Dr. Ikramul Haq
The merger of Federally Administered Tribal Areas (FATA) with Khyber Pakhtunkhwa and Provincially Administered Tribal Areas (PATA) with respective provinces, after assent of President to The Constitution (Twenty-fifth Amendment) Act, 2018 on May 28, 2018, (‘the 25th Constitutional Amendment’) was undoubtedly an historic day. This long-overdue and much-delayed action promised to offer a number of opportunities to the residents of these areas for equality, constitutional protections, development and inclusive growth—all these remain a dream unfulfilled after passage of two years of the merger. At that point of time, tall claims were made tackling the extraordinary challenges faced by these areas in the wake of the long reign of terrorism, especially removing the sense of deprivation of local residents, integration with the rest of the country and many more, giving equal opportunities and revolutionizing its infrastructure. These issues have many facets—political, legal, administrative and above all, economic. In this article, taxation issue alone is highlighted as exemptions provided in these areas after the merger, are not serving the purpose for which these were granted; that were to become catalysts/incentives for investment, development and creation of jobs.
The merger of FATA and PATA should have been accompanied with a comprehensive, multi-faceted programme of development, especially infrastructure, which is missing till today. These areas are rich in natural resources and if projects are launched prudently, the people of these areas can become prosperous. It is, in fact, the collective responsibility of all citizens to pressurise all concerned quarters—political and non-political—to give them means to progress.
The 25th Constitution Amendment removed the words “the Federally Administered Tribal Areas” from the definition of ‘Republic and its territories’ contained in Article 1 of the Constitution of Islamic Republic [“the Constitution”]. These are defined in Article 246 of the Constitution. Before the 25th Constitutional Amendment, these areas were outside the operation of tax laws, enacted by the parliaments, both federal and provincial. The President of Pakistan had the power to extend jurisdiction of any tax law to FATA while Governors of provinces could extend the laws to PATA. Nevertheless, tax laws were never extended to either FATA or PATA, except the Customs Act of 1969 to recover taxes on import and export of goods from customs-notified places in these areas, from where trade (transit and regular) between Pakistan and Afghanistan and imports and exports to many Central Asian countries take place.
After the 25th Constitutional Amendment, these areas became “taxable”, but certain exemptions were extended through Statutory Regulatory Orders (SROs). When the initial SRO 887(I)/2018 was promulgated on July 23, 2018, it was mentioned in The Merger and tax issues’, Business Recorder, June 1, 2018 and ‘Erroneous tax exemptions’ The News, August 26, 2018, the following textual and conceptually defects in it:
- In proviso to clause (146), Part 1 of Second Schedule to the Income Tax Ordinance, 2001 exemption was restricted to AOPs and companies on the condition that “registered offices are in the areas covered in Article 246 of the Constitution”. It was a faulty concept as these areas had/have no offices of Registrar of Firms prior or after the 25thConstitutional Amendment and the same was/is the case with Security & Exchange Commission of Pakistan (SECP) that deals with registration of companies. Any company registered by SECP anywhere in Pakistan is “resident” under the Income Tax Ordinance, 2001 and can work anywhere as 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 banks, 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.
- The exemption of income was restricted to an individual who is ‘resident’ payer/recipient of the areas. It was absurd as no border controls exist between areas mentioned in Article 246 and rest of the country and therefore criterion of counting days in a tax year to qualify as ‘resident’ under the Income Tax Ordinance, 2001 could not be possible.
Later on, the SRO 887(I)/2018 was replaced with SRO 1212(I)/2018 and SRO 1213(I)/2018 , issued on October 5, 2018, to restore exemptions from the levy of sales tax and income tax in these areas as existed prior to the 25th Constitutional Amendment providing exemption:
- of whole of sales tax, by whatever name called, as levied under the Sales Tax Act 1990, or notifications issued thereunder, on supplies made until 30 June 2023, to which the provisions of the Sales Tax Act 1990 or related notifications would not have applied had article 247 of the Constitution not been omitted;
- from any income, which was not chargeable to tax prior to the commencement of the (25th Amendment) Act 2018 of any individual domiciled or company and association of persons resident in these areas with effect from 1 June 2018 to 30 June 2023 (both days inclusive); and
- from deduction or collection of withholding tax from any individual domiciled or company and association of persons resident in these areas with effect from 1 June 2018 to 30 June 2023 (both days inclusive).
In the new exemption clauses, the words used are “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 the Federal Board of Revenue (FBR) and Ministry of Law once again inserted faulty exemption clauses. All 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 unambiguous words should have been employed to this effect which are missing. The concept of ‘domicile’ for an individual is still debatable as to whether his/her income received from taxable areas will be also exempt or not. Unscrupulous people may exploit this condition, either getting fake domicile or using name of a local domiciled person for doing business from taxable areas but claiming exemption available in these areas, e.g exporting goods from Karachi and getting exports proceeds in non-taxable areas.
The solution is simple: since these backward areas are in dire need of investment for infrastructure, industrial and business development, especially after economic toll of Covid-19 endemic and creating jobs, notably for the youth, investors, no matter to which area they belong or are resident of, should be given tax concessions unconditionally to the extent of incomes accruing and arising in these areas. This will help attract investment, remove the loopholes created by exemption clauses and end discretionary powers and bargaining tools available to tax officials. The provincial governments should also waive all taxes within the areas mentioned in Article 246 of the Constitution to attract domestic and foreign investment leading to development and job opportunities.
The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of management Sciences (LUMS)