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 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 provisions 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 to highlight some serious violations of the supreme law of the land, committed by the provincial legislators 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, BusinessRecorder,November 8, 2019] we strongly criticized the National Assembly for encroaching upon the provinces’ rights of levying sales tax on restaurants 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). Till today, no provincial government has invoked original jurisdiction of Supreme Court.
The author of ‘Unconstitutional’ taxation by provinces: SRB’s response’ made only two points that have a bearing on the issue under discussion and rest of the write-up is only reliance on certain cases that are debatable and in any case cannot override Messers Sui Southern Gas Ltd & Others v Federation of Pakistan & Other 2018 SCMR 802 in view of Article 189 of the Constitution. Our response to two questions is as under:
- “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 aruguents/contentions/conclusions 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.
[underlined by us for emphasis]
No misconception was intended in our article as claimed/insinuated by the author of ‘Unconstitutional’ taxation by provinces: SRB’s response. On the contrary, violation of the above provision on the part of the provinces was highlighted as would be elaborated and substantiated in the forthcoming paragraphs.
- 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 addressed the core issue of legislative competence of the federation and the federating units, especially after 18th Amendment [passed vide the Constitution (Eighteenth Amendment) Act, 2010]. The principles laid down cannot be read or inferred to be just restricted to labour-related laws. 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 or 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 our Article, we quoted from Messers Sui Southern Gas Ltd & Others v Federation of Pakistan & Other 2018 SCMR 802 that extensively elucidates the post-Eighteenth Amendment 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 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 our position. It also dismantles the arguments taken in ‘Unconstitutional’ taxation by provinces: SRB’s response’ that Supreme Court’s judgement is particularly restricted only to labour laws!
We once again reiterate that the provinces have full authority under the Constitution to levy sales tax on services as long as it does not have any extra-territorial implication(s). The same is the case with Workers Welfare Fund that Sindh enacted in 2014 and Punjab in 2019. Both have levied charge on “total income”. It is fine if a taxable entity is working exclusively in their respective territory. However, can these laws passed by Sindh and Punjab demand contribution from an entity that is operating on trans-provincial level and its total income is computed on the basis of operations partly out of their territorial boundaries? The entities operating on trans-provincial level cannot bifurcate their “total income” as assessed under the federal law (Income Tax Ordinance, 2001) on provincial basis. The cut and paste legislation by Sindh and Punjab from federal Workers’ Welfare Fund Ordinance, 1971 on “total income” basis is a concrete example of violating Article 141 and dictum laid down in Messers Sui Southern Gas Ltd & Others v Federation of Pakistan & Other 2018 SCMR 802.
Here it is pertinent to mention the highhandedness of FBR in 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 but they are demanding it on services on which provincial sales tax is not levied. The worthy writer of Unconstitutional’ taxation by provinces: SRB’s response’ would 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 a fact that the provincial agencies, Punjab Revenue Authority (PRA) and Sindh Revenue Board (SRB) keep on issuing notices to entities working on trans-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 account of origination and termination.
Pakistan has a written Constitution and examples given in ‘Unconstitutional’ taxation by provinces: SRB’s response’ of countries like United Arab Emirates (UAE) and Saudi Arabia are totally misplaced. In federations like India and Canada they have one harmonised sales tax on goods and services to end fragmentation that we are facing and creating a 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’.
At the moment misinterpretation of Entry 49, as amended by the 18th Constitutional Amendment, when read apart from Article 141, is leading to litigations between the taxpayers and provincial revenue authorities. The right to levy “taxes” on services under the respective laws of all the four provinces—Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan—mention chargeability in respect of rendering, supplying, initiation, origination, reception, consumption, termination or execution of service. In some cases, this raises serious issues of conflicts; overlapping jurisdictional matters and extraterritorial implications.
Since 2011 there have been serious disputes between SRB and FBR that resurfaced recently when sales tax on restaurants is imposed by the National Assembly. These remain unresolved. Later, many issues cropped up between FBR and PRA as well as among all provincial authorities entrusted with collection of sales tax on services. The significant areas of conflicts that have emerged historically and many remain unresolved till today are mentioned below.
- The provincial revenue authorities have been engaged in critical disputes/reservations over the mode of collection of sales tax on services—as to whether it should be on the basis of ‘origination’ or ‘destination’. Strangely, for B2B cross-border services, PRA has provided chargeability on reverse-charge basis which is not acceptable to SRB. Sindh insists that sales tax on B2B services should be charged on the principle of ‘origination’.
- Punjab and Khyber Pakhtunkhwa have been of the view that services received or consumed in their jurisdictions are liable to tax under their laws, but Sindh says services originating in its territory should be subjected to its sales tax even if they are delivered or consumed in other provinces. These contentious and conflicting viewpoints cause hardship to taxpayers many of whom have to seek interference of the courts as they are being doubly-taxed that consequently leads to increase in their cost of doing business. The argument of Sindh is that taxation of services on the basis of ‘destination’ raises issues about enforcement and the audit of taxpayers registered in the province.
- The argument of PRA is that taxation of services on the basis of ‘origination’ is against the universal practice of VAT because VAT functions on the basis of ‘destination’ at the national level. That is why the European Union agreed in 2004 that for the purpose of VAT, the union would be considered as one country.
- As mentioned in our article [Unconstitutional taxation by provinces, Business Recorder, January 3, 2020], none of the provinces has examined the implications of Article 141 vis-à-vis enacting laws with extraterritorial implications, which is the sole prerogative of National Assembly. This we mentioned in our paper Towards Broader, Flat, Low-rate and Predictable Taxes [PRIME Institute, 2016] and earlier article, ‘Alternate solution’, Business Recorder, November 20 & 22, 2015.
- Taxation of composite supplies having components of services as well as sale of goods, for example, hotels where accommodation includes supply of food (goods). In most of the countries, services of hotels and restaurants are considered as composite for value-added taxation (VAT). In Pakistani scenario, input paid on foodstuff is with FBR whereas sales tax on services is with provincial authorities. The argument by the provincial tax authorities that “a service shall remain and continue to be treated as a service whether it involves any use, supply or consumption of any goods either as an essential or an incidental aspect of service” becomes problematic when credit for input on goods is involved. Till today, FBR administering Sales Tax Act, 1990 insists upon tax from restaurants and hotels in respect of supplying of food and we wrote against them in Sales tax on restaurants, Business Recorder, November 8, 2019.
- Taxpayers engaged in composite supplies face difficulties as there is no objective test for determining the nature of a contract—whether it is for the supply of services or for the supply of goods or both—composite contract. It is not possible to issue separate invoices for different clauses of composite contracts as bifurcation becomes difficult for the value of goods and services. Then FBR is not ready to surrender its right of taxation where in contracts for the supply of goods, services are an incidental or essential part.
- SRB has repeatedly asked FBR to resolve all contentious issues to avoid double or multiple taxation on taxpayers including abolition of services from Federal Excise Act, 2005, but FBR says that it would levy FED if tax is not levied under any provincial legislation on any service. It insists on taxing restaurants and imposing sales tax on services of toll manufacturing.
- According to the communication of SRB to FBR, the issue of FED on services has been raised by SRB several times ever since 18th Constitutional Amendment (specifically in relation to item No 49 of Part I of the Fourth Schedule to the Constitution) and the 7th NFC Award were made in 2010 in consequence to which the Finance Division (NFC Secretariat), Islamabad, had issued D.O. Letter No F-5.(5)- NFC/2010-56 dated 26th March, 2010, requiring FBR to propose amendments in the Federal Excise Act enabling provinces to impose sales tax on all services, except terminal taxes on goods or passengers carried by railway, sea or air, taxes on their fares and freights through the Finance Bill, 2010.
- After promulgation of the Sindh Act, FBR issued a press release on 1st July, 2011 on its website informing the general body of taxpayers that FED on such services levied by provincial sales tax has been withdrawn. Sindh Government/SRB since then continuously pursued this matter of exemption notification with FBR but it just provided a contrary NOTE in FED Act of 2005.
- Sindh wrote to FBR that the issues of (i) levy of FED on services (subject to levy of provincial sales tax); (ii) federal sales tax on the food services provided or rendered by restaurants, and (iii) provincial sales tax on the services of toll manufacturing should be resolved urgently in a manner that the taxpayers are not subjected to any threat of double or multiple taxation. It was based on C. No 1/23-STB/2010(pt)/72589-R dated 21.5.2014) referring to the minutes of the meeting circulated vide FBR’s letter (C. No 1(1) Chief (Automation & ST/2014.164838-R dated 4.12.2014 wherein FBR pointed out that Sindh had imposed tax on overseas Pakistanis (reference minutes of the meeting held on 14.9.2015). It asked Sindh to reconsider and abolish terminal tax on airport for international travel (reference Para 11.1 of the minutes of the said meeting). SRB said no such tax was imposed by the Sindh Government. SRB then requested that Finance Division/FBR may intimate the provisions of the Sindh Sales tax on Services Act, 2011, which have been interrupted for levying taxes on overseas Pakistanis and/or on international air travel.
In the light of above conflicts and perpetual litigation and difficulties faced by taxpayers operating on trans-provincial level, we have been time and again emphasising 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 hydroelectricity, 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 the right to levy sales tax on goods as well as was the case at the time of independence.
In view of Article 167(4), the role of National Economic Council (NEC) has become very important though it has yet not been realised by the centre and provinces. Planning, in the aftermath of 18th Amendment should be federalised rather than centralised. The 18th Amendment redefined NEC on the pattern of Council of Common Interests (CCI). The NEC forms part of Chapter 3 of the Constitution entitled ‘Special Provisions’. 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 levels 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 both FBR in collecting income tax as per actual potential and the provinces that 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 as suggested in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).