 10% super tax. “Provided that for tax year 2022 for persons engaged, whether partly or wholly, in the business of airlines, automobiles, beverages, cement, chemicals, cigarette and tobacco, fertiliser, iron and steel, LNG terminal, oil marketing, oil refining, petroleum and gas exploration and production, pharmaceuticals, sugar and textiles, the rate of tax shall be 10% where the income exceeds Rs300 million,” reads the first proviso of the schedule that has now been omitted by the court.

The petitioners have challenged the constitutionality of Section 4C of the ITO 2001, “and the provisions appurtenant thereto, introduced vide Finance Act 2022, inter alia, upon grounds that the same unlawfully vitiates vested rights accrued in past and closed transactions; is discriminatory, confiscatory; demonstrably devoid of any intelligible differentia having rational nexus with the object of classification; and amounts to impermissible double taxation.”

The court further stated that operation of this judgment shall remain suspended for a period of 60 days from the date hereof; hence, the securities furnished pursuant to respective ad interim orders shall remain intact for the said period.

The government had also imposed a 1-4% super tax on people and firms earning from Rs150 million to over Rs300 million. The companies falling in this bracket would either pay poverty alleviation tax or the super tax, except those 13 sectors. The government has imposed a minimum of over Rs1 trillion in additional taxes on the people and companies for the fiscal year 2022-23 – the highest taxation in a single year. By doing so, the coalition government has beaten the Pakistan Tehreek-e-Insaf (PTI) government’s record of Rs735 billion in taxation measures through the fiscal year 2018-19 budget. However, despite the record taxation, the FBR is now struggling to achieve its monthly tax collection target of Rs965.2 billion.

The FBR Chairman Asim Ahmad said on Thursday that the machinery was now chasing a target of Rs900 billion.

In the last 10 days of December, the FBR needs to collect a whopping Rs635 billion to achieve its goal – a impossible feat. The target of Rs965 billion had been set on the assumption that the FBR would receive around Rs260 billion in December on account of taxes that were levied in the budget. Sources said that the FBR requested the finance minister to play his role in convincing the government-owned entities to pay 10% super tax. But after the SHC’s decision, the government cannot even collect this tax from public sector companies. Any excessive treatment with these companies would be tantamount to undermining the rights of the shareholders, as many of these companies are listed at the stock market. For the first half (July-December) of FY2022-23, the government set a tax target of Rs3.65 trillion. As of Wednesday, however, the FBR had only received Rs3.01 trillion, with a balance of Rs635 billion still pending.

Published in The Express Tribune, December 23^rd, 2022.

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