Introduction, 1- This note has been prepared to dispel the incorrect perception that Super Tax under Section (4C) of the Income Tax Ordinance, 2001 is payable on the amount referred to as ‘Dividend’ placed under Section 5 of the Ordinance.
2- It is generally but incorrectly considered that the term ‘dividend’ as included in the definition of income for the purposes of Super Tax under Section (4C) refers to the same sum, which is so designated in Section 5 of the Ordinance.
3- The reasons for our view and assertions are given in the following paragraphs:
Destruction of ‘tax on income’ concept
4- With the introduction of the presumptive basis of taxation by the Finance Act, 1992-93, inter alia, for ‘dividend income’ the concept of income taxation has been completely destroyed in Pakistan.
5- Unfortunately, this erroneous concept has also been given judicial protection by way of the decision of the Supreme Court of Pakistan in the case of Elahi Cotton Mills Limited [PLD 1997 SC 582]
6- In the repealed Income Tax Ordinance 1979 a new section was inserted by the Finance Act, 1992-93 which stated as under:
80B. Tax on income of certain persons from dividends and bank profits, etc.- (1) Notwithstanding anything contained in this Ordinance or any other law for the time being in force, where any amount referred to in sub-section (2) is received by or accrues or arises or is deemed to accrue or arise to an individual, unregistered firm, association of persons, Hindu undivided family or artificial juridical person referred to in clause (32) of section 2, the whole of such amount shall be deemed to be income of such person and tax thereon shall be charged at the rates specified in the First Schedule.
(2) The amount referred to in sub-section (1) shall be the following namely:-
(a) dividend on which tax is deductible under sub-section (6A) of section 50;
(3) Nothing contained in this Ordinance shall be so construed as to authorise any allowance or deduction against the income as determined under sub-section (1) or any refund of tax deducted or collected under section 50 or set off of any loss under any provision of this Ordinance.
(4) Where the assessee has no income other than the income referred to in sub-section (1) in respect of which tax has been deducted or collected, the tax deducted or collected under section 50 shall be deemed to be the final discharge of the tax liability of the assessee under this Ordinance and he shall not be required to file the return of total income under section 55.
(5) In a case to which subsection (4) applies, an order under section 59A shall be deemed to have been made in respect of income referred to in sub-section (1).]
7- Withholding provisions under the repealed Income Tax Ordinance 1979 were as under:
50(6A) The principal officer of a company shall, at the time of making payment to a shareholder, not being a company, on account of dividends, deduct ,and in case of bonus or bonus shares, collect,] tax at the rate specified in the First Schedule.
8- In the Income Tax Ordinance 2001 these provisions were effectively not adopted; however, for practical consideration the concept of presumptive taxation was placed outside the general provisions in the earlier part of the Ordinance. The concept of a different basis of taxation such as Section (5) precedes the general law for computation of taxable income which is governed by Section (9) of the Ordinance. Super Tax under (4C) is tax on taxable income.
9- Present Section (5) of the Ordinance is precise and clear. It does not involve any other provision of the Ordinance. It is a self-contained law. It states:
5- Tax on dividends.—(1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a company1 or treated as dividend under clause (19) of section 2.
(2) The tax imposed under sub-section (1) on a person who receives a dividend shall be computed by applying the relevant rate of tax to the gross amount of the dividend.
(3) This section shall not apply to a dividend that is exempt from tax under this Ordinance.
Special nature of Section (5) read with Section (4)
10- Section (5) of the Income Tax Ordinance, 2001 is not similar and mari materiata Section (80B) of the repealed Income Tax Ordinance, 1979.
11- The legislature whilst drafting the new law has adopted the stance that the provisions, which are based on presumptive basis are not part of ordinary law. These are self-contained manner of collection of taxes, which would have been invalid under the general principles of taxation if the protection under the Elahi Cotton Mills case would not have been there.
12- Unlike the repealed Ordinance the new Ordinance has specifically been designed on international best practices whereby ‘dividend’ has been made a part of scheduler basis of taxation. A schedular basis of taxation is defined as under:
A schedular income tax is one in which separate taxes are imposed on different categories of income. A global income tax is one in which a single tax is imposed on all income, whatever its nature.
13- This matter is further elaborated by the provisions of subsection (4) of Section (4) of the Ordinance. Section 4 is the governing section of the Ordinance for the charge of tax for all kinds of income and taxpayers.
14- Sub-section (4) of Section (4) is an integral element of the overall ambit of Section (4). It is an independent provision for the charge of tax.
15- It lays down two principles. Firstly, certain kinds of receipts such as dividends are segregated from the general taxation system, which are, inter alia, taxed on net income basis. Secondly, the liability of payment of tax has effectively been transferred to the payer and not the recipient though it is a tax of the recipient.
CHAPTER II
CHARGE OF TAX 4.
Tax on taxable income.
(1) Subject to this Ordinance, income tax shall be imposed for each tax year, at the rate or rates specified in Division I or II of Part I of the First Schedule, as the case may be, on every person who has taxable income for the year.
(2) The income tax payable by a taxpayer for a tax year shall be computed by applying the rate or rates of tax applicable to the taxpayer under this Ordinance to the taxable income of the taxpayer for the year, and from the resulting amount shall be subtracted any tax credits allowed to the taxpayer for the year.
(3) Where a taxpayer is allowed more than one tax credit for a tax year, the credits shall be applied in the following order –
(a) any foreign tax credit allowed under section 103; then
(b) any tax credit allowed under Part X of Chapter III; and then
(c) any tax credit allowed under sections 147 and 168.
(4) Certain classes of income (including the income of certain classes of persons) may be subject to –
(a) separate taxation as provided under this chapter; or
(b) collection of tax under Division II of Part V of Chapter X or deduction of tax under Division III of Part V of Chapter X as a final tax on the income of the person.
(5) Income referred to in sub-section (4) shall be subject to tax as provided for under this chapter, or Part V of Chapter X, as the case may be, and shall not be included in the computation of taxable income in accordance with section 8 or 169, as the case may be.
(6) Where, by virtue of any provision of this Ordinance, income tax is to be deducted at source or collected or paid in advance, it shall, as the case may be, be deducted, collected or paid, accordingly.
16- The force of attraction of the provisions of subsection (4) of Section (4) of the Ordinance is not similar to the provisions of Section (4C) of the Ordinance.
17- Clause (i) of Subsection (4) of Section (4) refers to separate taxation as provided under this chapter.
18- ‘Taxation’ in this clause refers to the whole scheme of taxation which includes determination of the amount taxable and the rate of tax. The concept of final tax as referred to in subsection (4)(b) is an additional factor that states that the recipient is not liable to pay any amount as tax in addition to what has been deducted by the payer. The liability is equal to the amount withheld at source.
19- This means that whatever is withheld is the final tax under the law and there is no basis to ask the recipient to pay any additional amount. This concept has further been clarified in law by way of clause (e)(ii) of subsection (1) of Section (8) of the Ordinance which states as under:
(e) the liability of a person under section 5, 6 or 7 shall be discharged to the extent that — ……..
(ii) in any other case, the tax payable has been deducted at source under Division III of Part V of Chapter X.
20- This means that there is no concept of payment of tax by the recipient in the case of dividend. The law about withholding tax on dividends has not been changed after the levy of Super Tax under Section (4C) of the Ordinance. It states as under:
150- Dividends.— Every person paying a dividend shall deduct tax from the gross amount of the dividend paid or collect tax from the amount of dividend in specie at the rate specified in 5 [Division I of Part III] of the First Schedule.
21- Section (5) read with Section (4C) and Section (8) and the rate of withholding and tax on dividend clearly envisage that if there would have been any intention of payment of Super Tax on the amount of dividend then there was a need to change the mechanism as the present mechanism cannot accommodate the payment of super tax. The correct manner for implementing that process would have been increasing the rate of withholding to the extent of super tax.
Nature and Relevance of Section (8)
22- Unlike the repealed Ordinance in the new Ordinance in order to clarify the status of Section (5) and other similar provisions a special section was inserted by way of Section (8) of the Ordinance. There was no such provision in the repealed Income Tax Ordinance, 1979. This provision states as under:
8- General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 7, 7A, 7B and 7E.– (1)-Subject to this Ordinance, the tax imposed under Sections 5, 5A, 5AA, 6, 7, 7A, 7B and 7E shall be a final tax on the amount in respect of which the tax is imposed and—
(a) such amount shall not be chargeable to tax under any head of income in computing the taxable income of the person who derives it for any tax year;
(b) no deduction shall be allowable under this Ordinance for any expenditure incurred in deriving the amount;
(c) the amount shall not be reduced by —
(i) any deductible allowance; or
(ii) the set off of any loss;
(d) the tax payable by a person under section 5,5A,6 , 5AA, 6, 7, 7A, 7B and 7E shall not be reduced by any tax credits allowed under this Ordinance; and
(e) the liability of a person under section 5, 6 or 7 shall be discharged to the extent that —
(i) in the case of shipping and air transport income, the tax has been paid in accordance with section 143 or 144, as the case may be; or
(ii) in any other case, the tax payable has been deducted at source under Division III of Part V of Chapter X .
The extent and nature of Super Tax
23- The law relating to Super Tax states as under:
4C- Super tax on high earning persons.?
(1) A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person:
Provided that this section shall not apply to a banking company for tax year 2022. (2) For the purposes of this section, “income” shall be the sum of the following:—
(i) profit on debt, dividend, capital gains, brokerage and commission;
(ii) taxable income (other than brought forward depreciation and brought forward business losses) under section 9 of the Ordinance, excluding amounts specified in clause (i);
(iii) imputable income as defined in clause (28A) of section 2 excluding amounts specified in clause (i); and
(iv) income computed, other than brought forward depreciation, brought forward amortisation and brought forward business losses under Fourth, Fifth 1 , Seventh and Eighth] Schedules.
(3) The tax payable under sub-section (1) shall be paid, collected and deposited on the date and in the manner as specified in sub-section (1) of section 137 and all provisions of Chapter X of the Ordinance shall apply.
(4) Where the tax is not paid by a person liable to pay it, the Commissioner shall by an order in writing, determine the tax payable, and shall serve upon the person, a notice of demand specifying the tax payable and within the time specified under section 137 of the Ordinance.
(5) Where the tax is not paid by a person liable to pay it, the Commissioner shall recover the tax payable under sub-section (1) and the provisions of Part IV, X, XI and XII of Chapter X and Part I of Chapter XI of the Ordinance shall, so far as may be, apply to the collection of tax as these apply to the collection of tax under the Ordinance.
(5A) The provisions of section 147 shall apply on tax payable under this section.
(6) The Board may, by notification in the official Gazette, make rules for carrying out the purposes of this section.
Taxation of income and presumptive tax
24- Super Tax has been levied on ‘income’. Under the repealed Ordinance 1979 the gross amount of dividend without any expenditure was deemed to be income by way of special such reference in Section (80B) which stated that ‘the whole of such amount shall be deemed to be income of such person’.
25- If these words would not have been there there was no basis to tax gross amount of dividend and expenditure were necessarily required to be allowed. The concept of deemed income was incorporated to overcome that deficiency
26- There is no such reference or connotation in Section (5) of the new Ordinance. The position adopted by the new Ordinance is correct as there is no reason to charge tax on gross amount. In order to overcome that position a self-contained law has been introduced by way of Section (5) which is effectively outside the concept of income taxation. Gross amount of the dividend is not income. The income is after deducting expenses. The legislature whilst drafting Section (5) of the Ordinance was aware of this deficiency and therefore did not treat the amount of dividend as income in that sense. That concept cannot be overlooked whilst imposing super tax.
Effect of the words ‘Subject to the Ordinance’ in Section (5).
27- Provisions of Section (5) are subject to the Ordinance. This requires general and particular reference of the use of the words subject to in this provision. In this particular case, as referred above, Section (5) is a self-contained provision of taxation of dividend however following elements are not there in that provision:
a. Rate of tax (First Schedule;
b. Manner and rate of withholding and discharge of liability (Section 150);
c. Special consideration in relation to this manner of taxation (Section8).
28- The provisions of Section (5) are superseded by the words ‘subject to the Ordinance’ whereas there are no such words in Section (4C). This may be construed that the latter section overrides the former provision.
29- This requires an analysis of these words. Subject to three different meanings.
1- Subject to can mean “affected by or possibly affected by (something). Below are some examples of this use:
Residents are subject to a Rs100 fine if they are caught littering.
Clothing purchases are not subject to tax. [=you do not have to pay tax when you buy clothes]
The field trip is scheduled for June but the date is subject to change. [=the date might change]
2- Subject to can also mean “likely to do, have, or suffer from (something). Below are some examples of this use:
He is subject to anxiety attacks.
Abbottabad is subject to earthquakes.
3- Subject to can also mean “dependent on something else to happen or be true.” Below are some examples of this use:
The renovations to their house are subject to town approval. [=the town must approve the renovation plan before work can begin]
Rooms at the inn are Rs 200 a night, subject to availability.
Black’s Law dictionary defines the term asunder:
1- Conditional or dependent on something. 2. Being under domination as an authority or government subject to the whims of the boss.3. Exposed or open to undesirable or unfortunate criticism. 4. The necessity of undergoing something. 5. Liable or prone to suffer something.
30- This means that provisions of Section (5) are dominated by the provisions anywhere contained in the Ordinance if the same are inconsistent in meaning. In this case the Ordinance by way of Section (4) read with Section (8) states that the speciality and finality of tax incidence under Section (5) cannot be changed. Section (4C) cannot override anything specifically discussed in Section (4).
Decision of the Islamabad High Court
31- The Islamabad High Court discussed the matter of levy of super tax in the case of Fauji Fertilisers Company Limited. In conclusion it is stated.
§4C, as it stands now, falls to be ultra vires the fundamental rights under Articles 18, 23 and 24, read with Article 4 of the Constitution. Using Imrana Tiwana phraseology, §4C is “held to be against the scheme of the Constitution and should either be read down or declared ultra vires for the reasons given” in this judgement. With the preference to save rather than destroy, §4C is to be read down in calculating the income taxable to super tax so as to:
(a) exclude all classes of income enumerated therein the tax on which is final under the other provisions of the Ordinance; and
(b) sever the exclusions of brought forward depreciation, brought forward business losses, and brought forward amortisation allowances available to the taxpayers under the other extant provisions of the Ordinance;
32- In the body of the order it is discussed as:
2.5.4 The first one is that classes of income, tax on which is already declared to be the ‘final tax? under, inter alia, §§ 4(4) and 8, and which crystallised in terms of leviability? at the end of the tax accounting year, cannot be taxed again by adding in the mix of classes of income that go into the bowl for this new category, for that will contradict the prior – and still intact – statutory command of taxes on such classes of income being the final tax. I tend to agree, for extant statutory provisions are as much in force as §4C is, and hold that, this being an irreconcilable conflict, the regime under §4C has to yield to the regime of the extant vested rights to allow carry-forward of depreciation, amortisation and business losses where so permitted under the other pre-existing provisions of the Ordinance.
What is the nature of the amount referred to as ‘dividend’ in Section (4C)?
33- In addition Section (4C) the term dividend is also included in Section 39 of the Ordinance. What does this refer to?
34- Professor Lee Burns of Australia who drafted the initial document of the new Ordinance issued notes on the contents of the draft proposed. In these notes Professor Burns stated that dividends included in Section 39 of the Ordinance are those which are not covered in Section (5) of the Ordinance. What are these dividends? At the time of the original draft as prepared by Professor Lee these were the dividends from a resident company only. Dividends received from a non-resident company were originally excluded from Section (5) of the Ordinance. Such dividends were to be taxed on a net income basis at the general rate. Nevertheless, by way of the Finance Act, 2003 this distinction was removed.
35- At present, dividends earned by banks are the best example, which fall outside the scope of Section (5) by way of Section 100A of the Ordinance.
Conclusion
36- This note therefore elaborates that tax on the amount subject to tax under Section (5) is not liable to any further tax under the Income Tax Ordinance, including the Super Tax under Section (4C) of the Ordinance.
Copyright Business Recorder, 2024
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