Retrospective tax on windfall income discourages corporatization—II

Whereas, if we compare the Indian windfall tax/duty to the Pakistani windfall tax, it is clear that Section 99D is broader by design. Similar to the UK windfall tax, the windfall tax levied in India pertains to the energy sector. A comparative brief of the windfall taxes in India, Pakistan and the UK is given in the table below:

Considering the domestic business environment of Pakistan, whereby corporatization is not the usual business mode, one question that may be asked is, as to why Section 99D applies only to companies? Prima facie, the rationale behind this tax seems to tax windfall incomes, profits, and gains.

Retrospective tax on windfall income discourages corporatization—I

However, it is food for thought as to why business individuals and AOPs have been excluded from the purview of Section 99D. Moreover, one may also wonder as to whether only the aforestated Sectors have earned a windfall income, profit, and gain? Perhaps, the policymakers might have come to the conclusion on the basis of available data that only the aforestated sectors and only those operating as companies have made windfall incomes, gains or profits in Tax years 2023, 2022, 2021 and 2020. We cannot say for sure, as no data in relation to this has been made public. If that is the case, then one also may wonder as to why this tax had been levied on every person vide the Finance Bill 2023.

If the Government decides to include other sectors within the purview of Section 99D, the restrictive design of Section 99D will defeat its purpose, which is to tax windfall gains, income and profits. For example, if the Government decides to include sectors which export goods or services, then only those persons who operate their business through a company will get taxed.

All persons earning windfall gains, profit or income, that are not companies, shall stand precluded, which is a bit perplexing, so to speak. An example could be two or more persons exporting goods through an AOP that have earned windfall income, gains or profits due to the devaluation of the PKR. This lays bare the potential discriminatory nature of Section 99D.

Another possible issue that may be subject to litigation is the retrospective application of Section 99D, as it may unlawfully vitiate past and closed transactions. The High Court of Sindh (“SHC”) in 2011 PTD 1558 held as under:

“11. …Ordinarily, a right can be regarded as progressing from a ‘bare’ right to become a vested right and then perhaps even a past and closed transaction. Of course, some rights only become vested rights, and do not go beyond to become past and closed transactions.

Others may vest immediately, as soon as they arise or accrue, and then may (or may not) become past and closed transactions. Some rights (though this would be a somewhat rare and unusual situation) may even become past and closed transactions once they accrue, i.e., progress to that category straight from being ‘bare’ rights.

“12. As even this brief account shows, some care must be taken to properly analyze the nature of the right under consideration. This is all the more so because (especially in the realm of fiscal statutes) past and closed transactions appear to stand on a footing higher than vested rights. This is clearly established by the decision in Molasses Trading and Export (Pvt) Ltd. v. Federation of Pakistan and others 1993 SCMR 1905, a case relied on by learned counsel for the petitioners…

“…However, by a majority, it was also held that those cases in which the bills of entry had been filed by or before 30-6-1988 (i.e., before the Finance Act, 1988 came into force) had become past and closed transactions, and section 31A did not apply to them, notwithstanding the absolute terms in which it had, ostensibly, been given retrospective effect.

The reason why the rights in those cases had gone from being vested rights to become past and closed transactions was that, in respect of customs duties, the levy of the tax stood crystallized on the date on which the bill of entry was filed. It is well-settled (see, e.g., the Ghulam Hyder Shah’s case (supra)) that retrospective statutes affecting vested rights and/or past and closed transactions are to be given the narrowest effect and interpretation that is reasonably possible.”

Considering the pronouncement of the SHC in the said case, the aggrieved persons may argue that they have already filed their income tax returns and paid their due tax liability on their profits for the past 3 tax years. Moreover, it is also a possibility that some companies out of those have been audited by the FBR and their tax returns (deemed assessment) have been amended by the FBR under Section 122 of the ITO.

Moreover, they will not be wrong in arguing that they have also planned their business feasibility according to the tax rates applicable to these companies for the respective 3 previous tax years. They also would have taken all their business decisions based on their projections these past 3 tax years.

As such, these businesses have said to have relied upon the implied assurance of the corporate tax liability applicable to them for the respective tax years. Therefore, any retrospective application of Section 99D may amount to vitiating past and closed transactions.

Without prejudice to the foregoing, if the policymakers did want to raise tax revenue through equitable measures, they could have considered the measures suggested by the Reforms and Resource Mobilisation Commission (“RRMC”).

As widely reported by the media, the RRMC suggested equitable measures worth PKR 1-1.5 trillion through their interim report. Rather than experimenting through this generic windfall tax, had they picked two or three of the measures suggested by the RRMC, they would have generated around PKR 650 billion as reported by the media. It seems like the policymakers have missed the bus on this one.

It is also likely that this windfall tax will discourage corporatization if extended to other sectors of the economy, since it is only applicable to companies. In a business environment that already suffers from a lack of documentation, this windfall tax may not make things any better.

(Concluded)

Copyright Business Recorder, 2023