Constitution and tax codes — I

Every year before the preparation of annual federal budget, the Federal Board of Revenue (FBR) seeks proposals from officers, trade/professional bodies, tax bars, and other stakeholders—this has become a ceremonial activity. Each year, after this fruitless exercise, the Finance Bill makes existing tax codes more complicated due to pointless amendments and burdens the citizens with unconstitutional obligations to act as withholding tax agents with specific restriction of not claiming any compensation that is violation of Article 11(2) of the Constitution of Islamic Republic of Pakistan [The Constitution] that prohibits all forms of forced labour. All those who are made withholding agents should challenge it under the Constitution. The Legislature passes such laws on the recommendation of FBR after approval by Cabinet as it has never taken note of this gross violation of the supreme law of the land. The Supreme Court of Pakistan and High Courts under the Constitution are mandated to protect the fundamental rights of citizens, but unfortunately, forced labour (duties as withholding agents) have not been examined from the perspective of Article 11(2) of the Constitution.

FBR has asked stakeholders to send proposals for budget 2021-22 by February 15, 2021 for income tax “preferably” in a ‘prescribed’ format and for customs by February 10, 2021 with the directions that “three separate formats are attached as Annex I, II and III for preparing the proposals on MS Excel Sheets (Please DO NOT use any other format) and “in case of local manufacturer claiming tariff protection on it’s finished product(s) or concession on its raw materials, please complete Annex-IV also, without which it will not be possible to process these types of proposals”. This entire exercise needs a detailed analysis from the perspective of Constitution.

Our existing tax policy is ill-directed, regressive and unfair. Tax machinery is both inefficient and oppressive. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled our trade and industry, especially after following the dictates of the foreign lenders. The results of prescriptions by the World Bank(WB) and the International Monetary Fund (IMF) to fix the ailing economy and anti-growth tax system are discussed in detail in Tax Reforms in Pakistan: Historic & Critical View, recently published by PIDE (available free at: https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf.

Pakistan needs to move towards fair and simple tax system that can yield sufficient resources for the State—as defined in Article 7 of the Constitution—for welfare of citizens. Details are available in Towards flat, low-rate broad and predictable taxes-revised and expanded edition (2020) [available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/].

This article is, however, confined to examining the constitutional jurisdiction of FBR being part of Executive to seek tax proposals and prepare Finance Bill, which is none of its business. In fact, it amounts to flagrant violation of the Constitution. This is the sole responsibility of the Legislature as held by the Supreme Court in CIT v Eli Lily (Pvt) Ltd (2009) 100 Tax 81 (S.C. Pak) and discussed in detail in the forthcoming paragraphs. The Constitution of Pakistan forbids any of the organs to usurp or meddle into the matters of other organs. Usurping the powers of an organ by another organ or organs leads to complete fiasco as elaborated by Supreme Court of Pakistan in a number of cases.

The definition of “State”, [first Article of Part II titled Fundamental Rights and Principles of Policy] says: “In this Part, unless the context otherwise requires, “the State” means the Federal Government, Majlis-e-Shoora (Parliament), a Provincial Government, a Provincial Assembly, and such local or other authorities in Pakistan as are by law empowered to impose any tax or cess”.

Article 3 [titled Elimination of exploitation] of the Constitution says: ‘The State shall ensure the elimination of all forms of exploitation and the gradual fulfillment of the fundamental principle, from each according to his ability to each according to his work”.

Article 5 [titled Loyalty to State and obedience to Constitution and law] of the Constitution reads as under:

(1) Loyalty to the State is the basic duty of every citizen.

(2) Obedience to the Constitution and law is the inviolable obligation of every citizen wherever he may be and of every other person for the time being within Pakistan

If “State” is not fulfilling its promise under Article 3 of the Constitution, how can it expect obligation imposed under Article 5(1) that “loyalty to the State is the basic duty of every citizen”? The Constitution is a social contract between the State and citizens. Any infringement of this cannot be taken lightly. How have legislators given powers to FBR to propose Finance Bills when Constitution makes it clear under Article 77 of the Constitution that “no tax shall be levied for the purposes of the Federation except by or under the authority of the Act of Parliament”? It is the duty of the legislators to decide tax policy and frame tax codes and make amendments in these. The Standing Committees of federal and provincial assemblies on revenue, having members of all elected parties, should themselves prepare Money Bills after public debates, televised hearings of experts summoned and/or seeking written proposals from stakeholders [see note of Justice Ch. Ijaz Ahmad in the CIT v Eli Lily (Pvt) Ltd (2009) 100 Tax 81 (S.C. Pak).

In the CIT v Eli Lily (Pvt) Ltd (2009) 100 Tax 81 (S.C. Pak), Justice Ch. Ijaz Ahmad in his separate note held as under:

Our Constitution is based on trichotomy as law laid down by this Court in various pronouncements such as the Zia ur Rehman’s case PLD 1973 SC 49, Mian Muhammad Nawaz Sharif’s case PLD 1993 SC 473 and Hakim Ali’s case PLD 1992 SC 595. The ratio of the aforesaid cases is as follows:-

Legislator to legislate the laws;

Executive to implement;

Judiciary to interpret the Law and Constitution

“2. It is a settled law that the Constitution has to be read as an organic whole as law laid down by this Court in various pronouncements. See Reference by the President PLD 1957 SC 219. The Constitution has confined the aforesaid organs of the state by clear demarcation. The Constitution forbids any of the organs to usurp or meddle into the matters of other organs. Usurping the powers of an organ by another organ or organs leads to complete fiasco. According to my understanding of the Constitution, the machinery of the Constitution has delicately established an equilibrium and harmony among all the organs, limiting them not to go beyond their limits. Every Article of the Constitution has its own significance and importance but Article 4 read with Article 5(2) commands each and every citizen and organ to remain within its bounds as is evident from the statement of the Article. Article 4 directs every citizen to act in accordance with law whereas Article 5(2) demands obedience to the Constitution. Aforesaid Articles were interpreted by the Apex Court of this country and laid down various principles including that even Chief Executive of the country is not omnipotent than the Constitution. See Chaudhry Zahoor Elahi’s case (PLD 1975 SC 383) and Zahid Akhtar’s case PLD 1995 SC 530. Legislators should legislate after securing necessary views from every stake holder through deliberations and consultations, keeping in view all the aspects and circumstances at, the time of’ framing the law. Generally speaking Constitution is based on trichotomy whereas according to my understanding Constitution is based on quadruple which are as follows:-

Legislators;

Executive;

Judiciary;

People of Pakistan.

Constitution is a social binding contract among the aforesaid organs of the State. From preamble to the last Article of the Constitution, duties and obligation have been assigned to every organs of the State so as to get prosperity of the people of Pakistan. It is for this reason the Constitution has to be read as an organic whole for the purpose of maintaining balance in every sphere of life such as opportunities of job, social justice distribution of wealth etc.

[Bold are by us to emphasise]

The Supreme Court of Pakistan in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.) held that “neither a Secretary, nor a Minister and nor the Prime Minister are the Federal Government and the exercise, or purported exercise, of a statutory power exercisable by the Federal Government by any of them, especially, in relation to fiscal matters, is constitutionally invalid and a nullity in the eyes of the law. Similarly budgetary expenditure or discretionary governmental expenditure can only be authorized by the Federal Government i.e. the Cabinet, and not the Prime Minister on his own”.

[Bold are by us to emphasise]

The legislative work related to framing tax policy and proposing changes in tax codes has been unconstitutionally exercised by FBR, and National Assembly just acts as a rubber stamp. The result is that FBR has failed to collect actual tax potential—which is not less than Rs. 8 trillion —as elaborated in towards flat, low-rate broad and predictable taxes-revised and expanded edition (2020).

(To be continued tomorrow)

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS))

Copyright Business Recorder, 2021