FCC upholds parliament’s authority to pass tax laws with retrospective, prospective effects

ISLAMABAD: In a landmark ruling, the Federal Constitutional Court (FCC) on Tuesday upheld the Super Tax under Sections 4b and 4c of the Income Tax Ordinance (ITO), 2001 intra vires to the Constitution, accepting the authority of Parliament to pass tax law with retrospective and prospective effects.

According to the Federal Board of Revenue (FBR) officials, total amount in cases related to Sections 4b & 4c is Rs310 billion, and Rs227 billion are recoverable in cases pertaining to Section 4c.

After hearing the arguments of the counsel of taxpayers from Karachi, Makhdoom Ali Khan, a three-judge FCC bench, headed by Chief Justice Amin-ud-Din Khan and comprising Justice Syed Hasan Azhar Rizvi and Justice Arshad Hussain Shah reserved the judgment and at 2 O’clock announced a short order. The detailed judgment would be announced later on. The bench accepted all the contentions of the FBR counsels.

The Commissioners Inland Revenue from Lahore, Karachi, Peshawar and Islamabad had challenged the judgments of Sindh, Lahore and Islamabad High Courts regarding levy of Sections 4b & 4c (Super Tax), inserted in ITO, 2001 through Finance Act 2022-23. Total 1993 cases were filed against Section 4C, while 284 petitions/ appeals were submitted before the FCC.

The FCC declared that the Parliament has exclusive authority to determine taxation under Sections 4(b) and 4(c) and that courts’ role is limited to interpretation.

It set aside the High Courts’ judgments striking down or reading down Section 4C. It held that courts cannot re-determine tax slabs, rates, thresholds, or fiscal policy, and that the High Courts committed judicial overreach, violating the doctrine of separation of powers. All appeals filed by the Secretary, FBR, and Commissioner Inland Revenue were confirmed as maintainable.

The Court rejected the appeals filed by taxpayers against the judgments of High Courts relating to Section 4b. It held that Section 4b would be applicable from 2015 and Section 4c from 2022 when they were respectively enacted.

The FCC declared that Section 4 (c) does not amount to double taxation, and there is no retrospectivity or past and closed transactions. The Court further stated that equity, fairness, or rationality of tax do not provide grounds for judicial interference.

Super taxes are valid, with specific exclusions for Benevolent/ Provident Funds. The Court said in order to seek exemption under 4C the Benevolent/Provident Funds have to present the exemption certificates to the Commissioners.

The short order modified the IHC judgment on oil companies’ cases, saying that the Super Tax be determined by the Commissioners after assessing each case as per protections of Petroleum Concession Agreements and Regulations of Mines & Oilfields & Mineral Development (Government Control) Act, 1948.

It is said that revenue authorities can independently file appeals without consultation.

Dr Shah Nawaz, counsel of the FBR, had contended before the bench that Section 4C of ITO itself empowers the Commissioner-IR to recover tax and all other enabling provisions to recover tax are also empowering the Commissioner-IR to proceed and collect/ recover tax; as such, he is empowered to defend any challenge to law.

On the issue of retrospectivity of 4C, Dr Shah Nawaz stated that Section 4C is not retrospective in operation. In fact, income tax is collected at the end of a financial year, and the applicable law is the law in force on the 1st day of the new financial year; i.e., 1st July. This principle is reiterated in many judgments; i.e., Elahi Cotton; Shahnawaz Pvt. Ltd; and Commissioner of Income Tax North Zone, West Pakistan verus Wazirunnisa Begum. He stated that all the three judgments establish that the applicable law is the law as it stands on the 1st day of July; therefore, any other interpretation would be against the settled principles of income taxation.

Accepting all submissions by the Secretary, Revenue Division, Hafiz Ahsaan Ahmad Khokhar, the FCC allowed the appeals, set aside the High Court judgments relating to the imposition of Section 4(c), and reaffirmed that the determination of taxation is Parliament’s prerogative, with courts exercising only a limited interpretative role.

The judgment clarified the limits of judicial review, strengthened parliamentary supremacy, and established a binding precedent for future taxation disputes. It declared that reading down by High Courts is constitutionally invalid, as it rewrites Parliament’s fiscal policy.

Asma Hamid, the lead counsel of the FBR, during her arguments had contended 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 conferred on a sovereign legislature carries with authority to enact a law either prospectively or retrospectively, unless there can be found in the Constitution itself a limitation on that power.

She had also submitted that the Constitutionality of a tax is tested on 1) whether it is passed by the competent legislature, or 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.

Section 4B inserted in the Income Tax Ordinance, 2001 through the Finance Act, 2015 during the PML-N government had introduced Super Tax on rich individuals, association of persons and companies earning income above Rs500 million in tax year 2015 at rate of 4 percent of income of banking companies and 3 percent on other categories for rehabilitation of temporarily displaced persons through Finance Bill (2015-16).

The government inserted Section 4C in the Income Tax Ordinance through Finance Act 2022 to charge the super tax from 13 specific sectors that according to it made windfall gains, taking their total income tax rate to 39 percent. The government had imposed the super tax on banks, cement, iron and steel, sugar, oil and gas, fertilisers, LNG terminals, textile, automobile, cigarettes, beverages, chemicals, and airlines.

The super tax under Section 4C was imposed on profits of wealthy corporations whose earnings exceeded Rs150 million, to ease the impact of the rising inflation on the poor. Several companies then approached all the provincial High Courts and the Islamabad High Court, challenging the super tax.

A five-judge Constitutional Bench of the Supreme Court, headed by Justice Amin-ud-Din Khan, on October 24, 2025 had adjourned the hearing. However, after the enactment of 27th Amendment when the FCC was established the Super Tax appeals were transferred to the FCC along with other petitions filed under erstwhile Article 184(3) of the Constitution.

Copyright Business Recorder, 2026