Taxation violating Constitution

Dr. Ikramul Haq & Abdul Rauf Shakoori

The Federal Government enhanced rate of sales tax from 17 percent to 18 percent with effect from February 14, 2023 through statutory regulatory order (SRO)—179(I)/2023 dated February, 14, 2023 [“notification”], issued under section 3(2)(b) of the Sales Tax Act, 1990, in utter violation of Constitution of Islamic Republic of Pakistan [“the Constitution”]. It is also in open defiance of judgments of the Supreme Court of Pakistan binding under Article 189 of the Constitution.

The notification reads:  “In exercise of the powers conferred by clause (b) of sub-section (2) of section 3 of the Sales Tax Act, 1990, the Federal Government is pleased to enhance the rate of sales tax in respect of taxable goods falling within the purview of sub-section ( 1)  of section 3  from seventeen percent under sub-section (1) of section 3 of the Sales Tax Act,  1990 to eighteen percent”.

In may be noted that the notification is not applicable on goods subject to sales tax at retail price as specified in the Third Schedule to the Sales Tax Act, 1990.

The Finance (Supplementary) Bill, 2023 [commonly called mini-budget] proposing taxes of nearly Rs. 170 billion as pre-condition of revival of stalled programme of International Monetary Fund (IMF), presented before the National Assembly as Money Bill by the Finance Minister, Muhammad Ishaq Dar on February 15, 2023, also proposes enhancement in the rate of general sales tax (GST) from 17% to 18% with the clear intendment:  

“The purpose of this Bill is to give legislative effect to the taxation proposals of the Federal Government to stabilize the economy in the aftermath of recent flood and shall come into force on the next day of assent given to this Act by the President of Islamic Republic of Pakistan”.

The vital question is whether through an SRO [notification] based on delegated powers under section 3(2)(b) of the Sales Tax Act, 1990, the Federal Government [executive arm of the state] can increase rate of sales tax to 18% without the approval of Parliament, even when a Bill to the said effect is pending before the Parliament.

For finding answer to above, it is imperative to examine the legislative history of section 3(2)(b) and section 13 of the Sales Tax Act, 1990, as substituted by the Finance (Amendment) Ordinance, 2015 (Ordinance No. IX of 2015), promulgated on April 30, 2015 by the President, and later made part of the Finance Act, 2015. 

Section 3(2)(b) of the Sales Tax Act, 1990 says:  “the Federal Government may, subject to such conditions and restrictions as it may impose, by notification in the official Gazette, declare that in respect of any taxable goods, the tax shall be charged, collected and paid in such manner and at such higher or lower rate or lower rate or rates as may be specified in the said notification”.

The above provision was added in the section 3 of the Sales Tax Act, 1990 by the Finance Act, 2015 without first laying down the Finance (Amendment) Ordinance, 2015 in the National Assembly as required under Article 89 of the Constitution confirming how much our legislators respect the supreme law of the land what to speak of rule of law!

It is pertinent to motion that for granting exemptions section 13(1) of the Sales Tax Act, 1990 applies, which says: “Notwithstanding the provisions of section 3, supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the federal government, be exempt from tax under this Act.”

The power to grant exemption is also available under section 13(2)(a) of the Sales Tax Act, 1990, as amended by the Finance (Amendment) Ordinance, 2015 and later added in the Finance Act, 2015. It reads as under:

 “The Federal Government may, pursuant to the approval of the Economic Coordination Committee of Cabinet, whenever circumstances exist to take immediate action for the purposes of national security, natural disaster, national food security in emergency situations, protection of national economic interests in situations arising out of abnormal fluctuation in international commodity prices, removal of anomalies in taxes, development of backward areas and implementation of bilateral and multilateral agreements.”

The provisions of section 3(2)(b) and section 13(2)(a) of the Sales Tax Act, 1990 are ultra vires of Article 77 of the Constitution which clearly ordains that the right to levy tax that includes granting exemption(s) is the sole prerogative of the Parliament and in emergent situation when Senate and National Assembly are not in session, it can be done through Presidential Ordinance subject to conditions laid down in Article 89. No other organ of state can levy taxes or extend concessions/exemptions through delegated powers.

The power to vary tax rates under section 3(2)(b or issue exemptions under section 13(2)(a) of the Sales Tax Act, 1990 through SROs given to the federal government with the approval of ECC under “exceptional circumstances” violates the supreme law of the land and dictum laid down by the Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)] which reads as under:

“It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd. V. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993 SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192).” [Page 18, Para 20]

The website of National Assembly proves that Finance (Amendment) Ordinance, 2015 promulgated by the President on April 30, 2015 was not presented before the House as required under Article 89(2)(i) of the Constitution. All the provisions contained therein were later added in the Finance Bill 2015 which was a clever trick on the part of the Finance Minister and his team. Issuance of such Ordinances amounts to usurping the powers of the Parliament, especially when both Senate and National Assembly are in session near the date when the Ordinance was promulgated.

It is a well-established fact that through SROs, the mighty sections of society are provided “legal ways” to amass more and more wealth. According to a report, exemptions and concessions given to them were of Rs. 5,500 billion from 2008 to 2013 alone as admitted by Chairman Federal Board of Revenue (FBR) before the Senate Standing Committee on Finance and Revenue on May 13, 2014. The glaring examples of abuse of delegated power through SROs reflect in beneficial notifications for sugar and steel industries owned by men in power.

Bureaucracy is also beneficiary of these powers e.g. SRO 569(I)/2012 issued on May 26, 2012 providing that government officials in grade 20-22 would pay just 5 percent tax on their monetised transport allowance as a separate block of income. It is a fact that they are getting the allowance as well as using the official vehicles! The Parliament must take note of it.

The issue of SROs levying taxes or varying tax rates or granting exemptions and concessions has yet not been debated from the constitutional point of view. For cartels possessing enormous money power, reduction of duties and tax concessions by FBR and then extending them by using its executive authority available in the form of SROs, has created innumerable tax distortions in the tax system. The burden of taxes in the wake of such concessions is invariably shifted on the poor.

Pakistan is a unique country where the executive authority can conveniently undo tax laws passed by the Parliament, which is gross violation of Article 162 of the Constitution of Pakistan, which reads as under:

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.

In the Finance Bill 2015, section 3(2)(b) of the Sales Tax Act, 1990, as amended by Finance (Amendment) Ordinance, 2015, was included for the approval of Parliament. None of legislators took note of this grave and blatant violation of supreme law of the land—Article 77 read with Article 162 of the Constitution as elaborated by the Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)].

Article 162 debars even the National Assembly to grant exemptions without the prior approval of the President, but interestingly, this power has been delegated unconstitutionally to EEC first, through Finance (Amendment) Ordinance, 2015 and then by passing Finance Act, 2015 by the Parliament itself in blatant disregard for Article 77 of the Constitution.

The following paragraphs of Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) are worth consideration:

“22. Mr. Salman Akram Raja, learned counsel for OGRA purported to canvass that taxing power of the Parliament can be delegated to the Government/Executive and the delegatee of such power may then decide at what rate tax is to be imposed or what exemption or reduction, if any, is to be granted. It seems that to save the provision of section 3 of the Act, 1931 he stated that as the Bill has already been tabled before the Majlis-e-Shoora (Parliament), therefore, it would be deemed that pending discussion on the Bill, the Parliament has empowered the Government/Executive to impose increase in GST with immediate effect in the public interest…”

“Viewed in this context what the Constitution committed to the Legislature as its primary obligation to be discharged by it with exercise of powers conferred on it, cannot be entrusted by the legislature to another organ of the State or to a body of its own creation. That would negate the very basic arrangement adopted by the Constitution and in its place create a mode of the discharge of legislative function, in a manner not envisaged therein or contrary to the instrument which constituted it. A reflection of this proposition will be found in the following observations of S.A. Rehman, J. (as he then was) in the judgment of this Court in Fazlul Quadar Chowdhary v. Shah Nawaz [PLD 1966 SC 105]: “The constitution contains a scheme for the distribution of powers between various organs and authorities of the State, and to the superior judiciary is allotted the very responsible though delicate duty of containing all the authorities within their jurisdiction, by investing the former with powers to intervene whenever any person exceeds his lawful authority”/

“23. We are not inclined to agree with the learned counsel because in the instant case, except tabling the Bill in the National Assembly, no legislation on the issue has so far taken place. The question of delegation of power or its coming into effect or operation will arise only after the Bill is passed by the Parliament and converted into an Act on receiving assent of the President, i.e., on successful completion of the constitutional process, and the arguments being raised by the learned counsel may perhaps be relevant thereafter. However, as it has been noted hereinabove, the learned counsel himself was of the opinion that delegation of power to the executive/government in the matter of imposing tax will create havoc in the tax regime. Thus, it is sufficient to conclude that no such delegation can be considered to have been conferred upon the government in terms of section 3 of the Act, 1931, allowing it to insert Declaration for the purpose of imposing/increasing or reducing GST with immediate effect”.

“24. It is also to be borne in mind that in a Parliamentary system of Government, the scheme of the Constitution is based upon the theory of separation of powers enunciated by the French political philosopher Montesquieu under which powers of the State are distributed among the three organs of the State, namely, Legislature, Executive and the Judiciary. Under Article 7 of the Constitution, 1973, two institutions named earlier find mention, whereas the Judiciary has not been included therein with a view to establishing a system of checks and balances. Similarly, John Locke, in his work “Treatise on Civil Government” has emphasized that “the legislative cannot transfer power of making laws to any other hands, for it being but a delegated power from the people, they who have it cannot pass it over to others. The people alone can appoint the form of the commonwealth, which is by constituting the legislative, and appointing in whose hands that shall be. And when the people have said “We will submit, and be governed by laws made by such men, and in such forms”, nobody else can say other men shall make laws for them, nor can they be bound by any laws but such as are enacted by those whom they have chosen and authorized to make laws for them”.

The delegated power to an executive authority to frame laws or issue SROs is in utter violation of Article 162 of the Constitution 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 Federal Government/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 democracy in any society. In the context of tax laws, it means that taxes are imposed through parliamentary process, rather than through administrative discretions (SROs).

The language of Article 77 of Constitution is couched in negative starting with the word “no”.  It excludes all others to levy any tax.  It shall and can only be levied for the purposes of the Federation and that too by or under the authority of the Act of Parliament.

In the past many FBR’s stalwarts had been insisting that words “by or under the authority of Act”, as used in Article 77 of the Constitution, authorise “taxation by delegation” as well which they considered justified doing so through Statutory Regulatory Orders (SROs). However, before the Supreme Court in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.), Additional Attorney General submitted”

“…the levy and exemption of tax is the function of Parliament under Article 77 of the Constitution and… power of exemption if given to the executive per se, would amount to the negation of the doctrine of parliamentary supremacy and the doctrine of separation of powers”.

The above submission was against the view of FBR and was confirmed by the Apex Court. Irritated by the judgement of the Supreme Court, the tax wizards sitting in FBR, who always hoodwinked the then Finance Minister Ishaq Dar or he himself was party to such unconstitutional measures, inserted amendments through Finance Act 2017 in Customs Act, 1969 [section 221A], Sales Tax Act, 1990 [section 74A], Income Tax Ordinance, 2001 [section 241] and Federal Excise Act, 2005 [section 43A] to nullify the judgement of Supreme Court in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.). The textofall these amendments was almost the same: “All notifications and orders issued and notified in exercise of the powers conferred upon the Federal Government, before the commencement of Finance Act, 2017, shall be deemed to have been validly issued and notified in exercise of those powers, notwithstanding anything contained in any judgment of the High Court or Supreme Court”.

One wonders what kind of wizards FBR and Ministry of Law had approved/vetted the said amendments. Article 77 of the Constitution, as enunciated by Supreme Court, could not be bypassed though such amendments in subordinate laws? These, in fact, amounted to contempt of court. The then Law Minister and Attorney General of Pakistan, both seasoned lawyers, should have advised the then Finance Minister to withdraw them as the only remedy was a constitutional amendment and not mere insertion of validation clauses in subordinate laws but they failed to do so.

Unfortunately, the then Prime Minister and the Finance Minister kept on violating the command of supreme law of the land and dictum of Supreme Court with impunity by levying and varying tax rates through Statutory Regulatory Orders (SROs). The worst example was SRO 408(I)/2017 dated May 31, 2017 through which against standard rate of 17% under Sales Tax Act, 1990, high speed diesel was subjected to rate of 34.5% and the most recent is SRO No. 179(I)/2023 dated February, 14, 2023 increasing rate of sales tax from 17 percent to 18 percent.

The landmark judgement by the Supreme Court [Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.)] in unequivocal and unambiguous terms provides that power of levying taxes (which includes exemption, waiver and change in tax rates etc) under Article 77 of the Constitution is the sole prerogative of the Parliament and it cannot be delegated to any executive authority.

It is shocking that even after the judgements of Supreme Court in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.) and Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)], successive governments, including the incumbent, have been resorting to imposing new taxes or varying the rate of taxes through SROs violating not only Article 77 but also openly defying Article 189 of the Constitution. They are lucky that this aspect has neither been considered by the Apex Court suo muto nor has any counsel representing the parties in various tax disputes, highlighted it for seeking contempt proceedings against the contemnors.

Undoubtedly, the 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 taxes imposed by the parliament or even levying taxes under the garb of rule-making powers.

Another blatant violation of Constitution remains unnoticed is raising non-tax revenue through maximum imposition of petroleum levy (PL) of Rs. 50 per litre from Rs. 30 through the Finance Act 2022 as it remains with the Federal Government, whereas imposition/rise in general sales tax on POL products has to be shared with the provinces as per prevalent National Finance Commission (NFC) Award, giving them 57.5% of proceeds.

The Finance Act 2022, received the assent of President on June 30, 2022 with effect from July 1, 2022, substituted Fifth Schedule to the Petroleum Products (Petroleum Levy) Ordinance, 1961 enhancing maximum imposition per litre of Rs. 50 on High Speed Diesel Oil, Motor Gasoline, Superior Kerosene Oil, Light Diesel Oil, High Octane Blending Component and E-10 Gasoline. It also increased the maximum levy per ton on Liquefied Petroleum Gas (produced/extracted in Pakistan) from Rs. 20,000 to Rs. 30,000.

On June 39, 2022 when the National Assembly passed the Finance Bill 2022, the then Federal Minister for Finance, Miftah Ismail, according to a Press report, “clarified (sic) that the government had no intention to pass on the full amount of PL (Rs50 per litre) as incorporated in the Finance Bill, 2022-23, to the consumers. The government got just the permission from the house for imposition up to Rs50 per litre levy on petroleum products”.

Earlier, the Finance Act, 2018 substituted Fifth Schedule to the Petroleum Products (Petroleum Levy) Ordinance, 1961 authorising maximum imposition per litre of Rs. 30 on High Speed Diesel Oil, Motor Gasoline, Superior Kerosene Oil, Light Diesel Oil, High Octane Blending Component and E-10 Gasoline. As regards, Liquefied Petroleum Gas (produced/extracted in Pakistan), the maximum levy was fixed at Rs. 20,000 per metric ton. After this amendment, the Government was not required to go to Parliament and could raise the PL anytime while remaining within the maximum limit. 

Since PL is non-tax item. Amendment in Petroleum Products (Petroleum Levy) Ordinance, 1961 could not have been made through Money Bills. The amendments made in 2018 and 2022 by National Assembly were thus unconstitutional. It is pertinent to mention that in 2011, amendments were made in Petroleum Products (Petroleum Levy) Ordinance, 1961 through Petroleum Products (Petroleum Levy) Amendment Act, 2011, which was passed by both National Assembly and Senate as per the Constitution. It can be seen at the website of Senate of Pakistan.

The substitution of Fifth Schedule to the Petroleum Products (Petroleum Levy) Ordinance, 1961 through Finance Act 2018, passed by National Assembly on May 18, 2018, bypassing the Senate was a flagrant violation of the Constitution. Later, it was used by the coalition government of Pakistan Tehreek-e-Insaf (PTI) in continuation of violation of supreme law of the land by the National Assembly during the Government of Pakistan Muslim League (Nawaz). In Finance Act 2002, the alliance government of Pakistan Democratic Movement (PDM) again committed the same unconstitutional act but no one has raised any voice.  It was explained by the Supreme Court of Pakistan in Workers Welfare Funds m/o Human Resources Development, Islamabad through Secretary and others v East Pakistan Chrome Tannery (Pvt.) Ltd through its GM (Finance), Lahore etc. and others [(2016) 114 TAX 385 (S.C. Pak.)] as under:

“We may develop this point further; although Article 73(3)(a) of theConstitution states that a Bill shall not be a Money Bill if it provides for the imposition or alteration of a fee or charge for any service rendered, this does not mean that if a particular levy/contribution does not fall within Article 73(2) it must necessarily fall within Article 73(3). Sub-articles (2) and (3) are not mutually exclusive. There may very well be certain levies/contributions that do not fall within the purview of Article 73(3) but still do not qualify the test of Article 73(2) and therefore cannot be introduced by way of a Money Bill, and instead have to follow the regular legislative procedure.

The above decision of the Supreme Court approved the judgement of Lahore High Court reported as 2011 PTD 2643 holding as under:

“The special legislative procedure is, therefore, an exception and must operate in its restricted scope. Being a special procedure it also has to be construed strictly as it is a deviation from the normal legislative process under the Constitution. Integrity of a money bill must be jealously guarded and matters falling outside the purview of Articles 73(2)(a) to (g) of the Constitution should not be permitted to stealthily crawl into a money bill (at times due to political sophistry of the Government in power) and adulterate its sanctity”.

At the time of passage of Finance Bills, 2018, the above judgement of Supreme Court was in the field but nobody in the National Assembly, including members of PTI raised the issue as to how amendment in Petroleum Products (Petroleum Levy) Ordinance, 1961 could be made through Money Bill. The same unconstitutional act was repeated at the time of passage of Finance Bill 2022 on June 29, 2022 and in the absence of bona fide opposition in National Assembly, it went unnoticed and unchallenged. It is strange that till today neither Senate of Pakistan nor so-called champions of defenders of rule of law and supremacy of the Constitution have taken any notice.  

It is cardinal principle of law that if foundation of any law is unlawful then superstructure automatically collapses. Since the very amendments in Petroleum Products (Petroleum Levy) Ordinance, 1961 as part of Money Bills in 2018 and 2002 are unconstitutional, all actions taken thereunder are ultra vires of the supreme law of the land.

Ours is an exceptional State where the legislators and administrators openly violate the Constitution and even well-educated members of civil society and human right activists ask the courts to take suo muto action or lawyers to file pro bono petitions but keep on voting these violators in power. They never even bother to sue the state functionaries for their unlawful acts or not fulfilling the obligation imposed by laws! This is called “collective apathy” or “learned helplessness’.   

The only hope to enforce Article 77 read with Article 162 of the Constitution is implementation of Supreme Court’s judgements in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) and Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.) by filing contempt application. These judgements are binding on all State organs under Article 189 of the Constitution. Usurping the exclusive power of Parliament to levy taxes by SROs, even after approval by EEC, is clear contravention of Constitution but unfortunately the august apex court has yet not taken any notice. It is high time that Supreme Court Bar Association should move a contempt application for perpetual violation by the government of the dictum laid down by Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) and Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.)in public interest.

Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, intellectual property, arbitration, international taxation, IT, and ML/CFT-related laws. He is the author of many books on the law, economic and political history of Pakistan, drugs, arms, terrorism, and related matters. He has been studying phenomena of arms-for-drugs, narco-terrorism, and the global heroin economy since 1979 and authored Pakistan: From Hash to Heroin and its sequel Pakistan: From Drug-trap to Debt-trap. He studied journalism, English literature, and law. He is the Chief Editor of Taxation He is the country editor and correspondent of the International Bureau of Fiscal Documentation (IBFD) and a member of the International Fiscal Association (IFA). He isVisiting Faculty at the Lahore University of Management Sciences (LUMS) and a member Advisory Board and Visiting Senior Fellow of the Pakistan Institute of Development Economics (PIDE). 

Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime, and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, investment companies, money service businesses, insurance companies, and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).