In an earlier article on this subject I had focused on the subject of validity of the instructions issued by the Federal Board of Revenue for collection of Workers' Welfare Fund [WWF] which is essentially a labour levy. In the following paragraphs I will try to explain that the levy of WWF and Workers Participation in Profit Fund [WPPF] cannot be levied in similar form as in the past.
In the case of WWF, the Ministry of Human Resources Development Islamabad vs. East Pakistan Chrome Tannery (Private) Limited decided on November 10, 2016 the Supreme Court of Pakistan has held that WWF is not a tax. It can be anything else but a tax under the Constitution of the Islamic Republic of Pakistan. I quote two relevant paragraphs from that decision:
Raheel Kamran, learned counsel for the petitioners in Constitutional Petitions No.5 to 8/2016 submitted that after the 18th Constitutional Amendment the concurrent legislative lists were abolished and the subjects devolved upon the Provinces. He argued that there is an order dated 14.1.2016 passed by the learned Single Judge of the High Court of Sindh stating that the Full Bench (of the High Court of Sindh) has declared such a levy to be a tax, and the outcome of this is that as a tax, it would fall within Entry 47 of the Federal Legislative List which is tax on income, therefore the Provinces can neither legislate on this subject nor collect the levy.
In the aforesaid judgment a very clear direction has been given that WWF is not a tax. In that case, Rashid Anwar who was one of the counsels, raised another point which has been reproduced in paragraph 24 of the decision.
There is another aspect of the matter which requires due attention. No doubt the feature of having a specific purpose is a characteristic of a fee, which the subject contributions/payments possess as discussed in the preceding portion of this opinion.
However, there are certain other characteristics of a fee, such as quid pro quo, which must be present for a contribution or payment to qualify as a fee. This was the main argument of the learned counsel who categorized the subject contributions in the nature of a tax, that they (the contributions) lacked the element of quid pro quo or in other words the benefit of the contribution did not go to the payers.
The industrial establishments or employers etc. were liable to pay the contribution but they were not the beneficiaries of the purpose for which such contributions were being made; the beneficiaries were their employees or workers etc.
Rashid Anwar attempted to argue that the benefit need not be direct and can be indirect, therefore although the employees were directly benefited by contributions made to the Employees' Old-Age Benefit Fund as they received the disbursements, the employers received an indirect benefit in that this results in happier employees which ultimately leads to greater productivity.
Whilst this may be true, albeit a strained argument, the attempt of the learned counsel challenging the legality of the amendments in the Finance Acts has all along been to categorize the contributions/payments as a fee, which would mean that they were not a tax.
While a fee is obviously not a tax, there was absolutely no need to try and squeeze the contributions/payments into the definition of a fee, when all that is required is to take them out of the ambit of a tax.
We may develop this point further; although Article 73(3)(a) of the Constitution 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 discussion above that the subject contributions/payments do not constitute a tax is sufficient to hold that any amendments to the provisions of the Ordinance of 1971, the Act of 1976, the Act of 1923, the Ordinance of 1968, the Act of 1968 and the Ordinance of 1969 could not have been lawfully made through a Money Bill, i.e. the Finance Acts of 2006 and 2008, as the amendments did not fall within the purview of the provisions of Article 73(2) of the Constitution.
In this judgment and the recent judgment on GIDC the characteristics of something called a fee have been explained. Justice Mansoor Ali Shah in his separate judgment in the case of GIDC elaborated what has been cursorily discussed by the aforesaid judgment of the Supreme Court.
In this connection it is required to see the Article 73 of the Constitution and the Federal Legislative List. The Federal Legislative list under Article 47 provides for taxes on income other than agricultural income whereas under Article 48 there can be levy of taxes on corporation.
The right to levy such taxes and fees emanates from Article 73 of the Constitution which under sub-article (2) provides the right for the imposition, abolition, remission, alteration or regulation of any tax. Sub-article 3 (a) provides the basis for the imposition or alteration of any ......fee or charge for any service rendered The purpose of reproduction of aforesaid legislations is to identify that the right to tax income and taxes on corporation lies with the Federal Government.
It cannot be devolved. The question is can it be devolved in substance by levy of a fee by the Provinces? Furthermore, it is also clear from the judgments of the Supreme Court and the express provisions of the Constitution that a 'fee' can only be in respect of services rendered.
In these circumstances if we see the present legislations by the three provinces passed by the Provincial Assemblies for WWF then it is absolutely clear that in all the cases that the charge, which has already been declared as a 'fee' is directly based on income of the establishment or is a tax on corporation, which is legally not permitted. Such legislations are beyond the scope of the rights of the provincial governments.
In this respect it is important to note that a full bench of Sindh High Court as stated above decided that WWF is tax on income therefore outside the scope of provincial legislation. This argument has been rejected.
However, the secondary question that has been touched by the judgment of the Supreme Court is whether a fee entirely based on income be levied by the Provincial Governments. The Supreme Court decided that it is a 'fee'. However, in substance it is not in the nature of 'fee' as decided by the Supreme Court simply on the basis of 'quid pro quo'. In the light of the aforesaid discussion it is my contention that:
WWF is not a tax but a fee;
After the 18th Amendment, the Federal Government has no right to charge a fee in relation to workers in any establishment. Now that purview lies with the Provincial Governments;
A fee is necessarily required to comply with the condition of 'quid pro quo';
The WWF legislation by the Provincial Government is based entirely on 'non quid pro quo' basis. The fee is directly based on income of the establishment which is subject of the Federation;
In the light of the above, it is my contention that all the Provincial legislations for charge of WWF are not in line with the spirit of the Constitution. The Federal law is no longer applicable in the provinces, therefore, in substance, there cannot be any WWF on any establishment. On purely non legal terms since WWF as legislated by the Provincial Governments is based on income therefore this 'fee' is not valid being outside the ambit of the Provincial Governments.
The Federal Government is not empowered to levy such fee after the 18th Amendment.
This therefore means that there is serious need to examine the charge for WWF which is nothing but an extra tax in the guise of a labour welfare fee. Notwithstanding anything else this direct charge on income is nothing but a tax on income that increases the cost of doing business. The rate of tax on listed entities is not 29% of income, it is 31%. WPPF will be dealt with in my next article.
Copyright Business Recorder, 2020
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