Super tax: IHC says section 4C ‘as it stands now’ ultra-vires constitution

The Islamabad High Court (IHC) on Thursday approved the petitions filed by various companies and organisations and declared section 4C (Super Tax on High Earning Persons) of the Income Tax Ordinance 2001, “as it stands now”, ultra-vires the constitution.

The verdict, which could potentially dent the government’s tax revenue target, was delivered by Justice Sardar Ejaz Ishaq Khan.

“Section 4C, as it stands now, falls to be ultra vires the fundamental rights under Articles 18, 23 and 24, read with Article 4 of the Constitution,” read the verdict, a copy of which is available with Business Recorder.

The verdict read that Section 4C is “held to be against the scheme of the Constitution and should either be read down or declared ultra vires for the reasons given” in this judgment“.

However, “with the preference to save rather than destroy, Section 4C is to be read down in calculating the income taxable to super tax so as to: (a) exclude all classes of income enumerated therein the tax on which is final under the other provisions of the Ordinance; and (b) sever the exclusions of brought forward depreciation, brought forward business losses, and brought forward amortization allowances available to the taxpayers under the other extant provisions of the Ordinance;

The verdict read that “Section 4C, as read down, will have prospective application only, and will not apply to any transactions or events past and closed on or before 30th June 2022;

“Section 4C, as read down, will not apply to the benevolent funds holding exemptions from tax under the other provisions of the Ordinance;

“Section 4C, as read down, will not apply to petroleum and exploration companies to the extent its application results in the taxation of such companies exceeding the thresholds stipulated in Rule 4 of the Fifth Schedule to the Ordinance;

Moreover, “all notices of demand or recovery impugned in the petitions are set aside, without prejudice to the revenue’s right to issue fresh notices not inconsistent with this judgment.”

Technical Release 2/2023

The IHC in the case of Writ Petition No 4027 of 2S022 has issued a detailed judgement on the matter of Super Tax brought in the Income Tax Ordinance, 2001 by way of Section 4C of the Ordinance;

This tax which was assumed to be one time tax introduced in the Finance Act, 2022 has now been made a permanent feature effectively increasing the rates to 10% from Year 2023 onwards also;

Levy of Super Tax was also challenged before the Sindh High Court and the Lahore High Court. The Sindh High Court decided that this tax is applicable for the Tax 2023 and not for the Tax year 2022. Furthermore it was decided that there cannot be any discriminatory rate of 10 % as against 4%.

The Lahore High Court has decided that Super Tax at the rate of 4% is valid for the Tax Year 2022, however, they have also agreed that there cannot be any charge at the rate of 10%.

The matter is pending before the Supreme Court of Pakistan and the court has asked to pay 50% of the demand;

The Islamabad High Court has moved a step further. They have decided as follows:

• With respect to prospective tax the court has “4C as read down, will have prospective application only, and will not apply to any transactions or event past and closed on or before 30th June 2022”;

• For the purposes of calculation of Super Tax the adjustment for brought forward depreciation and brought forward losses shall be available;

• Income subject to final tax will not be subject to super tax;

• Super tax shall not be applicable for oil exploration companies operating under the Mining Act;

This judgement is highly relevant for the Tax Year 2023 for the reason that by way of Finance Act 2023 the rate of tax has been increased from 4 to 10%. In this situation on the basis of the decision of the Islamabad High Court and also the Sindh High Court the increased rate cannot be applied for the Tax Year 2023.

Since advance tax and other liabilities have been linked with the discharge of super tax therefore it is suggested that appropriate legal advice and action be undertaken especially for companies that have an year end prior to June 30, 2023 as in our view increased rate is not applicable in such cases for the tax year 2023.