In the Finance Act 2023 many amendments have been proposed. This article is restricted to two important measures which in the opinion of the author represent misunderstanding of primary accounting and common law principles.
They will add to nothing but litigation costs for the taxpayers as these measures are bound to be challenged before the superior courts. These measures are: changes in the rate of super tax from 4 % to 10% for Tax Year 2023 and determination of value to be taxed in case of issue of bonus shares.
Super tax
Super tax under Section 4C was levied in by the Finance Act, 2022, which is effective from July 1, 2022. This tax was payable for the Tax Year 2022 which is a period from July 1, 2021 to June 30, 2022. As a result of an appeal by the taxpayers, Sindh High Court held that such tax will not be payable for the Tax Year 2022 but it shall be payable for the tax year 2023. However, a Single Bench of Lahore High Court in the petition (#58683) of 2022 has held that super tax levied by the Finance Act, 2022 is also applicable for the Tax Year 2022. The appeal against the order of Sindh High Court is already before the Supreme Court of Pakistan and its hearings are to be held after the summer vacation.
Based on the discussion held before the Supreme Court that are produced in the interim order, confusion persists on the matter. The part of the order is reproduced asunder:
Learned counsels for the petitioner have pointed out that the Tax Year 2022 for which the impugned Super Tax under Section 4C of the Income Tax Ordinance, 2001 (“Ordinance”) has been imposed starts from 01.07.2021 until 30.06.2022. In the present case, the respondents being high earning taxpayers with incomes greater or equal to Rs.300 million claim that they do not fall within the purview of Super Tax for two reasons.
Firstly, because their accounting year ended on 31.12.2021 prior to the close of Tax Year 2022 on 30.06.2022. Therefore, the impugned Super Tax was being demanded by the petitioner with retrospective effect.
We are not persuaded by the arguments at this stage because according to the learned counsel for the petitioner, the accounting year of the respondents ends during the course of Tax Year 2022 to which the provisions of Section 4C are lawfully applicable.
This observations of the Supreme Court reflect the confusion in the minds of their Lordships. It has also been reported that during the hearing there existed serious confusion on this matter.
It is hoped that the confusion (underlined sentence in the order of the Supreme Court) will be removed in due course. There is effectively no confusion on this matter and the subject of determining a tax charge for a tax year is not being explained appropriately. This aspect has been explained in the following paragraphs:
Under the Income Tax Act 1922 and also in the earlier Income Tax Laws of the Anglo-Saxon countries, which still prevail in UK Corporation Tax, the rates of tax were not laid down in the law. The current position of the UK Corporation Tax is as under:
Corporation tax rates
(1) Corporation tax is charged at the rate set by Parliament for the financial year as the main rate.
Subsection (1) is subject to—
(a) section 18A (which provides for tax to be charged at the standard small profits rate instead of the main rate in certain cases), and
(b) any other provision of the Corporation Tax Acts which provides for corporation tax to be charged at a different rate.
Under this system ‘Tax Rates’ for each financial year are legislated by the Parliament invariably after the close of the financial year. This system was also the practice in Pakistan before the promulgation of Income Tax Ordinance, 1979 and in the official copy of the Income Tax Act, 1922 one can find the year-wise Finance Acts.
In the Income Tax Ordinance 1979 a different practice has been adopted. This practice prescribes tax rates in the ordinance which convey the legal intention that the rate prescribed in the Ordinance is applicable for all years to come and any change applicable will be with prospective effect. It goes to the extent that even the reduced or increased rates for future years are prescribed.
This primary principle of retrospective and prospective intention of law has neither been raised nor presented before the two superior courts. It is expected that the same will be raised before the Supreme Court. The question here is not about the right of the legislature to prescribe any rate with retrospective effect; it is about the intention of the law and structure of the tax statute.
In this regard the second argument which has not been properly appreciated by Lahore High Court is with regard to the case where the income year has already closed on December 31, 2021 with respect to the Tax Year 2022 charge. In its order Lahore High Court has wrongly relied on the matter that for these persons the Tax Year relevant for the year ended December 31, 2022 is Tax Year 2022; therefore, any tax charge for that year will be applicable. They have considered that use of a ‘special’ year is a concession.
This presumption is wrong. A ‘special year is not a concession. It is an economic need. Even if it is considered that there should be equity in taxation, taxpayers having a ‘special year’ cannot be discriminated against those having June 30 as a year-end. If the law is applied as Lahore High Court has held then people having a ‘special year’ will be taxed for super tax for their income for the January 1 to June 30, 2021 period, whereas the same period will not be taxed for the persons having June 30, 2022.
Equitability can only prevail when in case of such changes the increased rates should be applicable for the split period income. The argument by lawyers in Lahore High Court that for those that have a December 31, 2021 this represents a past and closed transaction is completely valid.
(To be continued)
Copyright Business Recorder, 2023