FCC throws out pleas against super tax

Reaffirms parliament's exclusive legislative competence in taxation

ISLAMABAD:

The Federal Constitutional Court (FCC) has given the first big relief to the federal government by upholding Section 4(b) and 4(c) of the Income Tax Ordinance, 2001 which is estimated to add Rs310 billion in public revenue.

A three-member FCC bench led by Chief Justice Amin-ud-Din Khan has issued a short order after 17 hearings in the super tax case.

Earlier, the Supreme Court's Constitutional Bench led by Justice Khan had conducted more than 50 hearings. Later the matter was transferred to the FSC after the new court was formed under the 27th Constitutional Amendment.

Around 2,200 long-pending tax cases concerning Sections 4(b) and 4(c) of the Income Tax Ordinance, 2001 haven been disposed of after this short order.

The bench has reaffirmed parliament's exclusive legislative competence in taxation by setting aside the judgments of the Islamabad High Court (IHC) as well as Lahore and Sindh high courts.

The cases arose from tax levies under Section 4(b) for Tax Year 2015 and Section 4(c) for Tax Year 2022. While Section 4(b) had largely been upheld, Section 4(c) had been read down or struck down in some high courts rulings on grounds of alleged retrospectivity, discrimination, irrationality of tax slabs, double taxation, and inequity.

Senior counsels including Makhoom Ali Khan, Khalid Jawed Khan and Dr Farogh Naseem appeared on behalf of private entities. Hafiz Ahsaan Ahmad Khokhar, Asma Hamid and Ashtar Ausaf Ali represented the Federal Board of Revenue (FBR) and other government functionaries.

A former law officer, who represented the private clients in this case, said Section 4(b) petitions were weak as all three high courts had upheld levy of supertax under Section 4(b).

To that extent the decision of the FCC seems correct as petitioners had a very weak case. However, in Section 4© cases for the Tax Year 2022, all high courts had decided in favour of the taxpayers.

"I think the FCC decision on 4© is hard to justify and appears unduly supportive of the FBR and the government. The court's function is to interpret the law on settled principles and not act as the recovery wing of the government, which appears to have happened here," he said.

He said to the extent of discrimination against 15 industries subjected to higher rate of supertax, the FCC should have struck down the provision in schedule.

Single and division benches of three high courts, comprising some of the finest experts in tax matters were unanimous in declaring this blatant discrimination as ultra vires.

"The only relief given by the FCC is to the extraction companies which had foreign arbitration clauses in the agreements with the government which would have resulted in international awards against the government," he said.

An ex-law officer said the judgment will erode taxpayer's faith in the judicial system which is already at its lowest for many decades.

Another lawyer said the FBR will recover 200-300 billion. However, the economy will suffer in the larger picture as businesses will start to close businesses and shift to other countries like Bangladesh, Sri Lanka and Indonesia.

"There is no commercial sense to invest in Pakistan where not only the cost of business is higher but the taxes are expropriatory," he added.

Hafiz Ahsaan Ahmad Khokhar defended the FCC order and said it would protect substantial revenue, clarify the limits of judicial review, strengthen parliamentary supremacy, uphold the doctrine of separation of powers, and establish a binding precedent for future taxation disputes.

It is to be noted that none of the three judges on the FCC bench had any tax-related background and nor they had authored a single reported judgment in any important tax matter.