Huzaima Bukhari & Dr. Ikramul Haq
The coalition government of Pakistan Tehreek-i-Insaf (PTI) in its very first budget for finance year 2019-20, through Finance Act, 2019, imposed ‘minimum tax regime’ for certain class of taxpayers along with tax on normal income, whichever is higher, with effect from tax year 2020. This is in utter violation of the Constitution of Islamic Republic of Pakistan [“the Constitution”] as elaborated by the Supreme Court of Pakistan in Para 35 of its judgement in Messers Elahi Cotton Mills & others v Federation of Pakistan & other [(1997) 76 TAX 5 (S.C.Pak)].
It is surprising that no one has challenged its vires. The taxpayers and Federal Board of Revenue (FBR) during e-filing of returns for tax year 2020 realised its real brunt. Various tax bars and FBR held parleys and exchanged correspondence about its application and correct working of tax liability. The All Pakistan Tax Bar, apex body of tax professionals, should come forward and challenge it. It should have been done soon after the passage of Finance Act, 2019, as suggested in Taxation ambiguities, TNS, [Political Economy] The News, July 21, 2019, but it appears that this patently unconstitutional amendment escaped their attention as even until today, no writ petition is filed collectively, though some individuals have done it, on behalf of their clients. As usual, courts have not decided these after while last date of filing of returns is December 8, 2020!
Pakistan is perhaps the only country where income tax law [Income Tax Ordinance, 2001] is so complex that even the most learned ones in this field tend to agree with great genius scientist, Albert Einstein: “The hardest thing in the world to understand is the income tax”. Had he been alive to comply with the provisions of Income Tax Ordinance, 2001, he could have changed his statement to: “The most absurd thing in the world is the income tax law of Pakistan”.
The Income Tax Ordinance, 2001 [“the Ordinance”] contains various tax regimes. The normal income tax regime that isas per classic model of clubbing net incomes from various sources computed under their respective heads and then calculation of tax liability as per applicable rate given in the law. The presumptive tax regime (tax in lieu of income introduced in 1991 and 1992), minimum tax regime (introduced for the first time in 2019 for certain classes of persons, e.g. commercial importers, further details are discussed in forthcoming paragraphs. This so-called minimum tax regime is distinguishable from another tax, titled, Minimum Tax in section 113,Chapter IX of the Ordinance. It is turnover tax (introduced in 1991 under section 80D of the repealed Income Tax Ordinance, 1979) in case of certain taxpayers. It should not be confused with minimum tax regime introduced through Finance Act, 2019. There are many incomes that are taxed as separate block under the Ordinance. The withholding tax provisions, nearly 60 in number, applicable to transactions, expenditures, investments, gains, in some cases adjustable, in many as “minimum liability” and then some also fall in the ambit of full and final tax [presumptive tax regime]. It is the worst piece of legislation that a military dictator imposed on us in 2001 with effect from tax year 2003.
The Musharraf-Shaukat duo introduced the Ordinance repealing the Income Tax Ordinance, 1979 that was also promulgated by a military dictator, Zia-ul Haq. It was much better than the present one, but they succumbed to the demand of International Monetary Fund and one Australian, Lee Burns, drafted this law, which since inception has been amended thousands of time. The so-called democratic governments since 2008 did not bother to make it an Act of Parliament, simplifying it and presenting it in both English and Urdu as we emphasised in Undoing the legacy of military dictators, TNS, [Political Economy] The News, October 8, 2017].
In 1991 when for the first time, presumptive and turnover taxes were introduced in the repealed Income Tax Ordinance, 1979, the amendments were challenged in various High Courts and ultimately the Supreme Court decided the matter in 1997 in the following terms:
“….We are inclined to hold that presumptive tax is in fact akin to capacity tax i.e., capacity to earn. In this view of the matter, we will have to read Entry 47 in conjunction with Entry 52 which provides taxes and duties on production capacity of any plant, machinery, undertaking, establishment or installation in lieu of the taxes or duties specified in Entries 44, 47, 48 and 49 or in lieu of any one or more of them. Since under Entry 52, tax on capacity in lieu of taxes mentioned in Entry 47 can be imposed, the presumptive tax levied under sections 80C and 80CC of the Ordinance is in consonance with the above two entries if read in conjunction”…..However, we may point out that in Entry 52, the key words used are “in lieu of taxes and duties specified in entries 44, 47, 48 and 49 or in lieu of any one or more, of them”. In order to understand the real import of the above portion of Entry 52, we willhave to refer to the meaning of the words “in lieu of”. In this regard, reference may be made to Black’s Law Dictionary, Sixth Edition, Ballentine’s Law Dictionary, Third Edition; and the Legal Thesaurus by Steven C. De Costa, which read as follows:
Black’s Black’s Law Dictionary. nape 787
“In lieu of”: Instead of; in place of; in substitution of. It does not mean “in addition to”.
Ballentine’s Law Dictionary. page 628
“in lieu of”: In substitution for or in place of. Ordinarily implying the existence of something to be replaced.
Legal Thesaurus, nape 266
“In lieu of”: Proposition as a substitute for, as an alternative, by proxy, or, in place of, instead of, on behalf of, rather than, representing.
After citing the above references, the Supreme Court held:
“If we were to construe Entry 52 of the Legislative List keeping in view the above meanings of the expression “in lieu of”, it becomes evident that the Legislature has the option instead of invoking Entry 47 for imposing taxes on income, it can impose the same under Entry 52 on the basis of capacity to earn in lieu of Entry 47, but it cannot adopt both the methods in respect of one particular tax. Since under sections 80C and 80CC the imposition of presumptive tax is in substitution of the normal method of levy and recovery of the income-tax, the same is in consonance with Entry 52’.
[Bold and underlined by us for emphasis]
In 2019, on the advice of tax wizard chosen by the Premier, the legislators violated the Constitution and judgement of the Supreme Court by imposing minimum tax regime in respect of some incomes previously falling under presumptive tax regimes and/or taxed as separate block of income, where tax withheld at source is made non-refundable by using both Entries 47 & 52 of Part I of Federal Legislative List. This flagrant violation of Constitution continues unabated, while the Prime Minister keeps on promising the businessmen and the poor that his prime aim to rule is facilitating them! What can be more oxymoronic, when tax laws/procedures are complex and oppressive?
The following classes of taxpayers are hit by the unconstitutional income taxation under minimum tax regime:
- Commercial importers, subject to advance income tax on imports under section 148(7) of the Ordinance have to pay tax on net income, but income tax already paid in advance on imports is made minimum liability. Tax withheld on imports was deemed as full and final liability till tax year 2019 under presumptive tax regime, using Entry 52. Now applying Entry 47 as well is against the Constitution as enunciated by the Supreme Court.
- Other categories subjected to normal tax regime/ minimum tax regime are where tax is withheld under sections 148(8A), 151(3) [not companies and cases covered under 7B], 152(1AA), 152(1AAA), 152(2A) with a few exceptions, 153(4) with certain exceptions, 154(5), 233(3), 234A [also under 235 for them], 236(1)(a) [other than companies], 236C(1), 236Q(3) [for resident persons] of the Ordinance.
It is high time that the Government of PTI reverts to position, prevailing prior to tax year 2020, in respect of all cases, where simultaneous application of Entries 47 & 52 of Part I, Fourth Schedule to the Constitution is made violating the supreme law of the land with impunity. ____________________________________________________________________
The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).