In my two articles on the subject I discussed the subject of Workers' Welfare Fund [WWF]. The thrust of these two articles has been a simple premise that any charge on a company, by the Federation or the Province, that is based on profit/income of the entity is a 'tax' in all economic, commercial and accounting sense. In my first article I intentionally avoided the legal aspects of the matter for the reason that legislations are only transformation of social objectives in the form of law. As an accountant and advisor to business, I am more interested in the intent and objective of law and in the case of taxes the basis and objective for which they are levied. As a corollary to the first objective it is my duty to ensure that whatever is being collected is, in substance, in line with the powers of the state as laid down in the Constitution. Again, for that purpose, I am more interested in substance over form. With regard to Workers' Welfare Fund, notwithstanding all discussion and decisions of superior authorities, as far as the companies are concerned it is a 'tax' on their income based on taxable income of the company as determined by a Federal statute, i.e., Income Tax Ordinance, 2001. I reiterate that the word 'tax' as used in the aforesaid sentence does not mean tax in the sense as used in decisions of the superior courts. Clarity on this subject is the gist of this article. In a simple common accounting and commercial sense any charge or levy, either collected by the Federal or Provincial Government that is based on income of the entity' is a 'tax' if the sum so collected belongs to the state [Federal or Provincial government] and the entity contributing the same has no control over the same. The control over the sum so collected for Workers' Participation in Profit Fund [WPPF] is different from WWF. That I will discuss in another article. Nevertheless this is not the subject matter of my discussion in this article. The economic policy of the state that the amount so collected is to be utilized for the welfare of workers, at large, is not relevant for the company that is subject to such tax or if named as a 'fee'.

I reiterate that as a student of economics I am interested in the substance of the charge to determine whether the share of the state to that extent is reasonable or otherwise. For the company the amount to be paid to the State [Federal or Province whatever it may be] on the basis of income for the year is income tax under the Income Tax Ordinance, 2001 equal to 29% and Workers' Welfare Fund equal to 2%. There is no charge for both of these levies if there is a 'loss', except minimum tax. Minimum Tax is a bad law. For both the amounts there is no control over the money by the company paying these levies. The sum so collected is used by the state for general purposes for the sum collected as income tax and specifically for the welfare of workers in the country in the case of WWF. Thus for all purposes, in all senses, it is tax on income of the company. Accordingly, it will be wrong to assume that tax is equal to 29%. It is 31% and so on. Whatever is stated above is not the judgment of any court. This is a fact and a reality. Now the second question is the manner in which we describe the same in our scheme of arrangement for running the government which is called Constitution. The wording in the Constitution is also relevant keeping in view the object and the intent. The wording is taken from the Government of India Act, 1935 with very minor changes including some made by the 18th Amendment. Nevertheless, it is my view that even the 18th Amendment has not changed the substantive provisions relating to State objective for charge of tax on income of a corporation. The word 'corporation' is being carried from 1935 till now [85 years] notwithstanding the fact that there is no such word in the Companies Act, 2017. Though this is not the subject here however the purpose of identifying the same is that there is a term 'Taxes on Corporation' in the Government of India Act, 1935 that has been adopted in all our Constitutions. This is contained in Article 48 of the Legislative List. Notwithstanding the pronouncement on this matter as a student of economics, accounting and tax the term 'Taxes on Corporation' represent:

(a) A levy on an entity which is not an individual and represent an artificial person like a Company established under the Companies Act, 2017;

(b) That such levy is in the nature of a tax;

What is a tax? A tax in economic and commercial sense should have the following characteristics notwithstanding the legislative development in Pakistan.

(a) A tax is there where there is an 'income'. This is a universal principle which has been severely damaged in the case of the Elahi Cotton Mills Ltd. In that case certain sums have been taken as 'income' however the principle that corporations are to be taxed on income under the aforesaid entity;

(b) Taxes are related to income. In other words, such amounts are determined with reference to income. This means that the charge varies with the quantum of income. This principle is the worst application of the concept of income as is presumptive taxation;

(c) That even if the aforesaid two considerations are not there the amount collected is outside the control of the person paying the same. In other words, it is the state's share of the income. How the state will use the same is another subject. The purpose or the name under which the state is collecting it does not change the character.

Any levy that contains the aforesaid three characteristics is a tax on the corporation. In economic sense there is no need for any interpretation by any court. It is the people's will expressed in the Constitution that will decide the subject. The primary objective of my articles is whether or not based on international practices and the general rate of taxation of corporations around the country in the economic sense we need to have a tax equal to 31% or 29%. That percentage may be 0 to 99%. This is the state's right which will be determined on the basis of economic policy not by interpretation by any court. If there is any confusion same will be removed by legislature. Who collects it and the purpose for which it is used are secondary subjects. There is no saving in the statement that a portion of taxes collected by the state should be used for the welfare of the workers. Nevertheless, this is a subject of 'expenditure' not the income. In Pakistan, we are fighting on the right to tax without identifying that the objective of the levy was to allocate a portion of taxes for the welfare of the workers. The Council of Common Interest should not discuss whether WWF is to be collected by the Federation of the Province. It should discuss whether aggregate taxes on corporation's income be 29% or 31% is in the disguised form. Unfortunately, like many other things, this matter is being unnecessarily dragged in the courts. The federation will collect it if required to be collected.

To conclude, WWF is a tax on income in all economic and commercial sense. This has to be abolished if it is considered that corporate tax rate in Pakistan has to be in line with international practices. If a portion of that corporate tax is to be used for the welfare of workers then the same will be within 29% not beyond.

Notwithstanding any other argument the concept of devolution of WWF in the present form is totally non-practical for the reason that amount to be paid to the provincial government is based on income determined by an act of federal government. This matter will be understood properly when we examine a practical illustration. Company A based in Sindh, for example, declares a taxable income of Rs 1000. This means that Company A will pay voluntarily Rs. 290 to Federal Government and Rs 20 to the Sindh Government. The taxation officer at the Federal level converts the same into Rs. 2000. The company will then be required to pay another Rs 290 and Rs 20 to Federal and Provincial Governments respectively. In appeal the addition by the taxation officer is reversed. Who will pay the refund and who will monitor at the provincial government level the variation in taxable income at different stages. It is thus very clear that any levy which is based on taxable income of the company has to be governed by the Federal Government. All the provincial laws for WWF based on income of companies are totally incorrect and non-practical. This is the only interpretation of Article 48 'Taxes on Corporation'.

In this article I would like to clarify another subject also. This is also related to aforesaid conclusion. Entry 48 has given the right of tax on corporation to the Federation. As discussed above, for all practical purposes, WWF is a tax not a fee for the simple reason that it is directly related to income of the corporation and corporation has no control over the amount. In this situation the question of levy of WWF by the Provincial Governments is abintio wrong in the economic and commercial sense and intent and purpose for which this amount is charged.

The conclusion, therefore, is:

(a) There is a serious need to rewrite the Federal Legislative List which has been carried forward for the last 85 years. The world has changed. There has to be clarity on the matter. For examples the Federal Government has no right to charge taxes on capital gain on sale of immovable property;

(b) That there is no doubt in the assertion that for all economic, commercial and accounting purposes WWF is charged on income of the company being in substance in the nature of tax;

(c) That the effective rate of tax has been increased by 2% by way of this levy;

(d) That a province cannot in any sense levy a tax that is based on taxable income of a corporation. This proposition is totally absurd as it is not practically possible to relate the levy by a province with the amount of taxable income determined under a statute governed by the Federation;

(e) That a proper answer to the question is that if WWF has to be retained then the same shall be a part of taxes on income. The simple answer for the time being is allowing the amount paid as 'tax credit' instead of a deduction against income. Economic affairs of the state are to be run on the basis of economic desires of the people at large, including welfare of workers. There cannot be disguised taxation. Courts can only interpret the matter if there is any confusion. In my view there is no confusion on the matter. The confusion is there for the reason that state is more concerned about collection of funds. Instead they should concentrate on controlling the expenditure side.

Copyright Business Recorder, 2020