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By Dr. Ikramul Haq[*]
Levying of taxes on “agricultural income” is sole prerogative of the Provinces under the 1973 Constitution of Pakistan (hereinafter: “the Constitution”). In recent years, a number of enactments imposing agricultural income tax (sic) were promulgated in all the four provinces of Pakistan. All of theses failed to address the most important constitutional question: what is “agricultural income”? They were under the impression that this expression could be construed in any manner they deemed fit. They could not realise that if this expression is vulnerable to variable constructions then the very application of Article 70(4) read with Entry 47 of the Federal Legislative List of the Constitution will not be possible. It appears that neither the federal nor the provincial legislatures have given any thought to this vital issue while levying income tax on “agricultural income”.
The result is that the Federation violated the Constitution as early as in 1988 by adding two provisos in clause (1), Second Schedule to the Income Tax Ordinance, 1979 (hereinafter: “the Ordinance”). The Federation through the Finance Act 1988 required that in the case of directors of companies and persons engaged in business or profession, “agricultural income” should be included in their total income for “rate purpose” only. The Federation, in fact, indirectly levied tax on “agricultural income” violating the cardinal principle of constitutional law that what is not permitted directly is equally prohibited indirectly. This gross violation of Article 70(4) &142(c) read with Entry 47 of Federal Legislative List remains unchallenged (probably unnoticed as well) even after a lapse of 12 years.
This shows how much we understand or respect our Constitution, and how indifferent we are as a nation towards the supremacy of Constitutional rule. It s a mockery of law that the Federation through Finance Act 1988 and SRO 766(I)/88 dated 7th September 1988 violated the Constitution of Pakistan and no one has taken note of it during the last 12 years.
The consequence of this unconstitutional amendment can be understood from the following example:
- Mr. ‘X’ has below taxable income of Rs. 30,000 from a business source. He has agricultural income of Rs. 40,000 (from land inherited on the death of his father). Mr. ‘X’ is not liable to income tax as agricultural income is exempt under the Income Tax Ordinance, 1979 and his non-agricultural income is below taxable minimum limit, but due to above mentioned unconstitutional amendment, he will have to pay a tax of Rs. 509 for the assessment year 2000-2001.
Rs 509, in fact, is a tax on his “agricultural income” as his non-agricultural income is below taxable limit. Can Federation levy tax on “agricultural income” in view of Article 70(4) & 1429(c) read with Entry 47, of Federal Legislative List? The answer is a big NO, but the example given above proves beyond any doubt that the Federation in 1988 committed a gross violation of the Constitution of Pakistan.
Coming back to the most vital question as to what is “agricultural income” for the purpose of Entry 47, Part 1 of Federal Legislative List provided in Fourth Schedule to the Constitution, the following aspects need consideration:
a) In case there is no definitive meaning of “agricultural income”, then the Federation and Provinces can encroach upon each other’s constitutional jurisdiction in levying income tax on it.
b) How will a Province determine as to what is “agricultural income” for the purpose of levying income tax on it, which is its sole prerogative under Article 70(4) & 1429(c) read with Entry 47 of the Constitution?
c) Uniformity on all Pakistan basis is necessary for the determination of expression “agricultural income” so that all the provincial laws in respect of this income conform to Constitutional command, as well as to avoid discrimination between the people of different provinces.
The answer to these vital areas concerning constitutionality of income tax on “agricultural income” is available in the Constitution itself. Article 260(1) of the Constitution in respect of this expression says:
In the constitution, unless the context otherwise requires, the following expressions have the meaning hereby respectively assigned to them that is to say, –
“Agricultural income” mans agricultural income as defined for the purpose of the law relating to income tax.
This is an exhaustive and exclusive definition leaving no room for any controversy. In terms of Article 70(4) read with Entry No. 47, Pat 1 of the Federal Legislative List and Article 142(c) of the Constitution of Pakistan, the Provinces are competent to levy income tax on “agricultural income”, as defined in the Income Tax Ordinance, 1979. Did any Provincial Legislature pay attention to this constitutional command? Do income taxes imposed by Provinces on “agricultural income’ conform to this constitutional command?
Before answering these questions, it seems imperative to discuss the definition of “agricultural income” as contained in section 2(1) of the Income Tax Ordinance of 1979, as the Constitution itself relied on it. It reads as under:
“(1) “agricultural income” means-
(a) any rent or revenue derived from land which is situated in Pakistan and is used for agricultural purposes;
(b) any income derived from such land by-
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii);
(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator, or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any operation mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on:
Provided that the building is on, or in the immediate vicinity of, the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of the rent-in-kind by reason of his connection with the land, requires as a dwelling-house, or as a store-house, or other out-building;”
The above definition cannot be altered even by the Federal Parliament without the prior sanction of the President of Pakistan as provided in Article 162 of the Constitution that says:
- Prior sanction of President required to Bills affecting taxation in which Provinces are interested: – No Bill or amendment which imposes or varies a tax or duty the whole or pat of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression “agriculturalincome” as definedfor the purposes of the enactments relating to income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter, moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President.”
Underlined for emphasis)
Since the issue is that of distribution of legislative powers between Federation and Provinces, the Constitution takes extraordinary care in defining the expression “agricultural income”. In order to protect the rights of Provinces it also imposes an embargo on the Federation not to introduce any Bill aimed at varying the meaning of the expression “agricultural income” except with the previous sanction of President of Pakistan.
The historical record shows that even the authors of the Constitution violated this constitutional command. In a landmark decision in 1977, in the first time in history of Pakistan, it was decided by Zulfikar Ali Bhutto to impose income tax on agricultural income at the Federal level and the 1973 Constitution was accordingly amended. Consequently, in the Finance (Supplementary) Act, 1977 the definition of agricultural income as obtaining in section 2(1) of Income Tax Act, 1922 was amended removing the words ”and is either assessed to land revenue in Pakistan or subject to a local rate assessed and collected by the officers of the Government as such”. The aim of this exercise was to broaden the scope of agricultural income with a view to subjecting it to tax for which a schedule was also enacted.
It was tragic that on 5th July 1977, a military dictator overthrew the government of Zulifkar Ali Bhutto. The historic decision of taxing “agricultural income”, as passed by Federal Parliament in the shape of Finance (Supplementary) Act, 1977, was thwarted by the military regime of Ziaul Haq. The feudal legacy continued under his 11-year long rule and the mighty absentee landlords did not pay a single penny as income tax. It is, however, true that other oppressive taxes levied on agricultural lands by the colonial masters remained in force. So we protected our colonial heritage, but refused to implement a revolutionary measure of taxing “agricultural income” in 1977.
Nobody has taken notice of this gross violation of our Constitution in three decades. First at the time of altering the meaning of expression “agricultural income” through the Finance (Supplementary) Act, 1977, no previous sanction of the President was sought. The authors of the 1973 Constitution committed a gross violation of Article 162 themselves albeit with a good intention. It is strange that pre-1977 definition of “agricultural income” was not restored in 1979, when Gen. Ziaul Haq himself promulgated the 1979 Income Tax Ordinance repealing the 1922 Income Tax Act. Since the Federal Legislature gave up the idea of charging income tax on “agricultural income” it was unlawful not to retain the pre-1977 definition of this expression. Resultantly, the violation of Article 162 that was committed in 1977 still persists!
The arbitrary (rather unlawful) change in the definition of “agricultural income” in 1977, without the previous sanction of the President as required under Article 162, might have been protected under Article 75(4) of the Constitution, but the spirit of Constitution requires that the Federation should not alter or amend the definition of “agricultural income” as prevailing in the Income Tax law unless previous sanction of President is sought. At the same time, the Province while levying income tax on “agricultural income” should follow the same definition.
Both the Federation and Provinces under the Constitution are bound to follow the definition of “agricultural income” as provided in the Income Tax Ordinance, 1979 while determining their legislative powers in terms of Articles 70(4), 141 and 142 read with Forth Schedule to the Constitution. However, it is a matter of great concern that the Federation violated the commands of Constitution as narrated above in respect of tax on “agricultural income”. The same is true for the Provincial Legislatures. Even a cursory look at laws promulgated by them to tax “agricultural income” (and amendments therein from time to time) shows that:-
(a) NWFP did not even provide the definition of “agricultural income” in its “Northwest Frontier Province Agricultural Income Tax Ordinance, 1993”. The tax levied under the name of “Income Tax” was, in fact, a land tax on the basis of produce index units. This was nothing but a mockery of legislative process. If there was no political will to impose INCOME TAX on “agricultural income”, then what was the need to hoodwink the people by calling it Agricultural Income Tax.
(b) The same was the case with Sindh Agricultural Income Tax Act of 1994 as amended from time to time.
(c) The Punjab Agricultural Income Tax of 1997, as amended from time to time, was no exception. No effort was made till 2000 to impose income tax on total incomeearned from this source. A face-saving device was restored to satisfy the foreign donors by enhancing land tax on acre basis providing different rates in respect of irrigated and unirrigated lands.
(d) In Baluchistan, the position was no different till 2000. From 1993 to 1999, the Baluchistan Legislature promulgated various Agricultural Income Tax Ordinances, amended from time to time, following the same pattern as was adopted in the other three provinces.
The above analysis shows that none of the four provinces, while levying income tax on “agricultural income” followed Article 260 of the Constitution. All the laws passed by them were agricultural income tax just in name, whereas in substance no income tax on “agricultural income” was imposed till the financial year ending 30th June 2000 by any province. It shows an attitude of indifference and apathy towards constitutional provisions.
In 2000, all the provinces promulgated the so-called laws imposing (sic) income tax on “agricultural incomes” as an alternate base to land tax. The income tax on net agricultural income is payable only if land tax falls short of it. It is yet another eyewash. Who will determine net agricultural income? This is just to please the foreign donors that we have finally imposed income tax on agricultural sector in Pakistan. The reality is that there is still no political will to tax this source, especially when the civil-military bureaucracy own substantial cultivated lands as merit and gallantry awards. It appears that Pakistan will never come out of feudal shackles.
It is well established from the above analysis that the Provinces either do not levy income tax on “agricultural income” (as defined in the Constitution) and where such a tax is imposed, even as eyewash, the constitutional mandate and commands have been violated. One wonders what is happening in Pakistan. The military as well as civil governments have shown disrespect of the Constitution alike. This explains why constitutional democracy has failed to work here. No country can become a democratic society by just following the system of parliamentary democracy unless it demonstrates by action (not through lip-service which is very common in Pakistan) that constitutional commands are respected in letter and spirit. In Pakistan we have witnessed just the opposite; lawmakers themselves violate the law and advise others to show respect for rule of law!
[*] Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. Dr. Ikram is Chief Partner of Lahore Law Associates (fax: +92 42 7226953, e-mail: irm@brain.net.pk; website: http://www.paktax.com.pk). He is a member of the visiting faculty of the Institute of Direct Taxes in Lahore. He served for 12 years as Deputy Commissioner of Income Tax. He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani law and global narcotics trade, some of which are co-authored with his wife, Mrs. Huzaima Bukhari, Additional Commissioner of Income Tax. He has been awarded Doctorate of Law for his research: Tax Reform in Quasi-Constitutional Perspective.