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Rejoinder to ‘unconstitutional taxation by provinces’  

Huzaima Bukhari & Dr. Ikramul Haq

In response to our article [Unconstitutional taxation by provinces, Business Recorder, January 3, 2020], a letter was published on January 9, 2020 under the titled ‘Unconstitutional’ taxation by provinces: SRB’s response’that raised some questions and made a few observations that need clarification, elaboration and further debate on vital constitutional provisional involved. This rejoinder is meant to further accentuate our point that provinces cannot enact any law in violation of Article 141 of the Constitution of Islamic Republic of Pakistan [“the Constitution] and once again highlight serious violations committed by the provincial legislators of this provision of the supreme law of the land, while passing various laws—relating to taxes or other statutes.

At the very outset, it is imperative to put the record straight that nowhere in our article, it was said that the provinces had no right to levy sales tax on services, rather in our earlier article [Sales tax on restaurants, Business Recorder, November 8, 2019] we strongly criticized the National Assembly for encroaching upon the rights of the provinces by levying sales tax on restaurants. The relevant parts are as under:    

The imposition of 7.5% sales tax on restaurants through Finance Act 2019 by the National Assembly, energetically defended by the Chairman of Federal Board of Revenue (FBR), is patently unconstitutional being in violation of Article 142 of the Constitution of Islamic Republic of Pakistan [“the Constitution”]. It is also the worst manifestation of federal fiscal highhandedness. After Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment], the federal government cannot levy sales tax on services. This right exclusively vests with provinces under Entry 49, Part I of the Fourth Schedule to the Constitution which says: “Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, except sales tax on services”.  

We further added that the “entries contained in the Constitution are mutually exclusive as held in Pakistan International Freight Forwarding Association v Province of Sindh & Another [(2016) 114 TAX 413 (H.C. Kar.)]. We asked the provinces to take up this issue of unlawful act in the Supreme Court of Pakistan having original jurisdiction under Article 184(1) of the Constitution of Pakistan in any dispute between any two or more Governments (that cover Federal Government and the Provincial Governments).

The author of ‘Unconstitutional’ taxation by provinces: SRB’s response’ made only two points that having bearing on the issue and rest of the write-up is only reliance on certain cases that cannot override Messers Sui Southern Gas Ltd & Others v Federation of Pakistan & Other 2018 SCMR 802  and our response on each one of them is as under:

  1. “I have read with great interest the article ‘”Unconstitutional’ taxation by provinces” carried by the newspaper on Jan 3, 2020. The learned writers have chosen to express themselves in a rather pronounced tone on an issue that deserves circumspect and careful approach. We consider it appropriate to offer our views on the matter to dispel the misconception that the write-up might create in the minds of the valued readers of your esteemed daily.

We did not choose to express anything in “pronounced tone” as alleged, but based our contention on the following unambiguous language of Article 141 of the Constitution:

141. Extent of Federal and Provincial laws. Subject to the Constitution, Majlis-e-Shoora (Parliament) may make laws (including laws having extra-territorial operation) for the whole or any part of Pakistan, and a Provincial Assembly may make laws for the Province or any part thereof.

No misconception was intended in the write-up as claimed by the author of Unconstitutional’ taxation by provinces: SRB’s response. On the contrary, the violation of the above provision on the part of the provinces was highlighted. 

  1. The Supreme Court Judgment (2018 SCMR 802), cited by the writers, essentially relates to the provisions of labour-related laws on industrial relations e.g., Industrial Relation Act, 2012, Sindh Industrial Relations Act, 2013, etc., and does not relate specifically to taxation issues.

The Supreme Court in the said judgement has established the core issue of legislative competence of the federation and the federating units. The principles laid down are not just restricted to labour-related law as misconceived. It is pertinent to mention that any pronouncement of Supreme Court, ratio decidendi or obiter dictum, is binding under Article 189 of the Constitution. This is explained in Shahid Pervaiz v Ejaz Ahmad and others 2017 SCMR 206 by the Supreme Court as under:

“A fourteen Member Bench of this Court in the case of Justice Khurshid Anwar Bhinder v. Federation of Pakistan (PLD 2010 SC 483), has concluded that where the Supreme Court deliberately and with the intention of settling the law, pronounces upon a question of law, such pronouncement is the law declared by the Supreme Court within the meaning of Article 189 and is binding on all the Courts of Pakistan. It cannot be treated as mere obiter dictum. Even obiter dictum of the Supreme Court, due to high place which the Court holds in the hierarchy in the country enjoy a highly respected position as if it contains a definite expression of the Court’s view on a legal principle, or the meaning of law.

Declaration of law by the apex court has a binding force and in this regard the position has a special characteristic as distinct from the strength or weakness of a judicial precedent under the theory of precedents—“It is not permissible to bypass decisions under any pretext even where no reason is recorded for dismissal or acceptance”—Shahid Pervaiz v Ejaz Ahmad and others 2017 SCMR 206 [Para 105 at page 254].

It is worth mentioning that any adverse, derogatory and/or contemptuous remarks about the judgement of the Supreme Court by any subordinate court of an authority can lead to serious consequences as explained in Mirza Shaukat Baig and Other v Shahid Jamil & Others PLD 2005 Supreme Court 530 as under:

“30. The learned Division Bench of Lahore High Court has ignored the case law enunciated in different judgments pronounced by this Court on the grounds which are not tenable and by ignoring the fact that the judgments of this Court being apex Court are binding upon the learned High Court in the view of the provisions as enumerated in Article 189 of the Constitution of Islamic Republic of Pakistan which, inter alia, provides that any decision of the Supreme Court shall, to the extent that it decides a question of law or is based upon or initiate a principle of law shall be binding on all other Courts in Pakistan and the learned Lahore High Court is no exception to it. It is well‑entrenched legal proposition that “the ultimate responsibility of interpreting the law of the land is that of the Supreme Court. Therefore any decision of the Supreme Court shall to the extent that it decides a question of law or is based upon or enunciates a principle of law is binding on all other Courts in Pakistan.

A decision in suo motu Shariat review petition followed by Supreme Court would be binding on all other Courts in Pakistan. Law declared by Supreme Court becomes the law of the land and is binding not only on all Courts in Pakistan but also on all functionaries of the Government.” (PLD 1971 SC 324, PLD 1985 SC 228. It is worth mentioning here that “where a judgment of Supreme Court has  become effective as from a specified date, it would be binding not only on High Court’s and Courts subordinate to it but also on all other Courts of Pakistan from that date. Therefore, High Court rightly preferred Supreme Court decision over decision of Full Bench of High Court. The decision of Supreme Court cannot be ignored on the ground that certain grounds were not urged before Supreme Court” (PLD 1987 Lah.71, 1981 SCMR 520, PLD 1973 Lah 1). “Apart from the Constitutional obligation imposed upon the Courts even the propriety demands that the Courts must follow such a law without any hesitation. Unless the law so declared is altered or overruled by the Supreme Court itself, the High Court has no option but to follow it” (PLD 1975 Lah. 65, PLD 1964 Peshawar 250).

31. We have also noted that the language as used in paragraphs 14, 15, 16 and 17 in the judgment impugned appears to be derogatory and contemptuous which cannot be ignored lightly and it is directed that care and caution must be observed while offering comments on any judgment delivered by this Court in order to avoid the possibility of suo motu action by the Supreme Judicial Council and initiation of proceedings under the contempt laws”.

In the Article, we quoted from Messers Sui Southern Gas Ltd & Others v Federation of Pakistan & Other 2018 SCMR 802, the post-Eighteenth Amendment [passed vide the Constitution (Eighteenth Amendment) Act, 2010] position vis-à-vis legislative competence of federation and federating units as under:

We are in agreement with the observation made by the learned High Court that though in a Federal system, provincial autonomy means capacity of a province to govern itself without interference from the Federal Government or the Federal legislature, but as the Provincial legislature does not possess extra-territorial legislative authority i.e. it cannot legislate regarding the establishments operating beyond the territorial boundaries of that province”.

The above pronouncement of the Supreme Court in not restricted to any particular law. It is binding under Article 189 of the Constitution covering all kinds of legislations and not merely labour laws in particular as claimed in the write-up written in response to our article. The principle determined by the Apex Court in the above judgement is very clear:the Federal Legislature has extra-territorial authority but no such extra-territorial authority has been conferred to the Provincial Legislature by the Constitution”.

The above dictum and principle enunciated by the Supreme Court testifies to the  position we took. It also dismantles the arguments taken in ‘Unconstitutional’ taxation by provinces: SRB’s responsethat Supreme Court’s judgement is restricted only to a particular labour law!

We once again reiterate that the provinces have full authority under the Constitution to levy sales tax on services but it should not have any extra-territorial implication(s).

It is pertinent to mention here to mention highhandedness of FBR by inserting ‘Note’ under Table-II of First Schedule to Federal Excise Act, 2005 that reads as under:

Note.- The duty on the services as specified against serial numbers 1, 2, 2A, 5, 8, 11 and 13 shall not be levied on services provided in a Province where the provincial sales tax has been levied thereon.

[underlined by us for emphasis]

As evident from above, FBR can only levy sales tax on services performed/rendered in federal capital and areas under the jurisdiction of federal government they are demanding it on services on which provincial sales tax is not levied. The writer of Unconstitutional’ taxation by provinces: SRB’s responsewould certainly agree that this is in utter violation of judgement of Sindh High Court in Pakistan International Freight Forwarding Association v Province of Sindh & Another [(2016) 114 TAX 413 (H.C. Kar.)].

It is fact that the provincial agencies, Punjab Revenue Authority (PRA) and Sindh Revenue Board (SRB) keep on issuing notices to entities working on tarns-provincial level asking information which is not related to them and demand tax on the basis of unconstitutional laws having extra-territorial implications that is both on the basis of origination and termination. We have a written Constitution and examples given in ‘Unconstitutional’ taxation by provinces: SRB’s responseof countries like United Arab Emirates (UAE) and Saudi Arabia are totally misplaced. In federation like India and Canada they have one harmonised sales tax on goods and services to end fragmentation we are facing and creating mess of things. The issue was discussed in detail in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’ [Business Recorder, August 31, 2018] and viable solutions were offered in this and many others [Overcoming fragmented tax system, Business Recorder, October 19, 2018, PTI & revival of economy, Business Recorder, October 12, 2018, Bridging the tax gap, Business Recorder, October 5 & 7, 2018]. All these apparently escaped the attention of the worthy writer of ‘Unconstitutional’ taxation by provinces: SRB’s response’.

We have time and again emphasised that the taxation rights under the  Constitution between the federation and federating units need reconsideration allowing provinces to raise adequate resources that will also help in overcoming overall fiscal deficit faced by the federal government. For example, Balochistan should get “net proceeds” of Excise Duty, which is presently not the case, on natural gas and Khyber Pakhtunkhwa on electricity, as envisaged in Article 161(1)(a) & (b) of the Constitution. Their present share in sales tax from NFC Award—commonly known as Divisible Pool—is as low as 9% and 14% respectively. They have rich natural resources and wealth of oil, gas and electricity but due to low population get a small share for goods they produce. The same is the case for Sindh. They should get right to levy sales tax on goods as well as was the case at the time of independence.

In view of Article 156(2), the role of National Economic Council (NEC) has become very important though it has yet not been realised by the centre and provinces. The planning, in the aftermath of 18th Amendment should be federalised rather than centralised. The 18th Amendment redefined NEC on the pattern of Council of Economic Interests (CCI). The NEC forms part of Chapter 3 of the Constitution entitled ‘Special Provisions’. Article 156(2) clearly says:

The National Economic Council shall review the overall economic condition of the country and shall, for advising the Federal Government and the Provincial Governments, formulate plans in respect of financial, commercial, social and economic policies; and in formulating such plans, it shall, amongst other factors, ensure balanced development and regional equity and shall also be guided by the Principles of Policy set-out in Chapter 2 of Part II”.

The 18th Amendment also through Article 172(3) confers 50 percent ownership of hydrocarbon petroleum resources to the provinces. This subject was earlier held by the federal government. It needs to be implemented. Presently, many economists and politicians are arguing that the 18th Amendment and 7th National Finance Commission (NFC) Award are harming fiscal stability of Pakistan. Their argument needs consideration. The issue of NFC Award vis-à-vis provisions of 18th Amendment must be examined holistically.

The provinces should have the exclusive right to levy sales tax not just on services but also on goods within their respective physical boundaries as was the case in British India. It also needs to be highlighted that the performance of provinces in collecting agricultural income tax is extremely appalling. After the 18th Amendment, right to levy wealth tax, capital gain tax on immovable property, gift tax, inheritance tax etc is with provinces but they are not ready to levy such taxes on the rich and mighty. This is a common issue both at federal and provincial level arising from absence of political will to collect income tax from the rich classes—the meagre collection of agricultural income tax—less than Rs. 2 billion by all provinces and the Centre in fiscal year 2018-19—is lamentable.

It is also imperative that further amendment should be made after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government. This will help FBR to collect income tax as per actual potential and the provinces by levying sales tax on goods in addition to services will generate sufficient funds for their needs. It will also reduce fiscal deficit at the federal level. This is the only way to achieve fiscal stabilisation in Pakistan. However, this can only be achieved if we also reform and merge all tax collection agencies at federal and provincial levels for which we need comprehensive structural reforms.

The learned writers, relying solely on the aforesaid judgment have the temerity to declare. “The provincial assemblies therefore cannot enact any law that is extra-territorial in its application, for example imposing sales tax on services of entities having trans-provincial operation as well as on activities not performed or rendered in their geographical boundaries. Since their inception, the Sindh Revenue Board (SRB) and Punjab Revenue Authority have unconstitutional laws taxing services both at origination and termination as well as on entities having trans-provincial operations. The same is the position with Khyber Pakhtunkhwa and Balochistan”. It appears that the learned writers have failed to distinguish between labour-related issues which were matters of concurrent legislative list in the Fourth Schedule to the Constitution of Pakistan prior to its 18th Amendment of 2010 and the sales tax related issues described in Part-I of the Federal Legislative List of the Constitution. It is pertinent to note that in paragraph 22 of the judgment dated 12-02-2018 in C.P. No. D-1313 of 2013 & Others the Honourable Sindh High Court decided the issue of provincial Legislation pertaining to Companies Profits (Workers’ Participation) Act, 2015. The Honourable Court dealt with the term “trans-provincial” when reading the same with the earlier Judgment in the matter of M/s KESC. It was held that M/s KESC’s Judgment pertained to the enforcement of the fundamental rights envisaged by the Constitution and did not specifically speak of tax or a fund, etc. On such basis, the Honourable Court distinguished the earlier Judgment and held as follows:-

“Insofar as the Full Bench of this Court, the KESC case, is concerned, with respect, in our view it has no application to the issue at hand. The learned Full Bench was there considering the (federal) Industrial Relations Act, 2012, in which “trans provincial” is a specifically defined term (see s. 2(xxxii)). The learned Full Bench upheld the challenged provisions on the ground that they related to the enforcement of a fundamental right (the right of association under Article 17), and it was thus within the Federal domain in terms of entry No. 58 of Part I of the Federal List. Here, there is no issue of any fundamental right. None was referred to or relied upon although we specifically invited assistance from learned counsel in this regard. Therefore, the decision is, with respect, distinguishable”.

The learned writers have also ignored paragraph 23 of the Honourable Supreme Court’s Judgment in the Civil Appeals No. 663 to 637 of 2007 & Others (PTCL 2018 CL 700) which held that “Thus, prior to the making of the 5th Amendment to the Constitution in 1976, Entry 49, being open ended was wide enough to comprehend both the sales of goods and also sales of services. The fact that sales tax on services was, or was not, imposed by the Legislature at that time is not relevant. However, after the 5th Amendment, the scope of the Entry, was narrowed down to goods and only goods. There is, therefore, no redundancy”. Therefore, without putting any undue emphasis on the amendments made through the 18th Constitutional Amendment Act of 2010, one should clearly understand that sales tax on services is in the exclusive domain of the Provinces even since 13th September, 1976, in terms of the amendment made in Entry No. 49 of the Fourth Schedule to the Constitution vide the 5th Constitutional Amendment Act of 1976. This opinion is further strengthened by the Honourable Supreme Court Judgment dated 22 May, 2019, in the Civil Petitions No. 1069-K to 1071-K of 2018, the paragraph 15 of which states that “The Constitution also clearly states that the “sales tax on services” (item 49 to the Fourth Schedule) is within the exclusive domain of the provinces. The Sindh Sales Tax on Services Act, 2011 is to be interpreted keeping in sight these fundamentals… .” In the Honourable Supreme Court’s Judgment dated 24th April, 2019, in Human Rights Case No. 18877 of 2018, paragraph 12 of thereof states that “We are also not persuaded to hold that the taxes were imposed without requisite legislation or that the six statutes contravened the Constitution. The recovery of the taxes may therefore be resumed.” It is pertinent to note that the said “six statutes” include the 4 Provincial statutes i.e., the Sindh Sales Tax on Services, 2011, the Punjab Sales Tax on Services Act, 2012, the KP Finance Act, 2013 and the Balochistan Sales Tax on Services Act, 2015.

As for the Sindh sales tax collected by Sindh Revenue Board (SRB) under the Sindh Sales Tax on Services Act, 2011 (Sindh Act No. XII of 2011), we are of the opinion that it is intra-vires the provisions of the Constitution of Islamic Republic of Pakistan, read with the general consensus, as is apparent from Article 8 of the 7th NFC Award of 2010. The Sindh Act No. XII of 2011 and the rules made thereunder do not create any doubt or dispute on issue of origin or destination of taxable services. All services domestically provided or rendered in Sindh from a place of business in Sindh are taxable on origin basis and there is no requirement of SRB registration of taxpayers or of taxation of services not originating in Sindh or from Sindh. The Sindh Act No. XII of 2011 does not have any provision identical or analogous to the provisions of section 4 of the Punjab Sales Tax on Services Act, 2012 or section 20 of the KP Finance Act, 2013 or section 4 of the Balochistan Sales Tax on Services Act, 2015, although the reverse charge mechanism, as envisaged in the aforesaid three Provincial statutes (as are also prevalent in economies like in India and EU) are also not considered extra-territorial legislations. Sub-section (7) of the aforesaid sections of the three Provincial Statutes provides a mechanism for resolution of questions or disputes in terms of the “already recorded understanding between the Federal Government and Provincial Governments” (commonly known as “the Record Note of 2010″). As regards Sindh statute, the provisions of the Sindh Sales Tax on Services Act, 2011, are intra-vires the provisions of Articles 141 and 142(c) of the Constitution and there is no extra-territorial legislation in the Sindh Act No. XII of 2011. Such sales taxation on origin basis is practiced in several economies of the world including to the UAE, Saudi Arabia and even in the case of Federal Sales Tax on Goods in Pakistan. The opinion of the learned writers is not based on any evidence of judicial precedents in relation to Provincial taxation of services originating in the jurisdiction of a Province.

The Federal Government and the Provincial Governments have already agreed to (i) create a National Tax Council for harmonization of sales tax rules and procedures in Pakistan; (ii) develop a single portal and e-single tax return for the sales tax on goods and services; and (iii) facilitate in the provision of ease of doing business for the taxpayers. At this juncture of harmony amongst the Federation, Provinces, any attempt to create confusion or conflict may not be desirable.

The Sindh High Court in Pakistan International Freight Forwarding Association v Province of Sindh & Another [(2016) 114 TAX 413 (H.C. Kar.) categorically held:

“It is declared that on account of the 18th Amendment to the Constitution (which took effect from 19.10.2010) the Provinces alone have the legislative power to levy a tax on the rendering or providing of services, but this is subject to Article 270AA(7) of the Constitution (as substituted by the said Amendment), and by reason thereof the legislative competence has manifested in the Province of Sindh from 01.07.2011 onwards, the date on which the Sindh Sales Tax on Services Act, 2011 came into force”.

The above judgement considered the following important constitutional issues:

Where lies the legislative competence to impose a fiscal levy (whether tax or duty) on the rendering or providing of services? Does it lie solely with the Federation, which presently levies a duty in terms of the relevant provisions of the Federal Excise Act, 2005 (“2005 Federal Act”)? Or does it vest only in the Provinces, where a tax is levied in terms of their respective statutes, being here the Sindh Sales Tax on Services Act, 2011 (“2011 Provincial Act”)? Or, as some have contended before us, does the taxing power vest simultaneously yet exclusively in both the Federation and the Provinces? Or (finally) is it that the taxing power is common and concurrent?

The United Nations classifies ‘restaurant’ as service activity under International Standard Industrial Classification of all Economic Activities (ISIC). Since the adoption of the original version of ISIC in 1948, an overwhelming number of countries around the world have used ISIC as their national activity classification or have developed national classifications derived from ISIC. ISIC provides guidance to countries in developing national activity classifications and has become an important tool for comparing statistical data on economic activities at the international level. Needless to say that amendment made in Chapter 98 (services) of the Pakistan Customs Tariff, excluding restaurants from the list of services, by the National Assembly is unconstitutional.

According to Ms. Afshan Subohi [Back-pedalling on provincial autonomy, Dawn, October 28, 2019], “all the provinces, including Punjab and Khyber Pakhtunkhwa, openly resented the attempt that they see as an infringement on their rights. They are gearing up to put up a collective resistance to all such attempts”. The provinces must approach Supreme Court of Pakistan having exclusive jurisdiction in the matter under Article 184(1) & (2) that read as under:

184. Original jurisdiction of Supreme Court.-(1) The Supreme Court shall, to the exclusion of every other Court, have original jurisdiction in any dispute between any two or more Governments.

Explanation.-In this clause, “Governments” means the Federal Government and the Provincial Governments.

(2) In the exercise of the jurisdiction conferred on it by clause (1), the Supreme Court shall pronounce declaratory judgments only.

It is also time that taxation rights under the prevalent constitutional scheme are renegotiated between the Centre and provinces. There should be harmonised sales tax on goods and services. It would help to raise adequate resources for provinces and reduce gargantuan fiscal deficit at national level. In British India, sales tax on goods was a provincial subject. After independence, the Constituent Assembly took away this right in 1948 and none of the provinces has ever raised a voice to take it back. Sindh, Khyber Pakhtunkhwa and Balochistan are entitled to “net proceeds” on natural gas and electricity as envisaged in Article 161(1)(a) & (b)  of the Constitution, but they never pressed for it—their present share in sales tax from divisible pool is as low as 24.5%, 14.6% and 9% respectively. The provinces have rich natural resources as well as wealth of oil, gas and electricity but due to low population get a small share for goods they produce/supply.

Provinces also need to be criticised for their dismal performance in collecting agricultural income tax/property tax from the rich and mighty. Like the Centre, they lack political will to collect due taxes from mighty sections of society. The meagre collection of agricultural income tax—less than Rs. 2 billion by all provinces and Centre in fiscal year 2018-19—is a case in point. It is, thus, imperative that right to levy tax on income, including agricultural income, should be given to the Centre. In return, the Centre should hand over sales tax on goods to the provinces.


The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

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