Provincial assemblies of Khyber Pakhtunkhwa and Balochistan will have to provide tax exemptions to the erstwhile Federal Administered Tribal Areas and Provincially Administered Tribal Areas (FATA and PATA) in line with tax relief package of Economic Coordination Committee (ECC) of the Cabinet and the exemptions provided by the Federal Board of Revenue (FBR) through enacting SROs relating to income tax and sales tax.
Explaining the implications of tax exemption package announced by the ECC and notified by the FBR for erstwhile FATA/PATA, renowned tax expert and chartered accountant Ashfaq Tola said through 31st Amendment to the Constitution, Article 1, 246 and 247 of the Constitution relating to Tribal Areas have been amended. The 31st Amendment has effect on the tax status of entities and persons residing in these areas and the continuation of certain concessions provided to existing entities as decided by the Economic Coordination Committee of the Cabinet on 31 May 2018.
Under Article 1 of the Constitution, Pakistan is a Federation that consists of Balochistan, Khyber Pakhtunkhwa (KP), Punjab and Sindh. Under the same Article the territory of Pakistan also includes 'FATA' and territories as are or may be included such as PATA. Article 246 of the Constitution specifies the areas which are territories to be treated as Tribal Areas for the purposes of the Constitution. Article 246: Tribal Areas.
'Tribal Areas' means the areas in Pakistan which, immediately before the commencing day, were Tribal Areas and includes The Tribal Areas of Balochistan and the KP province; the former States of Amb, Chitral, Dir and Swat; iii. The former States of Amb, Chitral Dir and Swat and 'Provincially Administered Tribal Areas' means The districts of Chitral, Dir and Swat (which includes Kalam) the Tribal Area in Kohistan district Malakand Protected Area, the Tribal Area adjoining Mansehra district and the former State of Amb; and Zhob district, Loralai district (excluding Duki Tehsil), Dalbandin Tehsil of Chaghi district and Marri and Bugti tribal territories of Sibi district.
The erstwhile FATA includes Tribal Areas adjoining Peshawar district; Tribal Areas adjoining Kohat district; Tribal Areas adjoining Bannu district, Tribal Areas adjoining, LakkiMarwat district; Tribal Areas adjoining Dera Ismail Khan district; Tribal Areas adjoining Tankdistrict; Bajaur Agency; Orakzai Agency; Mohmand Agency; Khyber Agency; Kurram Agency; North Waziristan Agency; and South Waziristan Agency.
Prior to the 31st amendment, as per Article 247(3) no Act of Parliament was applicable on such Tribal Areas, unless the President directed so otherwise. Moreover, the President had the authority to issue Regulations for the governance of such Tribal Areas Also, neither the Supreme Court, nor any High Court had any jurisdiction over such areas. Furthermore, the rules governing FATA were the Frontier Crime Regulations 1901, which were subsequently amended back in 2011 through a Regulation passed, tax expert said.
Moreover, Tax laws passed by the Federal Government (ITO 2001), Sales Tax Act 1990, Federal Excise Act 2005 and the Customs Act 1969) are now applicable to FATA and PATA after the 31st amendment. Whereas the Provincial Sales Tax law of KP governs only the whole of KP.
The 31st Amendment to the Constitution was passed on 28th May 2018 by Parliament. Consequently, Article 247 has been omitted from the Constitution and Article 246 has been amended.
Ashfaq Tola explained this means that such areas will now be treated as part of the Federation of Pakistan if such areas form part of any province as referred above. By way of another amendment, the Provincial Assembly of KP, with two thirds majority, has included the areas which previously came under FATA, as part of Province of KP. PATA territories shall form part of the Province of KP or Balochistan as the case may be.
On removal of Article 247(3), the non-applicability of taxation laws on these territories has finished. Now such territories are subject to all Acts of Parliament as they are now part of the province of KP.
Moreover, the amendment itself does not provide any tax exemption to such areas from sales tax or any other exemptions. Since such territories have been integrated within the province of KP through this amendment, it can be assumed that the areas included would now expect all facilities, protections, Infrastructure provided within KPK, and that they will be governed by "all rules and laws" of KPK, and not just a selective few, unless provided otherwise by the Constitution or the Provincial Assembly thorough an Act.
There were no provisions in the Constitution prior to 31st amendment mentioning taking a certain course as to the taxation of FATA & PATA whilst merging them into provinces, Ashfaq Tola stated.
However, under KP Finance Act 2013 Section 28(d) KP Revenue Authority has the power to exempt, with the approval of government, "a class of persons, any area or areas of the Khyber Pakhtunkhwa from the whole or any part of the tax."
Secondly, the merger is not an executive one; rather a Constitutional one. The addition of 21 seals includes 16 seats as general seats, 4 seats for women and one seat for non-Muslim in respect of the area of FATA. It has been provided in the clause 6 of the 31st Amendment that the election of these additional 21 seats relating to FATA shall be held within one year after the General Elections 2018.
As per clause 1(2) of the 31st Amendment, the same shall come into force at once. Moreover, when the KPK Finance Act 2013 was enacted, the option of charging Sales Tax in the area of FATA and PATA was not introduced, discussed or approved.
In view of the above, it is our understanding that in order to extend the scope of the Provincial Sales Tax levied by the KP Government inter alia on taxable services under the Second Schedule to the KP Sales Tax on Services Act 2013, within the province to the newly integrated areas (i.e FATA and/or PATA), the Provincial Assembly of KPK needs to table a' Money Bill under Article 73 of the Constitution after the election of the abovementioned additional 21 seats has been conducted.
This is essential as without representation of members of the respective area(s), levy of any tax in these newly integrated areas will be unconstitutional. Furthermore, another reason for this is that at the time of enactment of the KPK Sales Tax on Services Act 2013, the territories of FATA and PATA did not fall within the jurisdiction of KP, Ashfaq Tola said.
The ECC of Pakistan in its meeting decided to continue certain concessions and immunities to persons and entities present in FATA and PATA. It included exemption of income tax on profits and gains of existing businesses conducted by individuals for a period of five years.
These businesses however need to be registered with FBR by 30th September 2018. Secondly, exemption from Sales tax to the retailers to facilitate the general consumers. Thirdly, domestic consumers of electricity would be exempted from Sales tax on domestic consumption of electricity. Fourthly, Federal Excise Act 2005 shall replace Central Excise Act 1944.
Fifthly, non-customs paid vehicles will be allowed to be used in FATA/PATA for a period of five years ending on 30th June 2023. However, these vehicles will not be allowed to cross over to other areas of the country. On the expiry of the five years' relaxation period, the vehicles would be regularized on payment of leviable duty and taxes. Sixthly, exemption from all withholding taxes, including salaries.
Seventhly, any person seeking to set up new industrial undertaking is granted exemption from Income Tax subject to prior approval of the ECC. Details of exemption provided by the ECC have been notified through SROs.
Therefore, provincial assembly of Khyber Pakhtunkhwa and Balochistan will have to provide Tax exemptions in line with the decisions made in the Economic Coordination Committee and the exemptions provided by the Federal Board of Revenue through enacting SROs relating to Income and Sales tax, Ashfaq Tola added.