Merger of FATA/PATA & tax issues

Huzaima Bukhari & Dr. Ikramul Haq

The passage of Constitution (Twenty-fifth Amendment) Act, 2018 [“25thConstitutional Amendment”] by Senate and National Assembly, its adoption by the Assembly of Khyber Pakhtunkhwa [by vote of 92 to 7] and assent by President of Pakistan on May 28, 2018 finally ended the unintelligible status of Pakistan that divided the country into taxable and non-taxable territories. Before this amendment, Pakistan was perhaps the only country in the world where certain area remained outside the operation of tax laws, enacted by the parliaments, both federal and provincial, unless the same were specifically extended to such areas through an explicit procedure prescribed in the Constitution.

Prior to the historic 25thConstitutional Amendment, there was no chargeability of taxes in the Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA) due to bar of erstwhile Article 247(3) of the Constitution of Islamic Republic of Pakistan (“the Constitution”) as tax laws were not specifically extended by President or Governors, as the case may be for FATA and PATA. Since there was no application of tax laws, no question of exemptions could have arisen. Now, there is application of all laws, including the tax laws. It is thus necessary that special exemptions should be given by Federal and Provincial assemblies otherwise all kinds of taxes will become payable from sources within these areas. At the time of considering the 25th Constitutional Amendment by the Parliament, Article 1(2) of the Constitution of Islamic Republic of Pakistan (“the Constitution”) read as under:

(1) Pakistan shall be Federal Republic to be known as the Islamic Republic of Pakistan, hereinafter referred to as Pakistan.

 (2) The territories of Pakistan shall comprise—

 (a) the Provinces of Balochistan, the Khyber Pakhtunkhwa, the Punjab and Sindh;

 (b) the Islamabad Capital Territory, hereinafter referred to as the Federal Capital;

 (c) the Federally Administered Tribal Areas; and

 (d) such States and territories as are or may be included in Pakistan, whether by accession or otherwise.

 Now after the 25th Constitutional Amendment, it reads as under:

(1) Pakistan shall be Federal Republic to be known as the Islamic Republic of Pakistan, hereinafter referred to as Pakistan.

 (2) The territories of Pakistan shall comprise—

 (a) the Provinces of Balochistan, the Khyber Pakhtunkhwa, the Punjab and Sindh;

 (b) the Islamabad Capital Territory, hereinafter referred to as the Federal Capital; and

  (c) such States and territories as are or may be included in Pakistan, whether by accession or otherwise

As evident from above, from the definition of ‘Republic and its territories’, contained in Article 1 of the Constitution, the words “the Federally Administered Tribal Areas” have been omitted. The same words are deleted from Articles 62 and 155 of the Constitution as FATA and PATA have no longer any existence. The merger of FATA with Khyber Pakhtunkhwa and PATA with respective provinces is undoubtedly a milestone in our history. This is now complete deliverance (independence in real terms) from the colonial legacy for the residents of these areas. This laudable act, though undertaken belatedly after 70 years, should be celebrated by all, as they say it is better late than never. At the same time, tax breaks should not only continue in these areas but new tax incentive should be given to investors creating jobs in FATA/PATA.

The Bill for 25thConstitutional Amendment contained the following ‘Statement of Objects & Reasons’:

“The Federal Cabinet in its earlier meeting in 2017 in principle approved the integration of FATA with the Province of Khyber Pakhtunkhwa and the Constitution (Thirtieth Amendment) Bill, 2017 was introduced in the National Assembly which is still pending with its Standing Committee now to be withdrawn.

2. On reconsideration and in consultation with the parliamentary leaders of different Political Parties and the representatives from the Tribal Areas the Cabinet in its meeting held on 22.05.2018 decided to prepare a comprehensive Bill to integrate the Provincially Administered Tribal Areas with the respective Provinces and the Federally Administered Tribal Areas with the Province of Khyber Pakhtunkhwa to bring the people of Tribal Areas in the main stream. Accordingly, the Constitution (Twenty-fifth Amendment) Bill, 2018 has been prepared.

The Bill is designed to achieve the aforesaid objects”.

The 25thConstitutional Amendment has also amended Articles 51 and 59, which specify the number of seats allocated to each of the federating units in the national and provincial assemblies. The strength of the Senate as a result would be reduced from 104 to 96 members with the proviso that:-

“Notwithstanding the omission of paragraph (b) of clause (1) and the omission of paragraph (b) of clause (3), the existing members of the Senate from the Federally Administered Tribal Areas shall continue till expiry of their respective terms of office and on the expiry of the aforesaid terms this clause shall stand omitted.

As FATA would no longer have separate representation, the number of seats in the National Assembly is going to be reduced to 336 from 342 with the same condition:  “Notwithstanding anything contained in clause (3) substituted as aforesaid or any other law for the time being in force, the members of the National Assembly from the Federally Administered Tribal Areas to be elected in the General Elections, 2018 shall continue till dissolution of the National Assembly and thereafter this clause shall stand omitted.

Khyber Pakhtunkhwa Assembly will have 145 seats, including 115 general, 26 reserved for women and four for minorities. FATA will have 21 seats in the Khyber Pakhtunkhwa  Assembly, including 16 general, four for women and one reserved for non-Muslims “provided that elections to the aforesaid seats shall be held within one year after the general elections 2018”. It means the elections to be held on July 25, 2018 will not be affected by the 25thConstitutional Amendment.

Through the 25thConstitutional Amendment, Article 246 of the Constitution that defines the expressions “Federally Administered Tribal Areas” and “Provincially Administered Tribal Areas” is also amended, which prior to the amendment, read as under:

     246.   Tribal Areas. _ In the Constitution,

               (a)     “Tribal Areas” mean the areas in Pakistan which, immediately before the commencing day, were Tribal Areas, and include-

                         (i)     the Tribal Areas of Balochistan and the Khyber Pakhtunkhwa Province; and

                        (ii)     the former States of Amb, Chitral, Dir and Swat;

               (b)     “Provincially Administered Tribal Areas” mean _

                         (i)     the districts of Chitral, Dir and Swat (which includes Kalam), the Tribal Area in Kohistan district, Malakand Protected Area, the Tribal Area adjoining [Mansehra] district and the former State of Amb; and

                        (ii)     Zhob district, Loralai district (excluding Diki Tehsil), Dalbandin Tehsil of Chagai district and Marri and Bugti tribal territories of Sibbi district; and

               (c)     “Federally Administered Tribal Areas” include _

•    Tribal Areas, adjoining Peshawar district;

• Tribal Areas adjoining Kohat district;

• Tribal Areas adjoining Bannu district;

(iiia) Tribal Areas adjoining Lakki Marwat district;]

• Tribal Areas adjoining Dera Ismail Khan district; 

(iva) Tribal Areas adjoining Tank district;]

• Bajaur Agency;

 (va) Orakzai Agency;]

• Mohmand Agency;
• Khyber Agency;
• Kurram Agency;
• North Waziristan Agency; and
• South Waziristan Agency

After the 25th Constitutional Amendment, after paragraph (c), the following new paragraph (d) is inserted:

“(d) On the commencement of the Constitution ( 31st Amendment) Act, 2018, the areas mentioned in,- (i) paragraph (b),- (a) in sub-paragraph (i), shall stand merged in the Province of Khyber Pakhtunkhwa; and (b) in sub-paragraph (ii), shall stand merged in the Province of Baluchistan; and (ii) paragraph (c), shall stand merged in the Province of Khyber Pakhtunkhwa”.   

The 25thConstitutional Amendment has also omitted the entire Article 247 of the Constitution. It may be reminded that it was provided in omitted Article 247(3) of the Constitution of Pakistan:

“No Act of Majlis-e-Shoora (Parliament) shall apply to any Federally Administered Tribal Area or to any part thereof, unless the President so directs, and no Act of Majlis-e-Shoora (Parliament) or a Provincial Assembly shall apply to a Provincially Administered Tribal Area or to any part thereof, unless the Governor of the Province in which the Tribal Area is situate, with the approval of the President, so directs; and in giving such a direction with respect to any law, the President or, as the case may be, the Governor, may direct that the law shall, in its application to a Tribal Area, or to a specified part thereof, have effect subject to such exceptions and modifications as may be specified in the direction”.

The tax laws—namely Income Tax Ordinance of 1979, Sales Tax Act of 1990, Customs Act of 1969 and Federal Excise Act of 2005—were prior to the 25th Constitutional Amendment not applicable to areas mentioned in Article 246 of the Constitution, except where specifically extended through President or Governor for FATA or PATA, as the case may be. With the omission of Article 247 by the 31^st Constitutional Amendment, the tax laws have become operational in FATA/PATA. When these were not merged with Khyber Pakhtunkhwa, Balochistan and other provinces—tax laws were ousted by virtue of Article 247 which is now omitted. This is in this background that the Assembly of Khyber Pakhtunkhwa before dissolution on May 27, 2018 passed resolution stressing the Federal Government to continue tax exemptions for these areas.

The jurisdiction of High Courts and Supreme Court has already been extended to these areas vide the law passed by both the Hoses, namely, ‘Supreme Court and High Court (Extension of Jurisdiction to Federally Administered Tribal Areas) Act, 2018, that received the assent of the President on  April 17, 2018.

In the past, prolonged litigation took place between the companies/entities situated in areas covered in Article 246 and the Federal Board of Revenue (FBR) over taxation matters. The famous cases of Gul Cooking Industries and Bara Ghee Mills contain all the contentious issues involved. The FBR’s wizards having extremely short memory did not bother to give respect to many judgement of Peshawar High Court, elaborately interpreting the relevant provisions of the Constitution, especially in [2000] 81 TAX 360 (H.C.Pesh). In the said case the High Court held that no provision of the Income Tax Law could be invoked in areas mentioned in Article 246 of the Constitution of Pakistan. However, the FBR took the issue before the Supreme Court. The Peshawar High Court in its judgement announced on March 30, 2015 in Writ Petition No. 916-P/2013 and connected matters held as under:

• “Advance tax charged on import under section 148 of the Income Tax Ordinance, 2001, is not payable by petitioners importing goods for its utilization or consumption in Federally Administered Tribal Area or Provincially Administered Tribal Area”;  
• Declare that Sales Tax charged under section  3(1)(b) of the Sales Tax Act, 1990, is not payable by the petitioners importing goods for its  utilization or consumption in Federally  Administered Tribal Area or Provincially  Administered Tribal Area;
• Direct the Federal Government to take appropriate steps to ensure that persons carrying on business in FATA or PATA are rendered immunity from the payment of taxes under Income Tax Ordinance, 2001, and the Sales Tax Act, 1990, as the said statutes have not been extended to the said areas within the contemplation of Article 247(3) of the Constitution;
• Direct the Federal Government to take necessary steps to formulate a uniform policy for seeking securities from the persons importing goods for
• its consumption and utilization in FATA or PATA, so that the immunity provided under the Constitution is not abused and in case the imported goods are utilized or sold outside the said area, then the revenue of the State is recoverable from the securities, so provided.
• Direct that till the decision is taken by the Federal Government regarding the security mechanism stated hereinabove, the Board shall obtain from the petitioners postdated cheques for the payment of taxes at import stage under the Act and the Ordinance, as security, for goods destined for utilization and consumption in FATA or PATA. The postdated cheques shall be returned to the petitioners upon production of consumption certificates duly issued by the concerned commissioners, as specified in Notification dated 28.2.2011. It will be the liability of the petitioners to approach the respondents for the issuance of consumption certificates”.

In the wake of above orders, FBR took the matter to the Supreme Court that has through a detailed judgement [2018 SCMR 939] settled all the tax issues involving FATA and PATA. These matters related to law prior to the 31st Constitutional Amendment. All controversies relating to jurisdiction will now end as Article 247 of the Constitution is omitted. The right to tax by FBR and provincial tax authorities is now well-established in FATA/PATA, which can only be waived through exemptions give as per law (an Act of Parliament) and not by a mere resolution passed by Khyber Pakhtunkhwa Assembly before its dissolution on completing the term.

The scope of exemption reportedly would be granted for five years will be examined once the text of law is made available. Earlier, the non-chargeability of tax for FATA/PATA was for all sources of income in view of Article 247 that is no more part of the Constitution. As requested by Khyber Pakhtunkhwa Assembly, before its dissolution, to extend the tax exemption period for FATA for at least 10 years, the caretaker government as an interim step should ask the President to issue an Ordinance to this effect as National Assembly is no more in existence. After election on July 25 July, 2018 when new Assembly will sworn-in it can then adopt it as an Act. Since these areas are backward and are in the dire need of investment for rapid industrial and business development for providing jobs to the unemployed youth, the investors, no matter from which area they belong, should be given special tax concessions for 10-15 years to new units and 10 years to the existing ones.

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The writers, lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).