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The merger of Federally Administered Tribal Areas (FATA) with Khyber Pakhtunkhwa and Provincially Administered Tribal Areas (PATA) with respective provinces, after the assent of President to The Constitution (25th Amendment) Act, 2018 on May 28, 2018, (‘the 25th Constitutional Amendment’) was an historic day. After almost three years, the long-overdue and much-delayed projects to offer a number of opportunities to the residents of these areas for equality, constitutional protections, development and inclusive growth remain a dream unfulfilled. At the time of merger tall claims were made by the Pakistan Tehreek-i-Insaf (PTI) ruling in Khyber Pakhtunkhwa that once in power in the Centre, it would tackle the extraordinary challenges faced by these areas in the wake of the long reign of terrorism, especially removing the sense of deprivation of local residents, integration with the rest of the country, giving equal opportunities and revitalising its economy, improving infrastructure, providing jobs and making it “paradise” for tourists.

The PTI coalition government in the Centre and having a two-third majority in Khyber Pakhtunkhwa have so far failed to tackle the issues of these areas — political, legal, administrative and above all, economic. In this article, taxation issue alone is highlighted as exemptions provided in these areas after the merger, are not serving the purpose for which these were granted. The Federal Board of Revenue (FBR) in the presence of explicit exemptions has issued many instructions are against the law. These exemptions, meant to become catalysts/incentives for investment, development and creation of jobs in these areas, are being abused by unscrupulous businessmen. The majority of the population in these areas is still living in sub-human conditions.

The merger of FATA and PATA should have been accompanied by a comprehensive, multi-faceted programme of development, which is missing till today. These areas are rich in natural resources and if projects are launched prudently, the people of these areas can become prosperous. It is, in fact, the collective responsibility of all citizens to pressurise all concerned quarters—political and non-political—to give priority to these areas. It is worthwhile to mention that billions have been collected since tax year 2016 “for rehabilitation of temporarily displaced persons” under section 4B of the Income Tax Ordinance, 2001 [hereinafter “the Ordinance”] after military operations in these areas. This collection will continue in the cases of banks even after tax year 2021. The government must tell the nation how much collection under this provision is spent on those who were displaced in erstwhile FATA/PATA. This levy was challenged by many on constitutional ground that this not “tax” but Sindh High Court in [(2020) 122 Tax 208 (H.C.Kar)] and Lahore High Court in [(2020) 121 TAX 381 (H.C.Lah)] dismissed all these petitions holding that levy does not violate the vires of the Constitution of the Islamic Republic of Pakistan [“the Constitution].

The 25th Constitution Amendment removed the words “the Federally Administered Tribal Areas” from the definition of ‘Republic and its territories’ contained in Article 1 of the Constitution. These are defined in Article 246 of the Constitution. Before the 25th Constitutional Amendment, these areas were outside the operation of tax laws, enacted by the federal and provincial parliaments under Article 247(3) of the Constitution, omitted by The Constitution (Twenty-fifth Amendment) Act, 2018. The President of Pakistan had the power to extend jurisdiction of any tax law to erstwhile FATA while Governors of provinces could extend the laws to erstwhile PATA. Nevertheless, tax laws were never extended to either FATA or PATA, except the Customs Act of 1969 to recover taxes on import and export of goods from customs-notified places in these areas, where trade (transit and regular) between Pakistan and Afghanistan and imports and exports to and from many Central Asian countries take place.

After the 25th Constitutional Amendment, these areas became “taxable”. However, exemptions from income tax were extended through Statutory Regulatory Orders (SROs) and later through Finance Act, 2019. Initially, through SRO 887(I)/2018 issued on July 23, 2018, exemption clauses were inserted. In ‘The Merger and tax issues’, Business Recorder, June 1, 2018, the following textual and conceptual defects were pointed out:

  1. “In proviso to clause (146), Part 1 of Second Schedule to the Income Tax Ordinance, 2001 exemption is restricted to AOPs and companies on the condition that “registered offices are in the areas covered in Article 246 of the Constitution”. It is a faulty concept as these areas had/have no offices of Registrar of Firms prior or after the 25th Constitutional Amendment and the same was/is the case with Security & Exchange Commission of Pakistan (SECP) that deals with registration of companies. Any company registered by Securities and Exchange Commission of Pakistan (SECP) anywhere in Pakistan is “resident” under the Income Tax Ordinance, 2001 and can work anywhere as its registration is not based on working for a particular area of ‘Pakistan’—the expression defined in Article 1(2) of the Constitution. Many companies, like banks, have various branches located in the areas mentioned in exemption clauses. These companies are registered for all areas of Pakistan including those mentioned in Article 246 of the Constitution.

  2. The exemption of income is restricted to an individual who is ‘resident’ payer/recipient of the areas. It is absurd as no border controls exist between areas mentioned in Article 246 and rest of the country and therefore criterion of counting days in a tax year to qualify as ‘resident’ under the Income Tax Ordinance, 2001 is not possible”.

In the light of above valid objections, SRO 887(I)/2018 was replaced with SRO 1213(I)/2018, issued on October 5, 2018. The exemption for sales tax restored vide SRO 1212(I)/2018, ab initio rescinding “notifications No. S.R.O. 888(1)/2018, No. S.R.O. 889(1)/2018 and No. S.R.O. 890(1)/2018, all dated the 23rd July, 2018”. In a nutshell, exemptions from the levy of sales tax and income tax, including withholding taxes in these areas as existed prior to the 25th Constitutional Amendment restored as under:

  • “exemption from whole of sales tax, by whatever name called, as levied under the Sales Tax Act 1990, or notifications issued thereunder, on supplies made until 30 June 2023, to which the provisions of the Sales Tax Act 1990 or related notifications would not have applied had article 247 of the Constitution not been omitted”;

  • “any income, which was not chargeable to tax prior to the commencement of the (25th Amendment) Act 2018 of any individual domiciled or company and association of persons resident in these areas with effect from 1 June 2018 to 30 June 2023 (both days inclusive)”; and

  • exemption from deduction or collection of withholding tax under the Income Tax Ordinance, 2001 from any individual domiciled or company and association of persons resident in these areas with effect from 1 June 2018 to 30 June 2023 (both days inclusive).

In the new exemption clauses inserted in the Ordinance [clause (146) Part I, Second Schedule and clause (110) in Part IV, Second Schedule to The Ordinance], the words used were “of any individual domiciled or company and association of persons resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from the 1st day of June, 2018 to the 30th day of June, 2023 (both days inclusive)”. Both these clauses were later inserted by the Finance Act, 2019 with new numbering but the same language.

The following is the text of clause (145A), Part I, Second Schedule to the Ordinance”, inserted by Finance Act, 2019:

“(145A) Any income which was not chargeable to tax prior to the commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) of any individual domiciled or company and association of persons resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from the 1st day of June, 2018 to the 30th day of June, 2023 (both days inclusive)”.

It is strange, rather shocking, that ingenious draftsmen sitting in the FBR and Ministry of Law twice inserted faulty exemption clauses. More painful is the fact that legislators sitting in National Assembly and Senate (who sent their recommendation under Proviso to Article 73(1) of the Constitution without taking note of deficiencies) passed these as part of the Finance Act, 2019 without taking note of serious conceptual errors. All companies and association of persons (AOPs) are residents of Pakistan. If intention is to give exemption to only those companies and AOPs having their registered offices and “control and management” in these areas then unambiguous words should have been employed to this effect which are missing till today.

The concept of ‘domicile’ for an individual is still debatable as to whether his or her income received from taxable areas will also be exempt or not. Is this exemption is for everywhere in Pakistan to earn any income or only in the area mentioned in Article 246 of the Constitution? Is this exemption is “individual specific” or “income specific”? Many unscrupulous people are exploiting this exemption clause, either using fake domiciles or using of genuine domiciled persons of these areas for doing business from taxable areas but claiming exemption available in these areas, e.g. importing goods for Lahore and showing destination in any area of erstwhile FATA/PATA. Likewise, goods are being exported from Karachi and exports proceeds are received in any branch situated in non-taxable areas to avoid withholding of tax under section 154 of the Ordinance.

As explained above, clause (146) in Part-I of the Second Schedule and clause (110) in Part IV of Second Schedule to the Ordinance were inserted through SRO. 1213(I)/2018 dated 05.10.2018. In Finance Act, 2019, clause (145A) of Part-I and clause (109A) of Part-IV of Second Schedule to the Ordinance were inserted. There was no difference in the language of clauses (145A) and (146) of Part-I of Second Schedule. Similarly, clauses (109A) and (110) of Part IV of Second Schedule to the Ordinance have identical language and both exist even today. In Tax Laws (Second Amendment) Ordinance, 2021, issued on March 22, 2021 as a precondition of International Monetary Fund (IMF) to get tranche of US$ 500 million, clause (146) of Part I of Second Schedule inserted through SRO.1213(I)/2018 dated 05.10.2018 has been omitted. However, clause (110) of Part IV of Second Schedule inserted through the same SRO is still part of the Ordinance, whereas clause (109A), inserted by Finance Act 2019. It shows an omission on the part of FBR not to rescind clause inserted through SRO. 1213(I)/2018.

The FBR in in its version of Income Tax Ordinance, 2001 (“amended up to 30 June 2020”) in print form and available on its website is showing both the provisions having the same language! Even the publishing team and those manage website never bothered to read and correct it. Both the provisions are reproduced below:

Clause (109A) of Part-IV of Second Schedule to the Ordinance, inserted by Finance Act, 2019:

“The provisions of sections in Division III of Part V of Chapter X and Chapter XII of this Ordinance for deduction or collection of withholding tax which were not applicable prior to commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) shall not apply to individual domiciled or company and association of persons resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from the 1st day of June, 2018 to the 30th day of June, 2023 (both days inclusive)”

Clause (110) of Part-IV of Second Schedule to the Ordinance, inserted through SRO. 1213(I)/2018 dated 5 October 2018:

“The provisions of sections in Division Ill of Part V of Chapter X and Chapter XII of the Ordinance for deduction or collection of withholding tax which were not applicable prior to commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) shall not apply to individual domiciled or company and association of person resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from the 1st day of June, 2018 to the 30th day of June, 2023 (both days inclusive)”.

The above duplication was not removed by FBR despite our pointing out the same in writing. After insertion of clause (109A), clause (110) though not omitted by Finance Act, 2019, should have been rescinded as it has become redundant and must be deleted as was done in the case of clause (146) of Part I, second Schedule to the Ordinance through Tax Laws (Second Amendment) Ordinance, 2021.

It may be noted that exemption is also available to “plant, machinery and equipment imported for setting up industries in FATA subject to the same conditions and procedure as are applicable for import of such plant, machinery and equipment under the Customs Act, 1969 (IV of 1969)” [serial 116, Table I, Sixth Schedule to the Sales Tax Act, 1990]. Interesting in this exemption provision PATA is missing, which appears to be another inadvertent oversight by the FBR (de facto legislature) as the members in National Assembly and Senate (who send their recommendations for passage of Finance Bill under the Constitution) are totally incompetent to pick up above cites lapses, omissions, deficiencies and even blunders.

(To be continued)

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

Copyright Business Recorder, 2021