ISLAMABAD: The Federal Constitutional Court (FCC) declared that the classification of sectors through inclusion in the First Proviso to Division IIB and taxable under Section 4C at the rate of 10 percent for the tax year 2022 is reasonable, the differentia being intelligible and is thus permissible under Article 25 of the Constitution.
A three-judge FCC bench on Wednesday issued a written order on Super Tax cases, on its website, which the Chief Justice Amin ud Din Khan had read in the court yesterday (Tuesday). It set aside the judgments of the Sindh, Lahore and Islamabad High Courts to the extent they declared the contents of the First Proviso to be discriminatory.
The order said that the Section 4B will apply as enacted for tax year 2015 and onwards at the rates prescribed in Division IIA, Part I, First Schedule, Income Tax Ordinance, 2001, and found the provisions of section 4B neither discriminatory nor do they create any unreasonable or hostile classification among persons forming the same class upon whom the charge is imposed.
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The order said that the classification introduced there under is income-based, rests on an intelligible differentia, and bears a rational nexus with the object sought to be achieved.
The provision does not suffer from any inherent lack of legislative competence, nor does it, on its face, transgress any fundamental right in a manner sufficient to warrant its invalidation.
Any perceived inequities or hardships arising from the operation of section 4B fall primarily within the legislative domain and do not, by themselves, justify judicial interference in fiscal matters.
The provision squarely falls within Entry 47 of the Fourth Schedule, Legislative List, Part I of the Constitution, namely, ‘taxes on income’.
The legislature, therefore, was fully competent to impose, abolish, remit, alter, or regulate such tax through a Finance Act, as part of a Money Bill under Article 73(2)(a) of the Constitution, 1973. Consequently, section 4B is declared to be intra vires the Constitution;
The Court rejected the preliminary objection raised by the taxpayers regarding the maintainability of the appeals in section 4C cases for not having been filed by the federation. This Court has the inherent power to transpose a party, should it be necessary for just and proper adjudication of a matter before it.
Federation of Pakistan is a party in the appeals as a respondent. Therefore, it can be transposed as an Appellant.
It is so done. Record also reflects that of the pending cases, several appeals involving common questions of law including vires of the law, challenged show-cause notices, circulars and actions of the FBR/CIR, are filed by the Federation in addition to the CIR/FBR, therefore the appeals are held to be maintainable on this count too;
The order also held the Section 4C intra vires the Constitution, saying it shall apply as enacted for tax year 2022 and onwards at the rates prescribed in Division IIB, Part I, First Schedule, Income Tax Ordinance, 2001. It is established law that the legislature has the plenary power to enact laws with retrospective and prospective effect subject to such laws not effecting past and closed transactions.
There is no provision in the Ordinance 2001 whereby the closing of accounts of a tax year qualifies as an event which precludes the imposition of a fresh charge where none existed before, particularly when returns of income for tax year 2022 were yet to be filed.
The impugned judgments of the Division Benches of the Sindh, Islamabad and Lahore High Courts to the extent they hold section 4C not to apply retroactively to tax year 2022 are set aside.
The order said that the rates in Division IIB, Part I, First Schedule, Income Tax Ordinance amended through Finance Act 2023 shall apply for tax year 2023.
The impugned Pakistan Oilfields Judgment dated 15.03.2024 of the Islamabad High Court to the extent it holds the rates in amended Division IIB not to apply retroactively to tax year 2023 is set aside;
It is held that the definition of “income” for purposes of section 4C in so far as it includes income from all sources is validly enacted. The impugned judgments dated 20.07.2023 and 15.03.2024 of the Islamabad High Court to the extent they read down section 4C are set aside;
The direction issued by the learned Islamabad High Court, in the Pakistan Oilfields Judgment dated 15.03.2024, to the Federal Board of Revenue (FBR) to issue circular to implement the aforesaid judgment across Pakistan is beyond its jurisdiction and is set aside;
Super tax is a tax on income independent of the tax levied under section 4 of the Income Tax Ordinance, 2001. Entry 47, of Part I of the Fourth Schedule of the Constitution, Parliament is competent to levy “taxes on income”. Therefore, section 4C is a self-contained provision insofar as this levy is concerned and is thus, a standalone tax on income.
As such, section 4C as applies to capital gains under section 37A and Rules of the Eighth Schedule, Income Tax Ordinance, 2001 is held to be applicable thereto, being within the ambit of section 4C(2)(i) and (iv), Income Tax Ordinance 2001;
Section 4B and section 4C, by virtue of Rules 4AA and 4AB of the Fifth Schedule, Income Tax Ordinance 2001 will only apply to the income arising to E&P companies if it does not result in exceeding the aggregate rate of taxes provided in the aforesaid Schedule and their respective PCAs.
In respect of section 4C, the concluding paragraph 5(4) of the impugned Pakistan Oilfields Judgment dated 15.03.2024 passed by the learned Islamabad High Court is modified to the extent that the departmental determination/assessment of each PCA shall be undertaken by placing the respective terms and conditions in juxtaposition with the Regulation of Mines & Minerals (Government Control) Act, 1948 and applicable taxing law governing their respective PCAs, be it the Income Tax Act 1922, Income Tax Ordinance 1979 or Income Tax Ordinance 2001. This finding will be deemed restricted to the application of section 4B and section 4C to such income as arises under Rule 1, Fifth Schedule to the Income Tax Ordinance 2001 and corresponding parimateria provisions in the applicable tax laws in relation to individual PCAs. Section 4C will otherwise apply to other income of E&P companies from all other sources which fall under sub-sections (i), (ii) and (iii) of sub-section (2) of section 4C.
In this respect, the respective Commissioner Inland Revenue shall first make the determination of the E&P companies’ liability, keeping in view the foregoing, and issue a fresh notice affording them an opportunity of hearing before taking any measures for recovery.
Moreover, section 4C shall not apply to E&P companies to the extent that its application would result in taxation exceeding the threshold stipulated in Rule 4 of the Fifth Schedule to Ordinance.
The legislative intent underlying Rule 4 is to provide a sector-specific framework recognizing the unique nature, risks, and investment requirements of the petroleum and exploration industry. Imposing a super tax beyond the prescribed threshold would effectively override this legislative safeguard, impose an excessive and disproportionate burden and frustrate the purpose for which the special provisions were enacted.
In the absence of a clear and express intention of the Legislature to abrogate or modify these sectoral thresholds, section 4C cannot be construed so as to operate in a manner inconsistent with Rule 4 of the Fifth Schedule;
In the case of banking companies, it is held that section 4C shall apply as enacted vide Finance Act, 2022 to banking companies for Tax year 2023 and onwards and at rates applicable to tax year 2023 as amended by Finance Act 2023;
Without prejudice to the foregoing declaration, section 4C shall not apply to the income, particularly to the benevolent funds enjoying exemption from tax under section 53, read with the Second Schedule to the Ordinance. Such funds constitute a distinct class expressly exempted by the Legislature in furtherance of recognized charitable and welfare objectives.
Subjecting them to a super tax would defeat the very purpose of the statutory exemption and would be inconsistent with the legislative scheme of the Ordinance.
In the absence of a clear and specific legislative intent to withdraw or curtail the said exemption, section 4C cannot be construed so as to override the exemption granted to benevolent funds.
In the case of provident and benevolent funds before this Court, considering the Commissioner’s/ FBR’s statement made before this Court during the course of proceedings, such funds which hold valid exemption certificates under the Ninth Schedule read with the relevant entries in the Second Schedule are not liable to pay super tax under section 4C.
Copyright Business Recorder, 2026
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