Whenever historians will write the history of an abusive, incorrect, absurd and technically incorrect tax imposition anywhere in the world they will censure Pakistan for its ‘presumptive’ and ‘minimum’ tax regimes as introduced under Sections 80C and 80D of the repealed Income Tax Ordinance, 1979. This grave error got legal sanction when the honourable Supreme Court of Pakistan in the case of Elahi Cotton Mills Limited (reported as PLD 1007 SC 582) legitimised these laws.
Any student of ‘tax on income’ will agree that the amount charged under these ‘deeming provisions’ cannot be treated as ‘taxes on income’ as defined under Article 260 of the Constitution of Pakistan for which powers have been given to the Federal Government under Entry 47 of the Federal Legislative List of the Fourth Schedule to the Constitution. It can easily be termed as ‘state bhatta’ (extortion) under these provisions as even those persons are required to pay income tax who do not have any income.
I have tried to comprehend what the honourable court wanted to say in that judgement for umpteenth time but failed. However, being a citizen, I am bound to accept this judgement whether or not I am able to understand it. It is therefore essential to quote the question framed before the court and the head notes, in the hope that someone else may derive some convincing meaning from that judgement.
The question framed in that case was very clear. It asked the Supreme Court the simple and straight question as under;
(i) That Entry No.47 of the Fourth Schedule to the Constitution containing Federal Legislative List, Part I, providing “Taxes on income other than agricultural income” does not admit levy of a presumptive income-tax on the basis of declared turnover as income-tax cannot be levied unless income, profit or gain are. worked out on the basis of computation as provided under the Ordinance i.e., gross receipts minus admissible deductions.
The honourable Supreme Court, in my view, confused the issue and relied on a case law of the Indian Supreme Court in a case of deemed profit tax on liquor to validate the absurd presumptive tax. The observations of the Supreme Court as noted below do not provide the answer to the question raised. The pertinent observations are:
(b) Constitution of Pakistan (1973), Article 77 & Fourth Schedule.
That “a State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably”. (Willi’s Constitutional Law). [p. 675] I
(f) Constitution of Pakistan (1973), Article 25
r/w Income Tax Ordinance (XXXI of 1979)—Ss. 80-C, 80-CC & 80-D
The impugned provisions of the provisions of the Ordinance are based on reasonable classification as they are founded on an intelligible differentia which distinguishes persons covered thereunder with the other tax-payers. It has also a rational nexus to the object sought to be achieved by such classification i.e., to broaden the tax base and to recover the minimum tax. [p. 694] DDD
In our view, there has not been any discrimination in the case in hand. The impugned three sections are very clear as to the class of persons covered under them. Rule 9 gives option to a manufacturer who is subject to tax and deduction under subsection (4) of section 50 to opt for the presumptive tax under section 80-C for final discharge of his tax liability. He is not otherwise covered by the impugned section 80-C. The appellants are covered by the impugned provisions and, therefore, they cannot equate themselves with a person who is not covered by the above provision. [p. 695] EEE
(g) Constitution of Pakistan (1973), Article 25
r/w Income Tax Ordinance (XXXI of 1979)—S. 80-C
It will suffice to observe that the foreign contractors constitute a class themselves and, therefore, there cannot be any comparison between a foreign contractor and a local contractor for the purpose of determining the question of reasonableness. It may be pointed out that a country cannot attract foreign contractors and foreign investors unless they are offered good terms for inducing them to participate in the development of the country. [p. 696] GGG
I am unable to understand how these observations allow the state to tax a sum as income when it has nothing to do with income. There can be a loss in that transaction. The Indian Supreme Court was dealing with a percentage of profit. Even if the Indians have decided something wrong for a particular case, there is no reason to destroy the whole taxation system by following that decision. Pakistan has been a victim of such decisions of the superior courts. Such decisions reaffirms my view that taxation is primarily a subject of economics which requires understanding of economic rationale to tax a sum as income while interpreting the tax law. If not, the basic tax structure of the country will be destroyed as happened in Pakistan.
In the Finance Bill 2022, the Federal Government has come up with an idea more novel than what had been done in 1990. Under Section (7E) of the Income Tax Ordinance, 2001 it has been proposed that a portion of fair value of immovable property will be deemed to be income from that property and that this income will be taxed at the rate of 20 percent. Unlike the provisions of 80C and 80D, this deemed income has no relation to any income transaction. It is simply a levy if there is an ownership of an immovable property. The law in simple words states that if someone owns an immovable property valuing above a certain sum then it would be deemed that the property has been rented and a tax under Entry 47 of the Federal Legislative List will be charged on that property. This tax is completely invalid for the following two reasons:
Entry 50 of the Federal Legislative List allows the parliament to charge tax on capital value of assets, not including taxes on immovable property.
Entry 47 of the Federal Legislative List allows the Federal Government to charge tax on income;
Both these provisions are discussed in the following paragraph. Prior to the 18th Amendment to the constitution, the nature of Entry 50 was different. Under the Entry at that time the Federal Government was not allowed to taxes on capital gain on immovable property. The words ‘capital gains’ were deleted by the 18th Amendment. Accordingly, by way of the specific provisions in the Income Tax Ordinance the Federal Government is now taxing capital gains on disposal of immovable properties. The status of law as it stands now is that the Federal Government is not entitled to impose tax on capital value of assets if the assets represent immovable property. There is no ambiguity in the subject.
Mr Justice Saleem Akhter in the case reported as 1992 PTD 762 has very clearly explained the issue of tax on value of capital assets. He stated:
- We are in full agreement with the observation made by the learned Judges of the High Court. Item 50 of the Fourth Schedule provides for tax on capital value of the assets not including taxes on capital gain on immovable property. Therefore, tax on capital value of assets can be levied which is not disputed at all. Wealth Tax is one of those taxes which intends to subject the assets to taxation. It is nobody’s case that the Wealth Tax Act does not charge the assets. The Act has provided a mechanism for imposing and calculating the tax on capital assets. The provision for calculating such tax is provided by the Act. Section 3 denotes which part of the capital value shall be taken into consideration for the purposes of charging wealth tax. It is nobody’s case that the net value of assets is not a part of the capital value. The capital value of the assets includes the net value of the assets. The definition of the net wealth under section 2(m) clearly provides that first the aggregate value of all the assets belonging to the assessee has to be taken into consideration. This is the basis for charging the tax. Now, in order to calculate the tax the aggregate value of liabilities and debts are to be deducted from the aggregate value of assets and the excess so calculated has been termed as ` net wealth’ on which tax is calculated at the speed rate. This process of calculating the tax does not exclude the capital value of assets from wealth tax charged under section
In other words, by way of the 18th Amendment there was a swap. The Federal Government obtained the right to tax capital gains on disposal of immovable assets, for the reason that such gains are in the nature of income and under the constitution, income is to be taxed by the Federal Government. However, at the same time, it devolved the right to taxes on capital value of immovable assets which are effectively wealth tax. It is important to note that Wealth Tax, which was levied under the Wealth Tax Act, 1963, attained its validity from Entry 50 of the Federal Legislative List of the Constitution as it stood before the 18th Amendment. In my mind, there is no confusion about the matter and taxes levied under Section (7E) are constitutionally invalid under Entry 50 of the Federal Legislative List.
The Federal Government is aware of the infirmities in the status of this tax under Entry 50 of the Federal Legislative List; they have, therefore, worded the section in a manner that they can play around with Entry 47 of the Federal Legislative List under the protection provided by the Elahi Cotton Mills Judgment. Again referring to Entry 47 and the Elahi Cotton Mills case it is my opinion that this case will not help the government for the reason that in the case of presumptive taxation as endorsed by the Elahi Cotton Mills the question relates to transactions and events which related to income generating activities such as supplies, contracts, etc. The question was whether a deemed income can be laid down for such activities. The court held that within the wide definition of the term ‘income’ a deemed income concept can prevail. In this case there is no income generating activity. It is only an ownership of assets. The ownership of assets cannot be treated as giving rise to income even if extended meaning as applied in the presumptive tax law and the Elahi Cotton Mills Limited Judgment is adopted. There is a dire need to improve upon where the Elahi Cotton Mills decision left and develop the jurisprudence in accordance with the economic rationale and constitutional provisions.
Notwithstanding the merits of levy and reintroduction of wealth tax, it is my view that from a legal viewpoint the levy of taxes on immovable property in this manner is beyond the competence of the parliament and the superior courts will strike down these provisions as being void. In this respect it is further stated that the Federal Government cannot replace its right to tax income by introducing schemes like Fixed Tax and Presumptive Tax on Imports and try to collect revenue by resorting to acts which are not allowed under the Constitution.
Copyright Business Recorder, 2022