Technical Release 3/2026: Comments on short order of FCC on matter of Super Tax under Section 4C of the Income Tax Ordinance, 2001—I

General

These notes provide a short summary on the decision of the Federal Constitutional Court (FCC) dated January 27, 2001 on the validity of Section 4C of the Income Tax Ordinance, 2001.

This order is the result of numerous appeals filed against the orders of Islamabad, Sindh and Lahore High Courts.

All appeals on this matter were merged, therefore, this order is applicable on all the cases on this subject. It has been stated in the order that:

For detailed reasons to be recorded separately, and subject to such amplification and/or explanation therein as is considered appropriate, all the titled cases are decided in the following terms:

This means that there will be a detailed order on this subject. Accordingly, in paragraphs 1 to 9 of the Order FCC has not given the basis of the decision. Nevertheless, the conclusions drawn, which is the decision, have been given in clear terms. These matters are discussed in the following paragraphs:

Questions raised before FCC

Following questions were before the FCC:

(1) whether section 4C is intra vires the Constitution;

(2) whether section 4C applies retroactively on income arising in tax year 2022;

(3) whether the computation of “income” as defined in section 4C is constitutionally valid when it disallows brought forward losses, depreciation and amortization and includes heads of income liable to separate taxation;

(4) whether the classification in the First Proviso to Division IIB, Part I, First Schedule of the Income Tax Ordinance 2001 (hereinafter “the First Proviso”) of 15 sectors subjected to a higher rate of super tax under section 4C (at the rate of 10%) for tax year 2022 where the “income” exceeded PKR 300 million is constitutionally impressible?

(5) whether banking companies’ are liable to pay super tax under section 4C for tax year 2023 and onwards in light of the Proviso to section 4C and the Second Proviso to Division IIB, and in light of the Seventh Schedule of the Ordinance 2001; and

(6) whether income from capital gains on securities assessed under the Eighth Schedule of the Income Tax Ordinance, 2001 is liable to be taxed under section 4C.

No Deemed to be Retrospective Application

The FCC has held that Super Tax under Section 4C which was introduced by way of insertion of this section in the Income Tax Ordinance, 2001 by the Finance Act 2022 is applicable for the year 2022. The court has considered that this is not a legislation with retroactive application. There was a different view on this subject by the High Court. The FCC has observed:

iii. Section 4C is held to be intra vires the Constitution and 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 learned Sindh, Islamabad iv. and Lahore High Courts to the extent they hold section 4C not to apply retroactively to tax year 2022 are set aside;

This means that Section 4C is treated to be applicable for the Tax Year 2022 and the concept of closure of books of accounts has not been accepted, except in the case of banking companies where there was a different legislation.

For banking companies the Super Tax will be applicable for the tax year 2023 in accordance with the provisions laid down in the Finance Act, 2022

Extent of definition of Income

FCC has decided that Section 4C is an independent section which is not governed by Section 4 of the Ordinance and the legislature has the right to impose a tax under this section. This decision is the answer to the undermentioned question framed by the FCC in their order:

(3) whether the computation of “income” as defined in section 4C is constitutionally valid when it disallows brought forward losses, depreciation and amortization and includes heads of income liable to separate taxation;

This means that the term ‘income’ as defined in this section will not be governed by the provisions of other sections of the Ordinance. FCC has been held that:

v. 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;

vi 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;

vii 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;

(To be continued…)

Copyright Business Recorder, 2026