Tax exemptions of Rs50b defy IMF

PCAA, PAA exempted via Acts of parliament approved weeks after IMF-SBA

ISLAMABAD:

Pakistan has granted a Rs50 billion annual income tax exemption to two government departments, violating the International Monetary Fund (IMF) programme and its own tax law. This decision faced resistance from tax authorities despite being approved through two Acts of Parliament.

Official documents show that the Pakistan Civil Aviation Authority (PCCA) and Pakistan Airports Authority (PAA) were granted income tax exemptions through two Acts of Parliament weeks after the approval of the $3 billion Stand-By Arrangement (SBA).

The annual cost of the income tax exemption for this fiscal year alone is Rs50 billion, as per the documents. Sources reveal that the Federal Board of Revenue (FBR) made efforts to stop the tax exemption but encountered resistance from the Ministry of Law and Justice and other concerned authorities. These exemptions were not granted under the Income Tax Ordinance of 2001, violating section 54 of the Ordinance.

The Ministry of Law has supported the Civil Aviation Authority’s contention for the Rs50 billion income tax exemption.

The parliament approved two new laws, the Pakistan Civil Aviation Authority Act, 2023, and the Pakistan Airport Authority Act, 2023, in August last year, weeks after the IMF Executive Board approved the $3 billion bailout package. Pakistan cannot grant any income tax exemption until it is discussed and approved by the IMF.

Sources mention that the FBR and the Ministry of Finance were not in favour of the income tax exemption, with the FBR attempting to recover the amount from the Civil Aviation Authority.

The IMF board is scheduled to meet late next month to approve the staff level agreement and release the remaining loan amount of $1.1 billion. The government is also in the process of seeking yet another bailout package.

Documents indicate that the FBR believed the exemption was not available to both authorities as it was not provided under the Income Tax Ordinance, 2001. Section 54 bars any such exemption to any entity provided under any other law.

Section 3 of the Pakistan Civil Aviation Authority Act, 2023, provides that the Pakistan Civil Aviation Authority established under the Pakistan Civil Aviation Authority Ordinance, 1982, shall be deemed the authority established for the purposes of the Pakistan Civil Aviation Authority Act, 2023.

According to the Pakistan Civil Aviation Act 2023, “notwithstanding anything contained in the Income Tax Act, 2001, or any other law relating to income tax, super tax, sales tax on services, or property tax, the authority shall be exempted from paying any such tax on its income, services, profits, gains, or property.”

According to the Airports Act, “notwithstanding anything contained in the Income Tax Act, 2001, or any other law relating to income tax, super tax, sales tax on services, or property tax, the Authority shall be exempted from paying any such tax on its income services, profits, gains, or property.”

The Ministry of Law and Justice has backed the CAA’s claim for Rs50 billion income tax exemption.

This issue is a classic case of competing non-obstante clauses; two conflicting sets of legislation need to be interpreted in a purposive manner, and all efforts must be made to harmonise and reconcile two conflicting enactments. If the above is impossible to achieve, a non-obstante clause becomes effective, according to the Law Ministry opinion.

“In the opinion of this Division, the intent of the legislature as envisaged in section 34 of the Pakistan Civil Aviation Act, 2023, and section 38 of the Pakistan Airports Authority Act, 2023, is too clear to ignore,” according to the Law Ministry’s written opinion.

It adds that the legislature has categorically ousted the operation of the Income Tax Ordinance positively by naming its own former enactment and then restricting its operation in regards to the two special laws mentioned above.

“Henceforth, it is the opinion of this (Law) Division that the non-obstante clauses as provided in sections 34 and 38 of the PCA and PAA 2023 would, in light of the Judicial Pronouncement quoted above, by virtue of being enacted latter in time, override the provisions of section 54 of the ITO Ordinance, 2001.”

However, the FBR has not accepted the Law Ministry’s opinion. The tax authorities are facing an uphill task to collect Rs879 billion from the taxpayers in the month of March. The State Bank of Pakistan has instructed the commercial banks to keep their branches open beyond scheduled timing to facilitate tax payments.

The FBR is of the view that it differs with the Ministry of Law and Justice on the grounds that the Income Tax Ordinance is the “only special law” dealing with taxation. Therefore, for the purposes of taxation, neither the Pakistan Civil Aviation Act, 2023, nor the Pakistan Airport Authority Act, 2023, are special laws, it added.

Published in The Express Tribune, March 29^th, 2024.

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