The Finance Minister, Senator Ishaq Dar, in a press conference held on May 11, 2015, claimed that through recently-promulgated Finance (Amendment) Ordinance, 2015, power of Federal Board of Revenue (FBR) to grant concessions/exemptions through Statutory Regulatory Orders (SROs) has been withdrawn. He claimed that these have now been transferred to the Economic Co-ordination Committee (ECC) of Cabinet in exceptional circumstances. The text of this Ordinance is not made available till the writing of these lines. Thus, the comments on the Finance (Amendment) Ordinance, 2015 are based on Press reports.
According to a report (Business Recorder, Mar 9, 2015), the Law and Justice Division has asked the FBR to make it clear whether Finance (Amendment) Ordinance, 2015 is a Money Bill or not that withdraws its powers. Law and Justice Division has demanded from FBR two documents to meet the National Assembly/Senate Secretariat requirements on a top priority basis. Firstly, the statement of objects and reasons duly signed by the Minister In-charge. Secondly, a certificate whether it is a 'Money Bill' or not duly signed by the Minister In-charge. It is revealed in the report that under the Finance (Amendment) Ordinance, 2015, FBR's power to grant exemption from duty has been abolished. Further, the federal government shall place before the National Assembly all notifications of customs, sales tax, income tax and federal excise duty issued in a financial year.
Finance (Amendment) Ordinance, 2015, as reported in Press, is ultra vires of Article 77 of the 1973 Constitution which clearly ordains that the right to levy taxes is the sole prerogative of the Parliament. No other organ of State can levy taxes or extend concessions/exemptions through delegated powers.
The power to issue SROs given to ECC is violative of the dictum laid down by the Supreme Court in the Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)]. This judgement is binding on all State organs/persons under Article 189 of the Constitution of Pakistan. Usurping the powers of Parliament by the EEC, in utter contravention to the Constitution and above-mentioned judgement of apex court, is highly lamentable. Unfortunately, the august apex court has yet not taken note of it. No contempt proceedings have been filed by anybody. No protest has been lodged even by members of parliament for this gross violation of Constitution and usurping their exclusive powers.
The federal and provincial tax codes of Pakistan contain numerous exemptions and concessions while many are added, modified or withdrawn through SROs. These exemptions and concessions have not only eroded the tax base but have also contributed towards widening the rich-poor divide. These waivers, concessions and exemptions are depriving the State of revenue worth billions of rupees that is urgently needed for the ever-increasing needs of the vast majority of population for providing basic amenities of life, education, medical treatment, housing and transport.
The most painful aspect of these SROs is utter violation of the supreme law of the land and judicial acquiesce about it. The power delegated to EEC would be struck down if challenged in a constitutional petition in the light of the following ruling of the Supreme Court in the Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others[(2013) 108 TAX 1 (S.C. Pak)]:
"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 1993SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192)." [Page 18, Para 20]
The World Trade Organisation (WTO), in its latest report prepared for the fourth Trade Policy Review of Pakistan (March 24 & 26, 2015), has observed that in Pakistan "the decline in revenue can be attributed to a number of factors, most notably widespread tax evasion, a wide array of tax exemptions, and failure to widen the tax base. Furthermore, the prevalence of SROs, which are discretionary measures providing tax and tariff exemptions and relief to vested interests, are a significant drain on fiscal revenue." The report has highlighted that about 4,500 SROs were issued leading to a revenue loss of Rs 650 billion.
It is an established fact that the use of ad-hoc trade policy instruments under SROs severely undermines the predictability of the trade regime and also supports a culture of rent-seeking. Now, after tariff rates are amended by the forthcoming Finance Act 2015, EEC will resort to tariff exemptions/concessions, and to add or modify import rules through SROs-a malpractice previously done by FBR. Issuance of SROs by EEC is just an eye-wash as recommendations will continue to emanate from FBR appeasing powerful segments, casting doubts about transparency and fiscal discipline. By altering the structure of tariff incentives unpredictably, with uncertain effects on resource allocation, these concessions and exemptions may counteract economic efficiency by raising tariff and increasing effective rates of protection. The real remedy is to abolish all provisions in tax laws that authorises issuance of SROs.
As per official admission, the cost of exemptions and concessions as a result of import-related SROs alone amounted to Rs 137 billion during the financial year 2013-14. The total impact was of nearly Rs 350 billion as admitted by the Finance Minister in Parliament in reply to the Question 52 posed by MNA, Lal Chand.
It is worth mentioning that Pakistan is committed to eliminating most tax or customs tariff exemptions or concessions granted through SROs and to approve a legislation by end-December 2015 to permanently prohibit the practice as part of the request for financial assistance from the IMF. FBR maintains lists of active SROs for both imports and exports. In the case of imports some 92 SROs remain active. Out of this overall number, some 38 active trade-related concessionary SROs, introduced between 1991 and 2010, hamper trade, increase the cost of doing business and breed malpractice. The regime is complex, discriminatory and lacks transparency.
It is well-established that through SROs the mighty sections of society are provided "legal ways" to amass more and more wealth-according to a report, exemptions and concessions given to them were of Rs 5,500 billion in the last 5 years alone as admitted by Chairman FBR before the Senate Standing Committee on Finance & Revenue on May 13, 2014. The glaring examples of abuse of delegated power through SROs reflect in beneficial notifications for sugar and steel industries owned by men in power. Bureaucracy is also beneficiary of these powers, eg, SRO 569(I)/2012 issued on 26th May 2012 providing that government officials in grade 20-22 would pay just 5% tax on their monetized transport allowance as a separate block of income.
The issue of SROs levying taxes or varying tax rates or granting exemptions and concessions has yet not been debated from the constitutional point of view. For cartels possessing enormous money power, reduction of duties and tax concessions by FBR and then extending them by using its executive authority available in the form of SROs, has created innumerable tax distortions in the tax system. The burden of taxes in the wake of such concessions is invariably shifted on the poor.
Pakistan is a unique country where under delegated powers, the executive authority can conveniently undo tax laws passed by the Parliament which is gross violation of Article 162 of the Constitution of Pakistan, which reads as under:
162. Prior sanction of President required to Bills affecting taxation in which Provinces are interested: - No Bill or amendment which imposes or varies a tax or duty the whole or part of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression "agricultural income" as defined for the purposes of the enactments relating to income tax, or which affects the principles on which under any of the foregoing provisions of this Chapter, moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President."
Article 162 debars even the National Assembly to grant exemptions without the prior approval of the President but interestingly, this power has been delegated unconstitutionally to EEC through the Finance (Amendment) Ordinance, 2015 in blatant disregard of Article 77 of the Constitution.
It is high time that Parliament should rectify the situation in the light of dictum laid down by the Supreme Court in the Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)] disapproving Finance (Amendment) Ordinance, 2015 as soon as the same is laid before it as required under Article 85(2) of the Constitution.
(The writers, authors of many books and partners in HUZAIMA IKRAM & IJAZ, are Adjunct Faculty Members at Lahore University of Management Sciences)