‘Unconstitutional’ windfall tax–I

Banks have regular windfall income from dealing in foreign currencies – oxymoronic treatment by SRO. 1588(I)/2023 dated 21.11.2023.

In Pakistan, Federal Board of Revenue (FBR) is de facto legislature (sic) in tax matters. This reflects on the sheer incompetence of our so-called elected legislators (sic) sitting in the Parliament. They merely act as rubber stamp in tax legislation.

In utter violation of Article 77 read with Article 162 of the Constitution of Islamic Republic of Pakistan [“the Constitutions], Money Bills are introduced in the National Assembly.

Even the President of Pakistan, as symbol of federation, is unaware of his powers and role in tax legislation under Article 162 of the Constitution. Consequently, many unconstitutional amendments in the tax laws are introduced giving unbridled and unfettered powers to Revenuecracy to continuously destroy the economy and fleece the poorest of the poor through oppressive indirect taxes.

Members of Parliament have committed the most heinous crime by granting delegation (excessive and unconstitutional) of essential legislative powers to Revenuecracy—a blatant and brutal violation of Article 77 read with Article 162 of the Constitution. This is abdication and not delegation of powers, permissible under the supreme law of the land. Its worst example has surfaced in the form of section 99D, inserted in the Income Tax Ordinance, 2001[“the Ordinance”] vide Finance Act, 2023 that reads as under:

99D. Additional tax on certain income, profits and gains.– (1) Notwithstanding anything contained in this Ordinance or any other law for the time being in force, for any of the last three tax years preceding the tax year 2023 and onwards, in addition to any tax charged or chargeable, paid or payable under any of the provisions of this Ordinance, an additional tax shall be imposed on every person being a company who has any income, profit or gains that have arisen due to any economic factor or factors that resulted in windfall income, profits or gains.

(2) The Federal Government may, by notification in the official Gazette, –

(a) specify sector or sectors, for which this section applies;

(b) determine windfall income, profits or gains and economic factor or factors including but not limited to international price fluctuation having bearing on any commodity price in Pakistan or any sector of the economy or difference in income, profit or gains on account of foreign currency fluctuation;

(c) provide the rate not exceeding fifty percent of such income, profits or gains;

(d) provide for the scope, time and payment of tax payable under this section in such manner and with such conditions as may be specified in the notification; and

(e) exempt any person or classes of persons, any income or classes of income from the application of this section, subject to any conditions as may be specified in the notification.

(3) The Federal Government shall place before the National Assembly the notification issued under this section within ninety days of the issuance of such notification or by the 30th day of June of the financial year, whichever is earlier.

No right of appeal has been provided in section 99D of the Ordinance, which is a clear and blatant infringement of fundamental rights guaranteed under Article 10A of the Constitution.

The Supreme Court of Pakistan in the Mehram Ali and others v FOP PLD 1998 Supreme Court 1445 held that any statute denying at least one right of appeal by an independent court/tribunal is ultra vires the Constitution:

“That the right of “access to justice to all” is a fundamental right, which right cannot be exercised in the absence of an independent judiciary providing impartial, fair and just adjudicatory framework i.e. judicial hierarchy.

The Courts/Tribunals which are manned and run by executive authorities without being under the control and supervision of the High Court in terms of Article 203 of the Constitution can hardly meet the mandatory requirement of the Constitution.“[Para 11(vi), Page 1477]

The principle of ‘audi alteram partem’ is one of the foundational principles of natural justice, also lacking in this levy. Supreme Court of Pakistan in the Federal Government Employees Housing Authority v Ednan Syed and others PLD 2025 Supreme Court 11 held:

“Furthermore, Article 10A of the Constitution requires that everyone is entitled to a fair trial and due process, which includes the basic right to be heard.

The principle of audi alteram partem is one of the foundational principles of natural justice. It necessitates the requirement of being heard so that the judicial order reflects the contention of every party before the Court. To fulfill the requirements of being heard, it is settled that the relevant party must be issued first a notice and then be allowed a hearing. These two (notice and hearing) are basic pre-requisites, which satisfy the test of being heard as well as fair trial and due process within the ambit of Article 10A of the Constitution“.[Para 14, Page 22]

Since legal drafting is FBR’s Waterloo, section 99D of the Ordinance gives unregulated and unguided powers to the Federal Government [Executive] to charge additional tax on what it adjudges’ windfall income, profits and gains’ (an expression not defined in the Ordinance).

Section 99D is a self-contained provision enabling the Federal Government to impose on any company [part of any sector] “an additional tax in addition to tax already payable on taxable income if it earns any income, profit or gains that have arisen due to any economic factor or factors that resulted in windfall income, profits or gains”. Why this section excludes non-corporate entities can be anybody’s guess—but certainly violates Article 25 of the Constitution.

The rate of tax under section 99D can be up to 50% at the discretion of Federal Government (again unconstitutional delegation of essential legislative powers). In other words, section 99D gives absolute power, which corrupts absolutely, to Executive, to target anyone and impose tax up to 50% on any income that according to it qualifies to be “income, profit or gains that have arisen due to any economic factor or factors that resulted in windfall income, profits or gains”.

Section 99D empowers the Federal Government to levy windfall tax up to 50%, with the following conditions amongst others:

• Selecting the relevant sector or sectors

• Determining the economic factor(s) giving rise to windfall income, profits and gains

• fix the tax rate and timelines for tax payments

• Exempting specific persons or income classes where necessary

• Section 99D (3) mandates that a notification must be issued in the Official Gazette and presented before the National Assembly within 90 days of issuance or by June 30 of the financial year, whichever comes first.

The very first exercise of powers under this section by the Federal Government (read FBR) exposes the mindset of an arbitrary agency that has no regard for rule of law, is known for its highhandedness, inefficiency and corrupt practices. It has only targeted banking companies knowing that even unlawful tax can easily be extracted from them.

The Caretaker Government in utter violation of section 230 of the Elections Act, 2017 issued a statutory regulatory order [SRO No. 1588(I)/2023 dated 21.11.2023,hereinafter “the Notification”], targeting only the commercial banks, declaring their regularly earned and taxed foreign exchange income as “windfall”!

Section 99D and the Notification issued thereunder raise the following crucial points:

1. The expression “windfall income, profits and gains” has not been defined under section 99D or in the Notification or elsewhere in the Ordinance and left to the discretion of Executive to abuse it.

2. Anything taxed as normal banking income under section 100A of the Ordinance read with Rule 6 of the Seventh Schedule can be treated as windfall income.

3. No machinery provision is provided either under the section or the Notification.

4. Through delegation of power, the Federal Government can determine what is chargeable to tax as windfall despite the clear command of Article 77 read with Article 162 of the Constitution. It is explained by Supreme Court of Pakistan in the Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) and Messer Mustafa Impex, Karachi v Government of Pakistan(2016) 114 Tax 241 (S. C. Pak.) that no taxation is valid through delegation.

5. The Notification is hit by the doctrine of excessive delegation on the touchstone of well-established principle of trichotomy of power enshrined in the Constitution.

6. The Notification is discriminatory.

7. There appears no intelligible differentia in singling out the banks while ignoring other companies for the same nature of income?

8. This is a tax in addition to and not in lieu of tax already charged

9. This tax is confiscatory and ex-propriatory in nature

10. Retrospective application of law on past and closed transactions is not sustainable.

It is imperative to discuss the above points in some detail:

Undefined terms [points 1, 2 & 3]

If any word/expression is not defined in a tax law, it is trite rule of interpretation, based on leading pronouncements by higher judicial for a meaning assigned in General Clauses Act, if available should be adopted. In the absence of the same, the generally accepted dictionary meaning should be applied.

However, technical terms must be assigned their technical meanings. Black’s Law (Ninth Edition) at page 1626 and page 1766 defines“windfall profit tax“ and “windfall”, respectively as under:

“windfall-profits tax. (1973) A tax imposed on a business or industry as a result of a sudden increase in profits. • An example is the tax imposed on oil companies in 1980 for profits resulting from the Arab oil embargo of 1970. [Cases: Internal Revenue C=>4338.]

windfall. (I5c) An unanticipated benefit, usu. in the form of a profit and not caused by the recipient“.

In short, windfall income refers to a sudden and unexpected gain of money that is usually much larger than regular income. Some key characteristics of windfall income are:

• Sudden and unexpected: It comes unexpectedly, not because of regular work or investments.

• Significant amount: It is a much larger sum than one regularly received.

• One-time or irregular: It is not a recurring income source and may not be received again.

• Some common examples of windfall income are:

• Inheritance: Receiving a large inheritance from a deceased relative can be a significant windfall.

• Lawsuit settlements: On winning a lawsuit, a substantial settlement can be received, which could be considered windfall income.

• Selling a valuable asset: Selling an asset like a property or a collection for much more than expected can also be a windfall.

• Receiving a large bonus or gift: While not as common as the other examples, some employers or individuals might hand out a large bonus or gift that qualifies as windfall income.

• Higher commodity price due to exceptional circumstances: Due to war or other catastrophes or some exceptional economic factors, unexpected income, profits or gains (windfalls) in respect of rise in commodity prices.

Considering the above, the question arises that when section 100A read with Rule 6 of the Seventh Schedule to the Ordinance, treats foreign exchange income as business income of the banks and taxes it as such, then how can it be treated as windfall income and that too without first establishing it empirically and confronting the same to the banks?

It is also important to note that financials of the banks prepared under provisions of the Banking Companies Ordinance 1962 are fate accompli for the department and there are cases pending on various appellate levels where FBR has disallowed unrealized exchange losses [though taxed unrealized exchange gains]. Therefore, charge under section 99D is approbating and reprobating—blowing hot and cold in the same breath.

No machinery provision provided [point 4]

There is complete absence of machinery in section 99D, a self-contained provision that does not provide for declaration of windfall income, profits and gains in any form, return, statement etc. nor any assessment and appeal procedure. In the Notification, the date of payment was 30.11.2023 and method of calculation adopted is against the law. It takes gross receipt, whereas the expression used by Legislature is “income, profits and gains” meaning by on net basis.

It is shocking that neither the law nor the Notification provides any procedure for declaring chargeable income. The Notification only directs banks to make payment in government treasury. Thus, in case of a dispute regarding calculation of windfall income, no mechanism exists for challenging it.

The demand calculated and conveyed on the basis of Notification by the Commissioner cannot be challenged by way of appeal. Even the demand raised without any opportunity of being heard is a patent and flagrant violation of Article 10A of the Constitution.

There is complete absence of machinery provisions for collection and payment of ‘additional tax.’ It is a cardinal principle that charge fails when machinery provision to enforce it is missing in totality. The following cases are relevant for this proposition:

The Elahi Cotton Mills Ltd. and others v FOP (1997) 76 TAX 5 (S.C. Pak.):

“..though the Legislature has the prerogative to decide the questions of quantum of tax, the conditions subject to which it is levied, the manner in which it is sought to be recovery, but if a taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy of the tax or that is confiscatory, the Court may stoke down the impugned statute as unconstitutional.” [Para 31 (xxxi), Page 81]

The Pearl Continental Hotel and another v Government of NWFP and others 2010 PTD 2018 [Supreme Court of Pakistan]:

“19.We are in no doubt that the machinery provisions, where provided, have to be construed liberally and in the manner aiding the realization of proper tax and to prevent avoidance of the tax. And where not provided for but tax recovery is made as per the law, the omission of machinery may not be considered as fatal to the tax recovery but where law is disregarded or breached or violated in assessing or recovering tax, non-existence of recovery provisions cannot be ignored.” [Para 19, Page 2028]

CIT v. B.C. SrinivasaSetty [1981] 128 ITR 294 (SC):

“..the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section”. [Page 299]

Vires, Delegation and Excessive Delegation [Points 5 & 6]

Beside the abuse of powers by Executive as elaborated above, even otherwise, section 99D granting powers to the Federal Government (Executive arm of the State) is in violation of Article 77 of the Constitution. It is explained by the Supreme Court of Pakistan in the Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak):

“20. It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd. V. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993 SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192).”[Para 20, Page 18]

In Messrs. Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.), Supreme Court, in unequivocal and unambiguous terms, has ruled that power of levying taxes under Article 77 of the Constitution is the exclusive prerogative of the Parliament and cannot be delegated to any executive authority:

“67. He has, however, correctly contended that the levy of tax is the function of Parliament under Article 77 of the Constitution and the regulation and issuance of fiscal notifications is in the nature of subordinate legislation. He has further, again correctly, contended that such powers, if given to the Executive per se, would amount to a negation of the doctrine of parliamentary supremacy and the doctrine of separation of powers. Both these propositions are valid and make the distinction between executive and legislative power clear”.[Para 67,Page 290]

Similar views were held in the Jurists Foundation through Chairman v Federal Government Through Secretary, Ministry of Defense and others [PLD 2020 Supreme Court 1]:

“41. This Court has time and again held that the essential legislative function of the Parliament cannot be delegated. The wisdom behind it is that the delegate must have legislative guidelines to formulate Rules and Regulations, and that guidelines, contours or boundaries must come from the Legislature itself. Delegation of an “essential legislative function” by the Legislature to the Executive is not permissible under the Constitution.” [Para 41, Page 40]

In the Flying Cement Company v FOP 2015 PTD 1945, Lahore High Court held:

“It has been held in the case titled Municipal Corporation of Delhi v. Birla Cotton Spg. & Wvg. Mills (AIR 1968 SC 1232) that the principle is well settled that essential legislative function consists of determination of the legislative policy and its formulation as a binding rule of conduct and cannot be delegated by the Legislature. Nor is there any unlimited right of delegation inherent in the legislative power itself. This is not warranted by the provisions of the Constitution. The Legislature must retain in its own hands the essential legislative functions and what can be delegated is the task of subordinate legislation necessary for implementing the purposes and objects of the Act.” [Para 46, Page 1978]

The act of surrendering/abdicating essential legislative power under section 99D is patently against the Constitution as elaborated by Supreme Court of Pakistan in Pakistan Television Corporation Ltd. v CIR (2019 119 TAX 151 (S.C. Pak.):

“The conclusion of the CIR and the ATIR insofar as it is based on SRO 550 or the superseded SRO 648 is contrary to the Constitution of the Islamic Republic of Pakistan, 1973 (Constitution) and the scheme of levy of a tax as provided in fiscal statutes. A tax, under Article 77 of the Constitution, can only be levied by or under the authority of an Act of Parliament. It is levied under the charging section of such an Act. Section 3 and the First Schedule to the Federal Excise Act, 2005 (Federal Excise Act) as well as the First Schedule to the Customs Act including PCT Heading 98.12 are statutory provisions. These can only be amended by an Act of Parliament. Delegated legislation such as a SRO cannot amend these.” [Page 165]

In the light of above, the power for determination of what is windfall income, profits and gains could not have been delegated to the Executive being an essential legislative function.

(To be continued)

Copyright Business Recorder, 2025