FBR counsel argues before FCC: Legislature can levy a tax with retrospective effect

ISLAMABAD: The Federal Board of Revenue (FBR) counsel told the Federal Constitutional Court (FCC) that the legislature can impose a tax with retrospective effect at any time, either through the Finance Act passed on the 1st day of July or any time during the financial year.

Asma Hamid, representing the FBR, argued that a validly enacted tax can affect past transactions at any time. She submitted that the State has the sovereign power to tax; this power has been conferred on a sovereign legislature, enjoying the authority to enact a law either prospectively or retrospectively, unless there can be found in the Constitution itself a limitation on that power.

A three-judge bench of the FCC, headed by Justice Amin-ud-Din Khan and comprising Justice Syed Hasan Azhar Rizvi and Justice Arshad Hussain, on Tuesday heard the FBR appeals against the judgments of the Sindh, Lahore, and Islamabad High Courts regarding the levy of Super Tax under Section 4C, inserted in the Income Tax Ordinance, 2001, through Finance Act 2015.

READ MORE: Super tax case: Rs114bn collected in terms of Sec 4B of IT Ord, FCC told

Asma argued that once Parliament is found to be competent to have enacted the law, then the form or manner in which the power to legislate is executed cannot be judged, ie, the limits of competence go beyond the pale of judicial review. It is always open to the legislature to amend, delete, or repeal an existing law to take away a statutory right of privilege.

She said that the constitutionality of a tax is tested on 1) whether it is passed by the competent legislature, 2) whether it is confiscatory, or 3) whether it is discriminatory. Fairness alone is not a good standalone standard – it’s too vague.

But fairness as embedded in arbitrariness/equality/confiscation tests is workable and consistent with constitutional design.

In practice, courts in both India and Pakistan apply a deferential version of fairness. They uphold almost all taxes, strike down only the ones that are plainly confiscatory, discriminatory, or irrational.

The FBR lead counsel contended that clear, express language of Section 4C leaves no doubt or ambiguity that it applies for tax year 2022 and onwards.

The main Section 4C specifically excludes banking companies from the charge of Section 4C for the tax year 2022.

In further amplification of legislative intent, the Second Proviso to Division IIB provides that it will apply to banks for TY 2023 onwards @10%, thus putting banking companies at ample notice a whole year in advance of their super tax liability under Section 4C. Therefore, in TY 2023, the banking companies’ reliance on the ground of retrospectivity was misleading to say the least, and the relief obtained by them in this regard was wholly illegal.

She submitted that Super Tax under Section 4C is squarely applicable on petroleum and the exploration companies by virtue of Rule 4AB in the Fifth Schedule of the Ordinance, and that protections of Petroleum Concession Agreements and Regulations of Mines & Oilfields & Mineral Development (Government Control) Act, 1948, do not protect such companies as is already decided by the Islamabad High Court in 2018 and 2019 while considering the same submission made by the petroleum companies. It was correctly held that the ITO, 2001, prevails over other laws in 2019 PTD 934 and 2018 PTD 996.

Hafiz Ehsaan Ahmad Khokhar, another FBR lawyer, explained that the levy, commonly referred to as the “Super Tax,” targets high-income individuals and large corporate entities, with the objectives of ensuring distributive equity and mobilizing fiscal resources in the national interest.

He emphasized that the provision, enacted as a Money Bill under Article 73 of the Constitution, enjoys the highest presumption of constitutionality. Importantly, he clarified that Section 4C does not constitute double taxation, as it is a distinct charging provision levied in addition to ordinary income tax, without re-taxing the same income.

Advocate Khokhar further submitted that the High Courts had committed judicial overreach by misapplying the doctrine of “reading down” to rewrite the legislation and treating the levy as retrospective.

He highlighted that, under the Income Tax Ordinance, 2001, tax liability crystallizes only upon filing the return, and Parliament retains full competence to prescribe rates for an open Tax Year.

He submitted that the impugned judgments, with utmost deference, had travelled beyond the settled parameters of judicial review and were vitiated on multiple legal grounds.

Firstly, the learned High Courts misapplied the doctrine of “reading down,” which is a tool of preservation, not reconstruction, and can only be invoked to uphold the constitutionality of a statute in alignment with legislative intent. By re-casting the fiscal provision, the High Courts effectively legislated afresh, a course wholly impermissible under the constitutional separation of powers.

Judicial interpretation cannot substitute legislative wisdom. Secondly, the judgments ignored the foundational presumption of constitutionality. Every enactment of Parliament carries a strong presumption of validity, and the burden rests upon challengers to demonstrate a clear transgression of constitutional limits.

He urged the Court to uphold the validity of Section 4C of income tax as a lawful and constitutionally sanctioned levy, consistent with Article 25 and international fiscal practice, and there is no discrimination aspect as alleged by the taxpayers. He prayed that the High Courts’ judgments, which attempted to dilute or rewrite Parliament’s express mandate, be set aside.

The FBR lawyers have completed their arguments. After Makhdoom Ali Khan, representing the taxpayers, resumed the arguments with regard to Section 4C. He contended that in the instant matter, the appeals have been filed by the Commissioner, Inland Revenue, instead of the federation.

He questioned under what provision of the Constitution the Commissioner derives power to request the Federal Constitutional Court to strike down the federal statute.

The bench adjourned the hearing until Wednesday (Jan 7).

Copyright Business Recorder, 2026