10pc tax credit allowed by SC to persons who imported, installed machinery till June 2019

ISLAMABAD: The Supreme Court of Pakistan (SC) has allowed 10 percent tax credit to the persons who have imported and installed machineries till 30th June 2019.

In this regard, the SC has issued a 41-page detailed judgment on the issue of Section 65-B of the Income Tax Ordinance, 2001.

The constitutionality of the amendments made to Section 65B of the Income Tax Ordinance, 2001 (ITO) by the Finance Act, 2019 was challenged in the present case.

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Explaining the judgment, a tax expert said that the SC has restored tax credit at the rate of 10 percent to those taxpayers who purchased, as well as, installed machinery before the rate was reduced to five percent. Therefore, tax credit @10 allowed to the persons who have imported and installed machineries till 30th June 2019.

“Claiming benefits for subsequent years on the strength of acquiring vested right or promissory estoppel is held inadmissible”, the tax expert referred to the SC judgment.

The tax expert explained that the petition is partly allowed. Appeal was filed by the FBR against judgment of the SHC. The petitioners have challenged reduction of tax credit from 10 to 5 per cent through insertion of a proviso in Sec 65B through Finance Act 2019.

The SHC allowed the petition on the ground that the petitioners have acquired vested rights upon import of plant and machinery by 30th June 2019.

The FBR has challenged this judgment before the SCP. The apex court held the benefit is available to those petitioners who have imported and installed machinery within the period by striking down the proviso.

All those who have claimed benefit of tax credit for subsequent years and are allowed by SHC are declared inadmissible. The judgment of SHC is reversed in favour of FBR to that extent, the tax expert added.

Through this judgment, the SC has struck down proviso added to subsection (1) of Section 65B of the Income Tax Ordinance which has reduced the rate of tax credit from 10 per cent to five per cent of the amount invested for the tax year 2019.

The SC has declared that the proviso added to subsection (1) of Section 65B through the 2019 amendments infringes the fundamental right of the first category of taxpayer companies to protection against discrimination and the guarantee of equal treatment under Article 25 of the Constitution, and is therefore liable to be struck down; and (ii) the change made to subsection (2) of Section 65B through the 2019 amendments does not infringe any of the fundamental rights of the second category of taxpayer companies guaranteed by Articles 18, 23, 24 and 25 of the Constitution.

The SC’s order added that the present petitions are converted into appeals, which are partly allowed.

Section 65B was introduced into the ITO by the Finance Act, 2010 as a tax incentive provision for local industry. It allowed taxpayer companies a tax credit at the rate of 10 per cent of the amount invested in the purchase of plant and machinery for an industrial undertaking set up in Pakistan, provided that the plant and machinery were purchased and installed between 1 July 2010 and 30 June 2015. Subsections (1) and (2) of Section 65B are relevant to the questions involved in the present case.

The ending year, 2015, mentioned in subsection (2) was changed to 2016 by the Finance Act, 2015; to 2019 by the Finance Act, 2016; and to 2021 by the Finance Act, 2018. However, the Finance Act, 2019 brought the ending year back from 2021 to 2019 and, by adding a proviso to subsection (1), reduced the rate of tax credit from 10 per cent to five per cent of the amount invested for the tax year 2019.

The SC judgment stated that in light of the constitutional position, when we examine the proviso added to subsection (1) of Section 65B, we find it to be in equal treatment provided by the fundamental right enshrined in Article 25 of the Constitution. This proviso reduces the rate of the tax credit for the tax year 2019 from 10 per cent to five per cent of the amount invested, whereas for all other tax years from 2010 to 2018, taxpayer companies were granted a tax credit at the rate of 10 per cent of the amount invested.

As a result, the first category of taxpayer companies has been discriminated against and has not been afforded the equal treatment that was given to other taxpayer companies for the tax years 2010 to 2018.

Therefore, having carefully considered the impact of the proviso on the first category of taxpayer companies, we find that there are no intelligible differentiae distinguishing these taxpayer companies in respect of tax credit for the tax year 2019 from the other taxpayer companies that were granted a tax credit at the rate of 10 per cent of the amount invested for the tax years 2010 to 2018.

The differentiation created by the proviso lacks any rational nexus with the object sought to be achieved. Consequently, the proviso is clearly in violation of the constitutional prohibition contained in Article 8, read with Article 25 of the Constitution.

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