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Huzaima Bukhari & Dr. Ikramul Haq
The twenty-fifth amendment in the Constitution of Islamic Republic of Pakistan, officially called ‘The Constitution (Twenty-fifth Amendment) Act, 2018’, previously named as ‘The (Thirty-first Amendment) Act, 2018’, was passed by the National Assembly (May 24, 2018) and by Senate (May 25, 2018) as well as endorsement by the Khyber Pakhtunkhwa Assembly as per 239(4) of the Constitution on May 27, 2018. It received the assent of President of Pakistan on May 31, 2018 that finally ended the indecipherable status of Pakistan into taxable and non-taxable territories. Before The Constitution (Twenty-fifth Amendment) Act, 2018 (‘the 25th Amendment’), areas mentioned in Article 246 of the Constitution of Islamic Republic of Pakistan [‘the Constitution”] were outside the operation of tax laws, enacted by the parliaments, both federal and provincial. However, the position now is that though these areas fall within “taxable” territories, but certain exemptions are extended through Statutory Regulatory Orders (SROs) without seeking the approval of National Assembly as required under Article 77 read with Article 73(2) and 162 of the Constitution.
Prior to the 25th Amendment, Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA)—commonly referred to as “Illaqa-e-ghair” (alien land) were “non-taxable” territories—as mentioned in Article 246 of the Constitution of Pakistan. These were not subject to federal taxation by virtue of erstwhile Article 247 of the Constitution. The President of Pakistan had the power to extend the jurisdiction of any tax law in FATA while Governors of provinces could extend the laws in PATA. Nevertheless, the tax laws were never extended to FATA and PATA, except the Customs Act of 1969 to recover taxes on the import and export of goods from customs-notified places in these areas, for example Torkham Post at Landikotal, from where trade (transit and regular) between Pakistan and Afghanistan and imports and exports to many Central Asian countries take place.
Article 247 was deleted by the 25th Amendment and these areas fell within the ambit of federal tax laws, although special exemptions with certain conditions have since been promulgated first vide SRO 887(I)/2018 dated 27 July 2018 and later re-enacted through SRO 1212(I)/2018 and SRO 1213(I)/2018 issued on October 5, 2018. The new SROs read as under:
S.R.O. 1212(I)/2018, Islamabad, the 5th October, 2018.– WHEREAS prior to commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018), the Sales Tax Act, 1990, was not in force in the Tribal Areas as defined in Article 246 of the Constitution of the Islamic Republic of Pakistan, hereinafter called as the Constitution, and the levy of sales tax was not attracted to the supply transactions made in the said Tribal Areas;
AND WHEREAS Article 247 of the Constitution stood omitted on commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) with effect from the 31st day of May, 2018 and the Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA) stood merged in the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution;
AND WHEREAS on commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018), the Sales Tax Act, 1990 is in force in the said Provinces including the erstwhile Tribal Areas forming part thereof;
AND WHEREAS a phased approach was needed for the full application of fiscal laws to the said erstwhile Tribal Areas, a decision was made to exempt all those supplies and transactions from levy of federal taxes which were not applicable to the said areas by virtue of said Article 247 and accordingly three sales tax Notifications No. S.R.O. 888(I)/2018, No. S.R.O. 889(I)/2018 and No. S.R.O. 890(I)/2018, all dated the 23rd July, 2018, were issued by the Federal Government granting exemption from sales tax to the supplies specified therein;
AND WHEREAS concerns were raised by the trading community of the said erstwhile Tribal Areas to the effect that the three aforesaid Notifications did not restore the position as existed prior to the commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018);
NOW, THEREFORE, in order to address the concerns so raised and to restore the position in relation to levy of sales tax to the said erstwhile Tribal Areas, the Federal Government, in exercise of the powers conferred by clause (a) of sub-section (2) of section 13 of the Sales Tax Act, 1990, is pleased to–
- ab-initio rescind its Notifications No. S.R.O. 888(I)/2018, No. S.R.O. 889(I)/2018 and No. S.R.O. 890(I)/2018, all dated the 23rd July, 2018; and
- exempt from whole of sales tax, by whatever name called, as levied under the Sales Tax Act, 1990, or notifications issued thereunder, on supplies made till the 30th June 2023, to which the provisions of the said Act of 1990 or the notifications issued thereunder, would have not been applied had Article 247 of the Constitution not been omitted under the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018).
2. This Notification shall take effect on and from the date the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) received assent of the President of the Islamic Republic of Pakistan.
S.R.O. 1213(I)/2018, Islamabad, the 5th October, 2018.– WHEREAS prior to the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018), the Income Tax Ordinance, 2001 (XLIX of 2001) was not in force in the Tribal Areas as defined in Article 246 of the Constitution of the Islamic Republic of Pakistan, hereinafter called as the Constitution, and the levy of income tax was not attracted to the said Tribal Areas;
AND WHEREAS Article 247 of the Constitution stood omitted on commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) with effect from 31st day of May, 2018 and the Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA) stood merged in the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution;
AND WHEREAS on commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018), the Income Tax Ordinance, 2001 (XLIX of 2001) is in force in the said Provinces including the erstwhile Tribal Areas forming part thereof;
AND WHEREAS a phased approach was needed for the full application of fiscal laws to the said erstwhile Tribal Areas, a decision was made to exempt all persons from levy of income tax which was not applicable to the said areas by virtue of said Article 247 and accordingly Notification No. S.R.O 887(1)/2018, dated the 23rd July, 2018, was issued by the Federal Government granting exemption from income tax as aforesaid;
AND WHEREAS concerns were raised by the trading community of the said erstwhile Tribal Areas to the effect that the aforesaid Notification did not restore the position as existed prior to the commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018);
NOW THEREFORE in order to address the concerns so raised and to restore the position in relation to levy of income tax to the said erstwhile Tribal Areas, and in exercise of the powers conferred by sub-section (2) of section 53 of the Income Tax Ordinance, 2001 (XLIX of 2001), the Federal Government is pleased to direct that the following further amendments shall be made in the Second Schedule to the said Ordinance, namely:–
In the aforesaid Schedule–
(a) In Part I,–
(i) clauses (144) and (145) shall be omitted; and
(ii) after clause (145), omitted as aforesaid, the following new clause shall be added, namely:
“(146) Any income which was not chargeable to tax prior to the commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) of any individual domiciled or company and association of persons resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from the 1st day of June, 2018 to the 30th day of June, 2023 (both days inclusive); and
(b) In Part IV,–
(i) clause (106) shall be omitted;
(ii) after clause (109), the following new clause shall be added, namely;
“(110) The provisions of sections in Division Ill of Part V of Chapter X and Chapter XII of the Ordinance for deduction or collection of withholding tax which were not applicable prior to commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) shall not apply to individual domiciled or company and association of person resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from the 1st day of June, 2018 to the 30th day of June, 2023 (both days inclusive).
Exemption clauses (now rescinded), inserted SRO 887(I)/2018 dated 27 July 2018, read as under:
- 1. “Profits and gains derived by individuals from any source in the districts of Chitral, Dir and Swat (which includes Kalam), the former Tribal Area in Kohistan district, Malakand former Protected Areas the former Tribal Area adjoining Mansehra district, the former State of Amb, Zhob district, Loralai district (excluding Duki Tehsil), Dalbandin Tehsil of Chagai district and Marri and former Bugti Tribal territories of Sibi district, former Tribal Areas adjoining the districts of Peshawar, Kohat, Bannu, Lakki Marwat, Dera Ismail Khan, Tank as well as former Tribal Areas i.e. Bajaur Agency, Orakzai Agency, Mohmand Agency, Khyber Agency, Kurram Agency, North Waziristan Agency and South Waziristan Agency, provided that existing business set ups register themselves with field offices of FBR by 30th September, 2018”—(Clause (144), Part I, Second Schedule to the Income Tax Ordinance, 2001).
- “Profits and gains of existing businesses conducted by association of persons and companies from any source in the districts of Chitral, Dir and Swat (which includes Kalam), the former Tribal Area in Kohistan district, Malakand former Protected Areas, the former Tribal Area adjoining Mansehra district, the former State of Amb, Zhob district, Loralai district (excluding Duki Tehsil), Dalbandin Tehsil of Chagai district and Marri and former Bugti Tribal territories of Sibi district, former Tribal Areas adjoining the districts of Peshawar, Kohat, Bannu, Lakki Marwat, Dera Ismail Khan, Tank as well as former Tribal Areas i.e. Bajaur Agency, Orakzai Agency, Mohmand Agency, Khyber Agency, Kurram Agency, North Waziristan Agency and South Waziristan Agency, provided that existing business set ups register themselves with field offices of FBR by 30th September, 2018.
Provided further that the exemption under this clause shall be restricted to the association of persons and companies whose registered offices are in the aforesaid Areas”—(Clause (145), Part I, Second Schedule to the Income Tax Ordinance, 2001).
“ The provisions of sections in Division Ill of Part V of Chapter X and Chapter XII of the Ordinance for deduction or collection of tax shall not apply in the districts of Chitral, Dir and Swat (which includes Kalam), the former Tribal Area in Kohistan district, Malakand former Protected Areas the former Tribal Area adjoining Mansehra district, the former State of Amb, Zhob district, Loralai district (excluding Duki Tehsil), Dalbandin Tehsil of Chagai district and Marri and former Bugti Tribal territories of Sibi district, former Tribal Areas adjoining the districts of Peshawar, Kohat, Bannu, Lakki Marwat, Dera Ismail Khan, Tank as well as former Tribal Areas i.e. Bajaur Agency, Orakzai Agency, Mohmand Agency, Khyber Agency, Kurram Agency, North Waziristan Agency and South Waziristan Agency, if the payer and the recipient are residents of the aforesaid areas.
Provided the provision of section 149 shall not apply in respect of persons working in the aforesaid areas even if the payer resides outside the aforesaid areas”—(Clause (106), Part IV, Second Schedule to the Income Tax Ordinance, 2001).
When the above three exemption clauses were inserted through SRO 887(I)/2018 dated July 23, 2018 by the Federal Government in exercise of the powers conferred on it by sub-section (2) of section 53 of the Income Tax Ordinance, 2001 [“the Ordinance”], we showed that these were textually defective and conceptually erroneous[‘The Merger and tax issues’, Business Recorder, June 1, 2018 and ‘Erroneous tax exemptions’, The News, August 26, 2018] inter alia for the following:
- In proviso to clause (146), Part 1 of Second Schedule to the Ordinance, exemption is restricted to AOPs and Companies whose registered offices are in the areas mentioned in the clause. There are no offices of Registrar of Firms in these areas as prior to the 25thConstitutional Amendment, no law passed by Parliament extended to these areas. The same is true for Security & Exchange Commission of Pakistan (SECP) that registers companies that has jurisdiction in the said areas prior to 25thConstitutional Amendment. Any company registered by SECP can work anywhere and its registration is not based on working for a particular area of Pakistan—the expression defined in Article 1(2) of the Constitution. Many companies like banking companies have various branches located in the areas mentioned in exemption clauses. These companies are registered for all areas of Pakistan including those mentioned in Article 246 of the Constitution and therefore, benefit of exemption cannot be denied.
- The application of clause (106), Part IV, Second Schedule to the Ordinance, is restricted to ‘resident’ payer and recipient of the areas mentioned therein. Under the Ordinance residential status is determined in the light of sections 2(50), 2(51) & 2(52) read with sections 81, 82 and 83 of the Ordinance. As per section 82 of the Ordinance, a resident individual is one whose stay in Pakistan is more than 183 days in aggregate during the relevant tax year. How will this period be determined? There are no border controls between areas mentioned in Article 246 and rest of the country. The word ‘resident’ is erroneously used. All residents of such areas are residents of Pakistan and the same is true for all citizens of Pakistan. Any individual having domicile of the said area cannot be compelled to show his stay of 183 days there in order to claim exemption! How can tax authorities determine the same in any case when there are no restrictions of movement for any citizen within Pakistan?
In the new exemption clause, the words used are now: “of any individual domiciled or company and association of persons resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from the 1st day of June, 2018 to the 30th day of June, 2023 (both days inclusive)”.
It is strange, rather shocking, that ingenious draftsmen sitting in Ministry of Law and FBR have once again promulgated the faulty exemption clauses. They never bothered to address the objection raised in ‘The Merger and tax issues’, Business Recorder, June 1, 2018 and ‘Erroneous tax exemptions’, The News, August 26, 2018 that companies and AOPs are residents of Pakistan. If intention is to give exemption to only those entities that have registered offices and “control and management in these areas then clear words should have been employed to this effect.
The concept of domicile for an individual is fine but it can still open a debate as to whether his/her income received from taxable areas will be also exempt or not. Unscrupulous people will exploit this condition, either getting fake domicile or doing business in taxable areas but claiming exemption in areas mentioned in Article 246.
The Caretaker Prime Minister, former Chief Justice of Supreme Court and his team with an able law minister promulgated erroneous exemptions as mentioned and discussed above. Unfortunately, the mistakes, pointed out by us, persist under the present Law Minister. He, in fact the entire Cabinet, has successfully been “hoodwinked” by crafty tax bureaucrats sitting in FBR.
The solution is simple: since these backward areas are in dire need of investment for industrial and business development for providing jobs to the unemployed youth, investors, no matter from which area they belong or resident of, should be given tax concessions unconditionally to the extent of incomes accruing and arising in these areas. This will dismantle the loopholes created by the exemption clauses and end discretionary powers and bargaining tools presently available to the FBR officials.
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The writers, lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).