Court questions FBR's ability to draft laws

The Lahore High Court (LHC) has declared that the new income tax rates for late filers cannot be charged on the past and closed property transactions and advised the Federal Board of Revenue (FBR) to hire experienced draftsmen to avoid such legislation.

The development came amid a cumulative 7% decline in withholding tax collection on the sale and purchase of properties during the first three months of current fiscal year despite more than doubling the tax rates in budget.

The provincial court gave the judgement after hearing a writ petition filed by the Defence Housing Authority (DHA) – the military's commercial real estate arm.

DHA pleaded before the court that the FBR should be stopped from charging late filer rates from previous tax years as an amendment to the law had been made in the current year's budget.

"This writ petition is allowed and it is declared that Rule 1A and its proviso do not have any retrospective operation and that these provisions shall have no effect on the transactions, returns and assessments concluded and completed prior to the promulgation of Finance Act 2024," said the court.

In the budget, the coalition government increased the withholding tax for tax return filers and non-filers, and introduced a new category of late filers to force people to file income tax returns till the deadline of September 30 every year.

Ironic though, the FBR has twice extended the date for filing tax returns to October 30. It has negated the purpose of late filing category and turned it into another tax collection tool.

By mid-October, the FBR had received about 4.4 million income tax returns, which were double the number at the same time last year. However, the 4.4 million returns were still two million lower than the total returns filed in tax year 2023. The FBR received Rs114 billion in income tax along with the 4.4 million returns.

LHC observed that the tax principles laid down in various previous judgements make it abundantly clear that where an amendment is brought about in fiscal statutes, it shall not be given a retrospective construction and cannot apply to past transactions until such intent is manifestly expressed.

"On a proper construction of the proviso to Rule 1A, it cannot be said that the legislature in categorical terms expressed its intention to apply it to returns filed in the past three years to make the taxpayers who were in default liable for tax on the rates mentioned in the 10th Schedule," said the court order.

The government made multiple changes in Rule 1A. It increased income tax on the sale of properties for filers up to 4%, for late filers up to 8% and for non-filers to 10%. On property purchases, it increased the tax to 4% for filers, 8% for late filers and 20% for non-filers.

However, the tax collection during the July-September quarter decreased to Rs48 billion on both sales and purchases, down Rs3.1 billion due to sluggish conditions in the realty sector.