Subsidy paid to Cotton Export Corporation liable to income tax

LAHORE: An appellate forum has held that a subsidy paid by the federal government to the Cotton Export Corporation of Pakistan (Pvt) Ltd was a revenue receipt and liable to income tax.

Departmental sources said this ruling in favour of the Federal Board of Revenue (FBR) has resolved a longstanding controversy regarding the status of subsidy under the Income Tax law.

The Cotton Export Corporation of Pakistan (Pvt) Ltd is a company incorporated by law, with 100% shares owned by the federal government. The company was established to promote the export of cotton from Pakistan.

The company had been receiving subsidies from the federal government to cover losses suffered due to the government’s policy of fixing cotton prices.

The case cantered on the corporation’s claim that the subsidy was a capital receipt and not taxable. However, the FBR argued that the subsidy was paid to reimburse the corporation for losses suffered due to the government’s policy of fixing cotton prices.

The appellate forum ruled that the subsidy was a revenue receipt, as it was paid to reduce the corporation’s losses.

The forum also held that the Inspecting Additional Commissioner (IAC) had the jurisdiction to exercise powers under Section 66-A of the Income Tax Ordinance, 1979. The corporation had argued that the IAC did not have the jurisdiction to revise the original assessment order, as it was passed with the approval of the IAC. However, the forum held that the IAC’s involvement in the original assessment order did not preclude him from revising it later.

The court’s decision has implications for other taxpayers who have received subsidies from the government. The FBR has welcomed the decision, saying it will help to clarify the tax treatment of subsidies.

The case has been ongoing for several years, with the corporation challenging the FBR’s decision to tax the subsidy. The court’s decision is a significant victory for the FBR and is expected to have a major impact on the tax landscape in Pakistan.

Copyright Business Recorder, 2025