‘Unconstitutional’ windfall tax—II

Discriminatory without intelligible differentia [Points 7 & 8]

The Supreme Court of Pakistan in Federation of Pakistan through Chairman FBR and others v Hazrat Hussain and others (2018 SCMR 939) and Messrs.

Lucky Cement Limited through General Manager, Peshawar v Khyber Pakhtunkhwa through Secretary Local Government and Rural Development, Peshawar and others (2022 SCMR 1994) has held that discrimination should not be made even in policies.

This law is discriminatory in nature as the exchange companies and some non-banking financial companies doing the same business were not brought into its ambit and there is no intelligible differentia in overlooking them and singling out the commercial banks only. It is held by Lahore High Court in Service Global Footwear Limited & another v Federation of Pakistan through Secretary Revenue Division & others[(2024) 129 TAX 702 (H.C.Lah.)]:

77. We will, at this juncture, reiterate the rule regarding classification vouched by the superior Courts and need not refer to the case law extensively which has been done by learned Single Judge and respectfully adopt the citations of precedents and their reliance for enunciation of the principles regarding Article 25 of the Constitution.

‘Unconstitutional’ windfall tax–I

In a nub, classification can only be reasonable if it is based on intelligible criteria having nexus to the object sought to be achieved. Further, classifications created on the basis of a separate class of persons which are similarly placed will not offend the fundamental right enshrined in Article 25 of the Constitution.[Para 77,Page 741]

Windfall Tax is “in addition to” and not “in lieu of” tax already charged [point 9]

Tax under section 99D is a tax “in addition to” and not “in lieu of” of tax already charged under section 100A read with Rule 6 of the Seventh Schedule. Foreign exchange income is already taxed as regular source, falling under the head business income.

The Supreme Court of Pakistan in Messrs. Elahi Cotton Mills Ltd and others v Federation of Pakistan through Secretary M/o Finance, Islamabad and 6 others [PLD 1997 Supreme Court 582]held that tax can be charged in lieu of but not in addition to:

35. A perusal of the above quoted meanings of the above expression “in lieu of” indicates that the same connote, instead of, in place of, in substitution of, but it does not mean, in addition to. If we were to construe Entry 52 of the Legislative List keeping in view the above meanings of the expression “in lieu of”, it becomes evident that the Legislature has the option instead of invoking Entry 47 for imposing taxes on income, it can impose the same under Entry 52 on the basis of capacity to earn in lieu of Entry 47, but it cannot adopt both the methods in respect of one particular tax. Since under sections 80-C and 80-CC the imposition of presumptive tax is in substitution of the normal method of levy and recovery of the income-tax, the same is in consonance with Entry 52. [Para 35, Page 85]

Confiscatory, Expropriatory & Retrospective [points 10 & 11]

The Supreme Court of Pakistan in the Elahi Cotton case Supra has already decided that unlimited taxing powers do not extend to the point of confiscation:

“That the taxing power is unlimited as long as it does not amount to confiscation and that the legislature does not have the power to tax to the point of confiscation.

That the word reasonable is a relative generic term difficult of adequate definition. It inter alia connotes agreeable to reason; conformable to reason; having the faculty of reason; notional; thinking; speaking; or acting rationally; or according to the dictates of reason; sensible; just; proper and equitable or to act within the constitutional bound.“

“That the taxing power is unlimited as long as it does not amount to confiscation and that the legislature does not have the power to tax to the point of confiscation.

That the word reasonable is a relative generic term difficult of adequate definition. It inter alia connotes agreeable to reason; conformable to reason; having the faculty of reason; notional; thinking; speaking; or acting rationally; or according to the dictates of reason; sensible; just; proper and equitable or to act within the constitutional bound“.

Under section 99D of the Ordinance, tax has been levied through SRO No. 1588(I)/2023 dated 21.11.2023 for tax years 2022 and 2023 related to accounting periods 01.01.2021 to 31.12.2021 and 01.2022 to 31.12.2022, respectively for which the banks had already completed and finalized their accounts and discharges all liabilities, including the taxes payable much before the issuance of the Notification.

Before the closing date of accounts, charge of income tax for these two years stood established, matured and crystallized, constituting past and closed transactions for the purpose of income tax that could not have been unsettled through retrospective legislation.

The principle related to retrospective application of law vis-à-vis past and closed transactions has been recognized by the Supreme Court of Pakistan in a number of judgements, and recently followed by the Lahore High Court in Service Global Footwear Limited and & others v. Federation of Pakistan (2024) 129 TAX 702 (H.C. Lah.):

“The appeals by appellants/taxpayers at (Appendix A) are allowed. The part of impugned judgment that upholds the retrospective application of section 4C by the use of the words “for the tax year 2022” is set aside. It is declared that, notwithstanding these words, the rights conferred on the appellants at the end of tax year 2022 on 30th June 2022 are past closed transactions and cannot be impaired or whittled away by the use of these words.

In sum, super tax under Section 4C cannot be imposed on these appellants for the tax year 2022. This obviously includes appellants with special tax year.“[Para 85(i), Page 744]

Conclusion

Section 99D as it stands is unsustainable under the supreme law of land. Uncontrolled and unfettered powers to Executive by Legislature is lamentable. Lack of a clear definition of “windfall income, profits and gains”, non-availability of right to appeal, the absence of machinery provisions for tax collection, methods of assessment and payment, and the potential for discriminatory application, all contribute to the complexity and controversy surrounding this tax.

Above all, delegation of essential legislative functions to the executive branch with retrospective application of the law on past transactions are in utter violation of law as enunciated by Supreme Court and High Courts, binding under Article 189 and 201 of the Constitution, respectively.

The Sindh High Court’s short order of 20-02-2025 upholding the vires of section 99D cannot be commented upon in the absence of detailed judgement, not available till the time of submitting this article.

The higher courts being custodian of fundamental rights and supremacy of the Constitution should declare section 99D, as it stands, as ultra vires or to be read down.

However, there is consensus that issuance of Notification under this section by the caretaker government is not sustainable as it blatantly and plainly violates Articles 4, 8, 10A, 18, 25 of the Constitution.

(Concluded)

Copyright Business Recorder, 2025