SC asks whether or not govt can promise tax credit and then take it away retrospectively?

ISLAMABAD: The Supreme Court was asked to decide whether the government can first encourage businesses to make fresh investments by promising tax credits and then take away the tax credit retrospectively after the companies have made the investments.

A three-member, headed by Justice Syed Mansoor Ali Shah, and comprising Justice Muhammad Ali Mazhar and Justice Shahid Bilal Hassan which heard the FBR petition against the SHC judgment after hearing the arguments had reserved the judgment.

By means of the Finance Act, 2018, companies were promised a tax credit equal to ten percent of any investment they made in upgrading and modernising their machinery.

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Based on this promise, a large number of textile companies such as Gul Ahmed, Sapphire, etc.; invested large sums of money in upgrading their plants. Once they had made the investments between July 1, 2018 and June 30, 2019, the government sought to take away the tax credit, retrospectively.

This was challenged by a large number of companies in the Sindh High Court on the basis that it is wrong, in principle, for the government to promise a benefit to industry if certain investments were made and to thereafter take it away once the investments had actually been made and could no longer be reversed by the companies as the plant and equipment had already been purchased.

The Sindh High Court allowed all the petitions in February 2023. The FBR challenged the SHC verdict before the apex court. FBR’s counsel argued that the legislature had unfettered right to take away any benefits at any time it so chose irrespective of whatever promises had been made.

Advocate Raashid Anwer, representing the textile industry, argued that exactly the same issue had arisen in 1989 when the government had done exactly the same thing. By means of the Finance Act, 1988, companies had been promised the same 10% tax credit if they invested in upgrading their plant and equipment. Thereafter in June 1989, when the companies had already made the investments, the tax credit was retrospectively taken away by means of the Finance Act, 1989.

Raashid argued that in the case of Gulshan Weaving the Sindh High Court held that once the companies had purchased the new machinery, they had done all that they were required to do and hence these transactions were past and closed transactions which could not be reopened. He apprised the bench that the Supreme Court did not set aside that judgement when FBR filed an appeal.

Raashid Anwer also relied on the 1993 Molasses case in the Supreme Court. He contended in that case, the legislature had amended the Customs Act to retrospectively take away certain benefits from importers by adding a new Section 31-A by means of the Finance Act, 1988.

The Parliament had gone to the extent of legislating that the newly inserted Section 31-A was deemed to have taken effect since 1969! Despite this the Supreme Court held that those imports which had been made before the enactment of the Finance Act, 1988 were past and closed transactions and whose benefit could not be taken away, retrospectively.

He also argued that if the government violated its promises, then it would have no credibility and it would have a detrimental effect on future investments, which the country desperately needed.

Copyright Business Recorder, 2024