Pakistan People's Party regime from 1971 to 1977 provided some sort of socialistic framework for the economy. The validity of measures taken during that time will be judged by history. The purpose of this article is to explain that a charge for workers' welfare fund, under the Workers' Welfare Fund regulations of 1971 is a part of a pro-worker legislation by a 'socialistic' government. Gen Zia-ul-Haq changed almost everything that Bhutto introduced except for two taxes under the nomenclature of Workers' Welfare Fund and Workers' Profit Participation Fund; these funds were continued as they provided a continuous revenue stream for the government. In the following paragraphs I will discuss the pertinent facts about these provisions and suggestions for improvement.
The primary question with regard to Workers' Welfare Fund [WWF] is whether it represents a tax on the income of a commercial entity or it is a fund contributed by the company for the welfare of the workers of that entity. From 1971 onwards billion of rupees have been collected by the Federal Government in the guise of WWF. Nevertheless, for all purposes it is straight tax at the rate of 2% on the profit of the company. In theory this amount is to be spent by the Ministry of Labour for projects for the welfare of workers. There may be some projects to justify the continuation of this levy however it is a stark reality that such expenditure is not commensurate with the amount collected. The question whether there is a head under the Consolidated Accounts representing WWF is quite plausible.
On the basis of this reality, it is suggested that WWF which is a tax for all practical purposes be abolished as it adds to the cost of doing business and at the same time it promotes underreporting of profit. Furthermore, many entities do not want to establish as a body corporate whereby WWF and WPPF which aggregates to 7% of profit become applicable. Keeping in view these factors which are supported by undeniable facts it is clear that there is no rationale for continuation of WWF.
The problem related to WWF has aggravated after the 18th Amendment whereby this matter has effectively been devolved to provinces. In effect, there is no legal basis for the continuation of Federal WWF. Nevertheless, under the specific provisions of the Constitution Federal Government can continue collection of WWF until and unless a legislation to this effect is made by the provinces. This status continued till recently when there was no WWF legislation in the provinces. Now, three provinces namely Punjab, Sindh and KPK have legislated with respect to WWF. In this situation even under the Constitution's transitory provisions there cannot be any collection of WWF by the Federation.
In this regard there is lot of confusion amongst the taxpayers and the tax collectors on this subject. The federal government has not surrendered its right to collect WWF and notices are being issued for non-compliance. I am not aware of the activity by the provincial governments in this matter. The problem in this respect took an interesting turn when Federal Board of Revenue issued a letter in response to a query by an accounting firm that WWF shall be recoverable by the Federal Board of Revenue under the WWF Ordinance, 1971 in pursuance of the decision by the Council of Common Interest. This means that there has been no devolution with regard to this levy.
In my view, this assertion is not entirely in line with the provisions of the Constitution. When matters relating to labour have been devolved to provinces then there is no provision under the Constitution that any such levy which is not a tax and not permissible to be treated as tax can be recovered under a Federal law. This matter should not be treated as similar to the case of Federal Excise Duty and Sales Tax on Services which all relate to taxes. I reiterate that WWF is not a tax under the Federal Legislative list.
With regard to Federal Legislative list of the Constitution one personal episode will explain the confusion that has been created on this subject. One day, late at night, I received a call from a former Law Minister, who happens to a very famous lawyer of the country, to enquire from me as an accountant the meaning of the term 'capital asset'. I tried to explain to him as far as I could. I asked him the reason for asking this question. He replied that he has to argue a case before the Supreme Court and he could not find a plausible definition of the term 'capital asset' as used in Federal Legislative List of the Constitution. Later, when both of us did some research it transpired that this list is a reproduction of the Government of India Act, 1935 and all our constitutions have adopted the same without any further thinking and considering developments that have taken place in the meantime.
In the light of the aforesaid status of the Federal Legislative List of the Constitution it is my firm view that WWF Ordinance, 1971 cannot be given an artificial life after the legislation of WWF by the provinces. There can be an argument that legislations have been made however their implementation has not yet been decided therefore the old law being WWF legislation by the Federal Government is applicable. I am not a lawyer to give opinion on this matter, however, keeping in view the nature of WWF and its abuse in the past by way of utilization of this levy it is high time to decide that Federal WWF is not payable. Furthermore, there should be clear directions through Council of Common Interest to the Provinces that all levies like WWF or WPPF if legislated should be on a fixed payment basis not related to the profit of the industrial entity. Since the expenditure under WWF is to be made on national or provincial basis therefore there is no reason to have WWF based on profit on an entity. In other words WWF Ordinance, 1971 does not meet the criterion of an equitable law. Since a transition has been adopted through the 18th Amendment this amendment is necessarily required be made.
As a student of taxation I am not aware of any country where there is a straight levy based on the profit of the entity in the guise of WWF. In a separate article I would explain the issue relating to WPPF. In summary it is my suggestion that the status of the recent letter issued by the FBR should be reexamined and businesses be relieved from this unreasonable levy which is nothing but a direct tax on profit. Higher taxes are always the basis of tax evasion.
Copyright Business Recorder, 2020