Huzaima Bukhari & Dr. Ikramul Haq
“By withdrawing tax measures through Statutory Regulatory Orders (SROs), the government is subverting the budget”—Dr. Kaiser Bengali, a noted economist and technical member, National Finance Commission from Sindh.
Dr. Kaiser Bengali, in an interview with a newspaper has said that “the giving of tax breaks by the federal government in the middle of the year has started affecting the revenue share of provinces, resulting in a significant reduction in transfers during the first six months of the current fiscal year”. According to Dr. Bengali, whenever the Federal Board of Revenue (FBR) comes under pressure to give a boost to the revenue collection, it starts resorting to “the old tactic of burdening the lower and middle class taxpayers”.
From July to December 2012, the federal government transferred Rs. 592 billion or 37.8% of the annual commitments made under the 7th National Finance Commission (NFC) Award to provinces whereas it should have been 45%. For the current fiscal year, the federal government is expected to disburse Rs. 1.45 trillion to the provinces as per their share in tax revenues—the provinces are entitled to 57.5% of the total tax collection but in the first six months, Punjab received Rs. 278.6 billion or 39.3% of its share of Rs. 710.3 billion, Sindh received Rs. 154.1 billion or 41.2% of its share of Rs. 373.6 billion, Khyber-Pakhtunkhwa received Rs. 96.4 billion or 39.9% and Balochistan was given just Rs. 63.2 billion or 47.4% of its annual share of Rs. 133.3 billion.
Dr. Bengali has claimed that lower revenue collection, as was the case last year, would jeopardise the federal and provincial budgetary frameworks. “Owing to the FBR’s inability to collect projected revenues, provincial budgets run into deficits that contribute to further widening of the national budget shortfall”, he added. Substantiating his claim, Dr. Bengali said that “besides the adverse implications of political appointments on top FBR positions, the following tax breaks affected the collections:
- withdrawal of the biggest new revenue spinner – 1% withholding tax on manufacturing – resulting in a revenue loss of Rs. 18 billion.
- drastic cut of federal excise duty on sugar to 0.5% aimed at benefiting the influential sugar industry owners, causing loss of Rs. 8 billion to the national exchequer.
- 50% cut of sales tax for steel melters causing revenue loss of nearly Rs. 4 billion.
Dr. Bengali demanded that “all SROs affecting the revenue share of provinces should be approved by the Council of Common Interests (CCI)—the Constitutional body headed by the prime minister with all chief ministers as its members”. The demand of Dr. Bengali is judicious. Total loss of revenue through SROs issued during the last few years is estimated about Rs. 1200 billion—unprecedented concessions to the rich made the State poorer and the masses indebted enormously. A very important constitutional provision has escaped everybody’s attention. Article 162 of the Constitution debars even the National Assembly to grant tax exemptions or concessions without prior approval of the President. The power to issue SROs delegated to the federal government by the Parliament is blatant violation of supreme law of the land. How can Parliament delegate a power which cannot be exercised by itself without the prior sanction of the President?
The principle of “no taxation without representation”, embodied in Article 77 read with Article 162 of the Constitution, is perpetually and flagrantly violated—a lamentable act that remains unnoticed at all levels. The prime culprits are members of parliaments who have been delegating their legislative power of levying taxes to the federal government (through FBR) though required to act within the four corners of the Constitution. Authority to issue SROs for extending any kind of exemption or concession in respect of any tax is gross violation of Article 162 of the Constitution which says:
“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.”
The delegated power to an executive authority to issue SROs is in utter violation of Article 162 as parliament itself is not authorised to consider any Bill or amendment that imposes or varies a tax or duty, the whole or part of the net proceeds whereof is assigned to any province, unless the same is first approved by the President. Exercise of delegated powers by FBR to vary a tax or duty through SRO is a blatant violation of Article 162 which has never been challenged and even no suo moto action is taken by the apex court that is to interpret and enforce the Constitution—this confirms our intellectual bankruptcy in understanding and implementing the supreme law of the land.
Enforcement of Rule of Law determines the failure or success of a society. In the context of tax laws, it means that taxes are imposed through parliamentary process, rather than through administrative discretions (SROs). Article 77 of Constitution says that no tax shall be levied for the purposes of the Federation except by or under the authority of the Act of Parliament. Thus delegation of legislative power to the executive to vary a tax or duty renders the entire tax system unconstitutional. The so-called wizards sitting in FBR have been playing havoc with tax laws by issuing infamous SROs and administrative instructions—granting exemptions or modifying the taxes imposed by the parliament or even levying taxes under the garb of rule-making powers.
Dr. Bengali has rightly highlighted the malady but has not suggested the right remedy i.e. withdrawal of all provisions delegating powers to the executive to issue SROs in view of Article 162 of the Constitution, taking these to CCI is not the answer. Tax administrators should be given powers to enforce tax laws and not to vary or modify them to negate the principles enshrined in Article 77 and 162 of the Constitution. Tax laws should be framed and enacted through a constitutional process and their proper enforcement is to be ensured by tax administration. All segments of the society should adhere to the rule that nobody is above law. In Pakistan, tax laws are meant only to fleece the poor for the luxuries of the rich. The privileged classes pay no taxes on their collossal incomes and wealth but the poor are subjected to all kinds of oppressive taxes. Adding insult to injury, they get nothing in return—even deprived of protection to their lives and property, what to speak of basic facilities of health, education, transport and housing.
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The writers, tax lawyers, are members of visiting faculty of Lahore University of Management Sciences (LUMS).