There’s need to remove confusion — I

‘Pakistan People’s Party regime from 1971 to 1977 provided some sort of socialistic framework for the economy. The validity of measures taken during that time will be judged by history. The purpose of this article is to explain that a charge for workers’ welfare fund, under the Workers’ Welfare Fund regulations of 1971 is a part of a pro-worker legislation by a ‘socialistic’ government. Gen Zia-ul-Haq changed almost everything that Bhutto introduced except for two taxes under the nomenclature of Workers’ Welfare Fund and Workers’ Profit Participation Fund; these funds were continued as they provided a continuous revenue stream for the government. In the following paragraphs I will discuss the pertinent facts about these provisions and suggestions for improvement”—Syed Shabbar Zaidi.

The above quotation has been taken from ‘Workers’ Welfare Fund: a tax or a fund? (Business Recorder, December 10, 2020). The learned author, former pro-bono Chairman of the Federal Board of Revenue [FBR] opined that contributions made to Workers Welfare Fund (WWF) under Workers Welfare Ordinance, 1971 and in Workers’ Participation Fund (WPF) complying with the Companies Profits (Workers’ Participation) Act, 1968 were taxes. He attributed imposition of these laws to PPP, whereas latter was passed in 1968 by the Parliament then and former by military dictator, Yahya Khan on December 9, 1971. Zulfikar Ali Bhutto took charge of two positions from Yahya Khan, President and the first civilian Chief Martial Law Administrator on December 20, 1971]. On the nature of these levies, 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.)], held these are not “taxes” and amendments made in Workers Welfare Ordinance, 1971 and some other laws vide Money Bill were ultra vires of the Constitution of Islamic Republic of Pakistan [“the Constitution]”.

It is worth noting that both these levies are allowed as “deductible allowance” to a taxpayer under the Income Tax Ordinance, 2001 that read as under:

60A. Workers’ Welfare Fund.– A person shall be entitled to a deductible allowance for the amount of any Workers’ Welfare Fund paid by the person in tax year under Workers’ Welfare Fund Ordinance, 1971 (XXXVI of 1971).

60B. Workers’ Participation Fund.– A person shall be entitled to a deductible allowance for the amount of any Workers’ Participation Fund paid by the person in a tax year in accordance with the provisions of the Companies Profit (Workers’ Participation) Act, 1968 (XII of 1968).

The Lahore High Court in East Pakistan Chrome Tannery (Pvt.) Ltd Vs. Federation of Pakistan and others (2012) 105 TAX 81 (H.C. Lah.) held as under:

“20. Looking at it through a different dimension, Section 4(7) of WWF Ordinance provides:

(7) The payment made by an industrial establishment to the Fund under sub section (1) shall be treated as an expenditure for purposes of assessment of income tax. (emphasis supplied)

Sections 21(a) and 60A of the Income Tax Ordinance, 2001 further provide:

“21. Deductions not allowed: Except as otherwise provided in this Ordinance, no deduction shall be allowed in computing the income of a person under the head “Income from Business” for

(a) any cess, rate or tax paid or payable by the person in Pakistan or a foreign country that is levied on the profits or gains of the business or assessed as a percentage or otherwise on the basis of such profits or gains.”

“60A. Workers’ Welfare Fund.- A person shall be entitled to a deductible allowance for the amount of any Workers’ Welfare Fund paid by the person in tax year under Workers’ Welfare Fund Ordinance, 1971 (XXXVI of 1971).”

The above provisions show that contribution towards the Fund is to be treated as an expenditure for the purposes of assessment of income tax and also as a deductible allowance which cannot be the case if the Fund is treated as a tax under the Income Tax Ordinance, 2001. This further defeats the argument advanced by the respondents that the Fund is a tax on income”.

The above judgement of single judge of Lahore High Court in a writ petition was approved by the Supreme Court of Pakistan in [(2016) 114 TAX 385 (S.C. Pak.)] and Shahbaz Garments (Pvt.) Ltd v Pakistan through Secretary Ministry of Finance, Revenue Division, Islamabad and others (2013) 107 TAX 89 (H.C. Kar.), passed by Full Bench of the Sindh High Court holding this as “tax”, was disapproved. The Supreme Court held as under:

“2. The facts pertaining to these matters are broadly divided into three categories for ease of reference. The first set of facts are that Sections 2 and 4 of the Worker Welfare Ordinance, 1971 (Ordinance of 1971) were amended by Section 12 of the Finance Act of 2006 and subsequently by Section 8 of the Finance Act of 2008 which broadened the scope of the obligation on industrial establishments to contribute towards the Workers’ Welfare Fund established under Section 3 of the Ordinance of 1971. The said amendments (and notices demanding enhanced payment by virtue of the amendments) were challenged through writ petitions before various High Courts of the country. It is pertinent to mention that there are divergent views of the High Courts on this question. The view of the Lahore High Court in the judgment dated 19.8.2011 reported as East Pakistan Chrome Tannery (Pvt.) Ltd Vs. Federation of Pakistan and others (2012) 105 TAX 81 (H.C. Lah.)=(2011 PTD 2643) is that the levy in question was a fee and not a tax, therefore the amendments made by the Finance Acts of 2006 and 2008 to the Ordinance of 1971 could not have been lawfully brought through a money bill, rather should have been brought through the regular legislative procedure under the Constitution. The Peshawar High Court, vide judgment dated 29.5.2014, followed suit. Subsequently Peshawar High Court disposed of numerous tax references on the basis of this decision, against which the appeals are before us. We would like to contend at the very outset that as regards those cases in which the revenue authorities/collecting agencies have assailed the judgment of the Peshawar High Court, although no rights of the collecting agencies have been affected as their job is to merely collect contributions for the Workers’ Welfare Fund, we are nevertheless deciding those cases as well keeping in view the importance of the matter and the conflicting judgments impugned before us. There is a contrary view of the Full Bench of the High Court of Sindh expressed in the judgment dated 1.3.2013 reported as Shahbaz Garments (Pvt.) Ltd Vs. Pakistan through Secretary Ministry of Finance, Revenue Division, Islamabad and others (2013) 107 TAX 89 (H.C. Kar.) = (PLD 2013 Kar 449) (Full Bench judgment) to the effect that the levy in question was a tax and not a fee, therefore the amendments made by the Finance Acts of 2006 and 2008 to the Ordinance of 1971 were lawfully brought through a money bill. The aforementioned judgments have been challenged by the parties before us.

1. The second set of facts are that various provisions of the Employees Old Age Benefits Act, 1976 (Act of 1976) pertaining to contributions to be made there under were amended by Section 9 of the Finance Act of 2008 effectively widening the scope of the obligation on employers to contribute towards the Employees’ Old-Age Benefits Fund established under Section 17 of the Act of 1976. These amendments were challenged through constitution petitions before the learned High Court of Sindh which, through its judgment dated 3.10.2012 reported as Soneri Bank Limited through Jaffar Ali Khan and others Vs. Federation of Pakistan through Secretary Law and Justice Division, Pak Secretariat, Islamabad and others (2013 PLC 134), held that the levy in question was a fee and not a tax, therefore the amendments made by the Finance Act of 2008 to the Act of 1976 could not have been lawfully brought through a money bill.

2. The third set of facts are that various provisions of the Workmen Compensation Act, 1923, the West Pakistan Industrial and Commercial Employees (Standing Orders) Ordinance, 1968 (Ordinance of 1968), the Companies’ Profit Workers’ Participation Act, 1968 (Act of 1968), the Minimum Wages for Unskilled Workers Ordinance, 1969 (Ordinance of 1969) and the Act of 1976 were amended through the Finance Act of 2007 which amendment(s) in effect broadened the scope of the obligation of the employers in the respective statutes (the obligation(s) in each statute shall be discussed during the course of the opinion). These amendments were challenged through a constitution petition before the learned High Court of Sindh which, through its judgment dated 26.2.2011, held that the changes sought to be made by amendments through the Finance Act of 2007 did not fall within the purview of Article 73(2) of the Constitution, hence, the said amendments could not have been lawfully brought through a money bill. All the aforementioned judgments have been challenged before us”.

Note: Review Petition in CA of 583 of 2015 in the above judgement is still pending before the Supreme Court.

Sections 2 and 4 of the Workers Welfare Ordinance, 1971 were amended by the Finance Act of 2006 and subsequently by the Finance Act of 2008 to broaden the scope of the obligation on industrial establishments to contribute towards the Workers’ Welfare Fund, established under Section 3 of the Ordinance of 1971. These amendments were declared ultra vires Constitution by Lahore High Court in East Pakistan Chrome Tannery (Pvt.) Ltd v Federation of Pakistan and others (2012) 105 TAX 81 (H.C. Lah.). This order was endorsed in 2016 by the Supreme Court in the judgement cited above. The issue was whether WWF is a fee or tax. The Supreme Court said it was not ‘tax’. Therefore, the amendments made by the Finance Acts of 2006 and 2008 as Money Bill held unconstitutional.

Through the Finance Act 2008, various provisions of the Employees Old Age Benefits Act, 1976 pertaining to contributions to be made thereunder, were also amended widening the scope of obligation on employers to contribute towards the Employees’ Old-Age Benefits Fund established under Section 17 of the Act of 1976. These amendments were challenged through constitution petitions before the Sindh High Court which, through its judgment dated 3.10.2012 reported as Soneri Bank Limited through Jaffar Ali Khan and others v Federation of Pakistan through Secretary Law and Justice Division, Pak Secretariat, Islamabad and others (2013 PLC 134), held that the levy was a fee and not a tax, therefore, the amendments made by the Finance Act of 2008 as Money Bill were unconstitutional.

Through the Finance Act of 2007 various provisions of the Workmen Compensation Act, 1923, the West Pakistan Industrial and Commercial Employees (Standing Orders) Ordinance, 1968, the Companies’ Profit Workers’ Participation Act, 1968, the Minimum Wages for Unskilled Workers Ordinance, 1969 and the Act of 1976 were amended through the Finance Act of 2007 to broaden the scope of the obligation of the employers in the respective statutes. These amendments were challenged before the High Court of Sindh which, through its judgment dated 26.9.2011, held that the amendments through the Finance Act of 2007 not falling within the purview of Article 73(2) of the Constitution could not have been lawfully inserted through Money Bill. The judgments of Lahore and Sindh High Courts were challenged in the Supreme Court that upheld the same in (2016) 114 TAX 385 (S.C. Pak.)] with the conclusion: “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 judgement was issued after 18th Constitutional Amendment [the “18th Amendment”] but the changes in laws under discussion were made prior to it, hence, the issue of jurisdiction between the federal and provincial legislature was not under dispute.

Before the 18th Amendment, the Federal Board of Revenue (FBR) had the power to collect contributions under Workers’ Welfare Funds Ordinance, 1971 and Profits (Workers’ Participation) Act, 1968 from all over the country as both the levies were calculated with reference to taxable income under the income tax law. After the 18th Amendment, the Sindh Assembly was the first province to pass the Sindh Workers Welfare Fund Act, 2014 to collect WWF. The Sindh Companies Profits (Workers’ Participation) Act, 2015) was passed by the Provincial Assembly of Sindh on April 22, 2016 with retrospective affect from 1st July, 2011. The Punjab Assembly following the Sindh Assembly enacted Punjab Workers Welfare Fund of 2019. These levies were challenged before the Sindh High Court on various grounds.

(To be continued)

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS))

Copyright Business Recorder, 2020