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Constitutionality of SROs

Huzaima Bukhari & Dr. Ikramul Haq

The federal and provincial tax codes of Pakistan contain numerous exemptions and concessions while many are added, modified or withdrawn through executive orders, called statutory regulatory orders (SROs). These exemptions and concessions have not only eroded the tax base but have also contributed towards widening the rich-poor divide. These waivers, concessions and exemptions are depriving the State of revenue worth billions of rupees that is urgently needed for the ever-increasing needs of the vast majority of population for providing basic amenities of life, education, medical, housing and transport. The most important and painful aspect of these SROs is gross violation of the supreme law of the land and judicial acquiesce about it.

Through SROs, the Executive nullifies or varies provisions of tax laws approved by Parliament, whereby 1973 Constitution unmistakably provides in Article 77 that the sole prerogative to levy taxes is with the Legislature and this power cannot be delegated as enunciated by the apex court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)] that is binding on all State organs under Article 189 of the Constitution of Pakistan. SROs levying taxes or exempting the same continue even after the judgement of Apex Court but no contempt proceedings or any other punitive action is taken against the violators for gross violation of Constitution.

According to a report published in Business Recorder on March 31, 2015, a draft Bill “is under consideration of the government to amend Sales Tax Act, 1990; Customs Act 1969, Income Tax Ordinance 2001 and Federal Excise Act 2005 to delete provisions dealing with the powers of the FBR to issue SROs for exemption of duties and taxes.” It is strange that what is against the Constitution of Pakistan will be undone through a Money Bill This is adding insult to injury. The power delegated to Executive for levying taxes or granting exemptions has already been declared ultra vires by the Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)] holding as under:  

“It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd. V. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192).” [Page 18, Para 20]

The World Trade Organisation (WTO), in its latest report prepared for fourth Trade Policy Review of Pakistan (March 24 & 26, 2015), has observed that in Pakistan “the decline in revenue can be attributed to a number of factors, most notably widespread tax evasion, a wide array of tax exemptions, and failure to widen the tax base. Furthermore, the prevalence of Statutory Regulatory Orders (SROs), which are discretionary measures providing tax and tariff exemptions and relief to vested interests, are a significant drain on fiscal revenue”. The report has highlighted the following points:

  1. According to an estimate, the issuance of 4,500 SROs has resulted in forgone tax revenue of Rs. 650 billion. The use of ad hoc trade policy instruments under SROs remains common and severely undermines the predictability of the trade regime; it also supports a culture of rent-seeking.
  2. After tariff rates amended annually in the Finance Act, Federal Board of Revenue (FBR) enjoys authority to provide tariff exemptions/concessions, and to add or modify import rules.
  3. Though a number of SROs were withdrawn during 2014, but the system continues casting doubts about transparency and fiscal discipline.
  4. Exemptions and partial exemptions provided for industries under the SRO regime are a central source of deviation from the most-favoured nation (MFN) rates.
  5. Transparency, and therefore analysis, of the level and structure of Pakistan’s tariffs has greatly complicated the large number of exemptions and partial exemptions which are announced separately through SROs and do not affect the customs duty rate shown in the customs duty column of the tariff schedule.
  6. SROs also specify whether specific products are exempted from sales and other domestic taxes, as well as rules and ordinances affecting imports. Although available on the FBR website, separate SROs make it difficult to discern the applicable taxes and other measures imposed on individual tariff items which may be covered under multiple SROs.
  7. SROs often provide the exemptions for inputs for certain industrial sectors. By confining regulations to select sectors these exemptions operate as a de facto licensing scheme.
  8. The most prominent exemptions applicable to the industrial sector were provided in three SROs accounting for 23 percent of Pakistan’s imports in 2009-10.On average, companies or industries under these three SRO provisions receive concessions up to around 11 percentage points from the statutory rates, applied non-uniformly across the industries. In addition, a comprehensive scheme of exemptions in the automotive sector, which discriminates by type of market (Original Equipment Manufacturer (OEM) versus after-sales parts), is implemented under SRO 656(I)/2006, auto-vendors under SRO 655(I)/2006 and SRO 693(I)/2006. Although the FBR website indicates that a number of SROs have been rescinded in 2014, the system of SROs continues to hamper transparency. 
  9. It remains difficult to provide a clear picture of which concessions/exemptions continue to operate and to assess their incidence. The extent to which new exemptions and concessions extend, replace or duplicate previous ones are often unclear as is the number of amendments that have been made to some of these SROs. Their use makes the tariff regime complex and less transparent.
  10. By altering the structure of tariff incentives unpredictably, with uncertain effects on resource allocation, these concessions and exemptions may counteract economic efficiency by raising tariff and increasing effective rates of protection. 
  11. The cost of exemptions and concessions as a result of import-related SROs amounted to Rs 137 billion during the financial year 2013-14. It is worth noting that Pakistan is committed to eliminate most tax or customs tariff exemptions or concessions granted through SROs and to approve legislation by end-December 2015 to permanently prohibit the practice as part of the request for financial assistance from the IMF. The FBR maintains lists of active SROs for both imports and exports. In the case of imports some 92 SROs remain active. Out of this overall number, some 38 active trade-related concessionary SROs, introduced between 1991 and 2010 hamper trade, increase the cost of doing business and breed malpractice. The regime is complex, discriminatory and lacks transparency. 

It is well-established that through SROs the mighty sections of society are provided “legal ways” to amass more and more wealth—according to a report exemptions and concessions given to them were of Rs. 5,500 billion in the last 5 years alone as admitted by Chairman FBR before the Senate Standing Committee on Finance & Revenue on May 13, 2014. The glaring examples of abuse of delegated power through SROs reflect in beneficial notifications for sugar and steel industries owned by men in power. Bureaucracy is also beneficiary of these powers e.g. SRO 569(I)/2012 issued on 26 May 2012 providing that government officials in grade 20-22 would pay just 5% tax on their monetized transport allowance as a separate block of income.

The issue of SROs levying taxes or varying tax rates or granting exemptions and concessions has yet not been debated from the constitutional point of view. Reduction of duties and tax concessions for cartels possessing enormous money power by FBR, extended by using its executive authority available in the form of SROs, has created innumerable tax distortions in tax system. The burden of taxes in the wake of such concessions is invariably shifted on the poor. Pakistan is a unique country where the executive authority can conveniently undo tax laws passed by the Parliament under delegated powers which is gross violation of Article 162 of the Constitution of Pakistan, which reads as under:

162.     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 part of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression “agricultural income” as defined for 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.

Article 162 debars even the National Assembly to grant exemptions without the prior approval of the President but interestingly, this power has been delegated unconstitutionally to an executive authority by the Parliament. How Parliament can delegate a power which it cannot exercise itself without the prior sanction of the President? By delegating powers under tax codes, the Legislature has violated Article 162 of the Constitution. It should rectify the situation immediately in the light of dictum laid down by the Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)].


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

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