ISLAMABAD: The Islamabad High Court (IHC) held that Section 4C of the Income Tax Ordinance, 2001 as read down, will have prospective application only, and will not apply to any transactions or event past and closed on or before 30th June 2022.
The judgment authored by Justice Sardar Ejaz Ishaq Khan said that for the purposes of calculation of super tax, the adjustment for brought forward depreciation and brought forward losses shall be available; Income subject to final tax will not be subject to super tax; and super tax shall not be applicable for oil exploration companies operating under the Mining Act.
High-income earners directed to pay 50pc of super tax liability
The super tax was brought in the Income Tax Ordinance, 2001 by way of Section 4C, which was inserted vide the Finance Act, 2022. It was assumed to be a one-time tax, now has been made a permanent feature effectively increasing the rates to 10 per cent from year 2023 onwards.
The petitioners are aggrieved by the levy of “super tax”, and some of them have also received and impugned notices from the Commissioner Income Tax.
The IHC’s detailed judgement is highly relevant for the tax year 2023 for the reason that by way of the Finance Act, 2023, the rate of tax has been increased from four to 10 per cent. In this situation on the basis of the decision of the IHC and also the Sindh High Court (SHC), the increased rate cannot be applied for the tax year 2023.
Since advance tax and other liabilities have been linked with the discharge of super tax, therefore, it is suggested that appropriate legal advice and action be undertaken especially for companies that have an year-end prior to June 30, 2023, as in our view increased rate is not applicable in such cases for the tax year 2023.
Levy of super tax was also challenged before the SHC and the Lahore High Court (LHC). The SHC decided that this tax is applicable for the tax year 2023 and not for the tax year 2022. Furthermore, it was decided that there cannot be any discriminatory rate of 10 per cent as against four per cent.
The LHC has however decided that super tax at the rate of four per cent is valid for the tax year 2022, however, they have also agreed that there cannot be any charge at the rate of 10 per cent.
The matter is pending before the Supreme Court of Pakistan and the court has asked to pay 50 per cent of the demand.
Justice Ejaz wrote that retrospective (or any) legislation cannot override fundamental rights, nor can override rights acquired under transactions past and closed or, preferably, rights acquired under “facts and events that have already occurred”.
The judgment held that the taxable events for the petitioner’s respective tax years closed, and the leviability of any tax on the petitioners crystallised and fell to be determined, only on the basis of the law as it stood on the date of the close of the taxpayers’ tax accounting year, regardless of whether they followed a special or a normal tax year. It on the strength of Molasses, Anwar Yahya, and Blodgett, declared that super tax under Sec 4C could not be levied for any period prior to 30.06.2022.
The court questioned whether the Constitution confers the competence to define income twice and in a different manner for the same income. Entry 47 of Part I of the Fourth Schedule to the Constitution confers the competence to levy taxes on “incomes”, but not to redefine the same incomes under another name to be taxed again.
Justice Ejaz noted that the word “income” is not defined by the Constitution but is defined under section 2(29) of the Ordinance. Even though case law holds that the word “income” is to be given the widest possible meaning, no case law has been cited to the effect that the same income can be redefined to yield up a new category of income.
All classes of income under Section 4C are already defined and covered under various heads of income chargeable to tax. No authority for defining a new category of income using other taxable classes of income was cited by the revenue. On this score too, I find the legislative competence to be lacking.
Justice Ejaz wrote; “I fail to see how the “economic exigency” that Ms Asma Hamid boldly puts forth as the reason to extract the last blood from the industry is attributable to anything but the mismanagement of the economy by the successive governments themselves.” “Is a Parliament that does not rein in its successive profligate governments to abide by the Constitutional and statutory mandates entitled to expropriate the last drops of blood flowing in the veins of its ailing industry, and is it entitled to assert that its supreme will shall prevail notwithstanding a persistent breach by its progeny governments of their Constitutional and statutory obligations?”
The judgment questioned; “Is it not a violation of the citizens” inalienable right under Article 4 to be treated in accordance with law, where the root cause for imposition of a tax is persistent violation by the Parliament and its progeny governments of the commands of the Constitution, the FRDLA, and other sovereign commitments for reform?“
Copyright Business Recorder, 2023
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