SHARJEEL TAREEF
A landmark decision by Appellate Tribunal Inland Revenue (CIR, Zone-I, LTU, Lahore Vs. M/S. Allied Bank Limited Lahore) has provided crucial clarity on the scope of excise tax in the financial sector, ruling that internal “interchange fees” between banks are not subject to Federal Excise Duty (FED). The judgment, which sided with Allied Bank Ltd. against tax authorities, offers a profound insight into a judicial philosophy favouring strict statutory interpretation and has significant implications for jurisprudence and the digital economy.
The legal point of law at the heart of this case was whether the interchange fee-a sum transferred from a merchant’s bank to a cardholder’s bank to cover transaction costs-constitutes a “taxable service” provided to a customer. Tax authorities argued it was a payment for services rendered and thus liable for FED. However, the tribunal meticulously dismantled this argument, establishing a clear legal precedent.
The ratio decidendi, or the core reason for the decision, hinged on a precise definition of a taxable event. The tribunal’s reasoning, articulated by Member Mian Abdul Bari Rashid, concluded that a taxable service under the Federal Excise Act, 2005, must involve a direct charge to a customer. The interchange fee, the judgment found, is not a charge levied on either the cardholder or the merchant. Instead, it is an internal settlement mechanism, a component of a “revenue-sharing arrangement” governed by inter-bank and card network rules. Because no direct service-for-fee transaction occurs with an end customer, the fundamental condition for applying the tax is not met.
This judgment is a clear exhibition of a judicial philosophy rooted in strict constructionism, particularly vital in fiscal law. The tribunal underscored the established principle that tax liability cannot be created by inference or analogy; it must be explicitly mandated by the legislature. The ruling states that a law’s scope “cannot be extended to receipts or arrangements not squarely falling within the explicit language of the charge.” This demonstrates a commitment to judicial restraint, where the court refrains from expanding the tax net beyond the clear letter of the law, thereby upholding the separation of powers.
The wider implications of this decision are threefold. For jurisprudence, it reinforces the bedrock principle of legal certainty, assuring businesses that their tax obligations will be determined by explicit statutes, not by interpretive expansion. For legislation, the ruling sends a clear message to lawmakers: if the intent is to tax complex internal financial arrangements, the law must be amended with unambiguous and specific language. The judiciary will not fill legislative gaps.
Finally, for society and the financial industry, the judgment provides stability and predictability. By insulating internal bank-to-bank settlements from this form of taxation, it prevents a potential increase in costs that could have ultimately been passed down to merchants and consumers, potentially hindering the growth of digital payments.
The tribunal’s decision is more than a technical victory for a financial institution. It is a principled defense of clarity and predictability in tax law. By focusing on the precise mechanics of the transaction and the explicit wording of the statute, the judgment champions a legal environment where fiscal obligations are transparent and based on clear legislative intent, not administrative interpretation.
Sharjeel Tareef, Advocate High Court, is a seasoned legal expert in constitutional and corporate law, advising public and private sectors and contributing to legal and policy thought.