Constitutional indictment of tax policy: Parliament abdicates, FBR legislates

Pakistan’s fiscal disorder is no longer confined to high rates, low yields or coercive enforcement. It has crossed into something far more dangerous: statutory defiance of the Constitution itself.

The Income Tax Ordinance, 2001, particularly its Seventh Schedule, governing banking companies, contains provisions that are in direct conflict with the Constitution’s command regarding Quranic injunctions and elimination of riba.

Rule 3 of the Seventh Schedule states:

“3. Treatment for shariah compliant banking.–(1) Any special treatment for ‘Shariah Compliant Banking’ approved by the State Bank of Pakistan shall not be provided for any reduction or addition to income and tax liability for the said ‘Shariah Compliant Banking’ as computed in the manner laid down in this schedule.

(2) A statement, certified by the auditors of the bank, shall be attached to the return of income to disclose the comparative position of transaction as per Islamic mode of financing and as per normal accounting principles. Adjustment to the income of the company on this account shall be made according to the accounting income for purpose of this schedule”.

The language of Rule 3 of Seventh Schedule is well considered. Any “special treatment” for Shariah-compliant banking approved by the State Bank of Pakistan (SBP) “shall not be provided” for reduction or addition to income or tax liability. Where Islamic mode of financing differs from conventional accounting, the adjustment is to be made “according to the accounting income”. In simple terms: Shariah-compliant methodology is rendered fiscally irrelevant. Now juxtapose this with Article 227(1) of the 1973 Constitution:

“All existing laws shall be brought in conformity with the Injunctions of Islam as laid down in the Holy Quran and Sunnah, in this Part referred to as the Injunctions of Islam, and no law shall be enacted which is repugnant to such Injunctions.”

Further, Article 38(f), as amended by the Constitution (Twenty-sixth Amendment) Act, 2024, obligates the State to eliminate riba [Quranic term for exploitative interest] completely before the first day of January 2028.

The commitment is neither ornamental nor optional. It is a binding constitutional direction. In the face of this, the tax statute explicitly repudiates Shariah-compliant treatment for computation of taxable income. This is not tax neutrality. It is a stark structural contradiction and blatant constitutional violation!

Islamic banking ostensibly avoids riba through profit-and-loss sharing accounts, murabaha, ijara, diminishing musharakah and other instruments. The prevalent fiscal framework hardly recognises their economic substance.

Openly, the Seventh Schedule to the Income Tax Ordinance, 2001 requires banks to compute taxable income as if conventional accounting norms were the controlling standard overriding Shariah compliant instruments.

READ MORE: EDITORIAL: Pakistan’s tax system and the state’s behaviour

The State publicly promotes ‘Islamic banking’, which many object is still working on pre-determined rates of return. SBP approves Shariah modes of transactions. Parliament incorporates expansion of Islamic finance in the Constitution.

However, when the tax liability is determined, Shariah treatment is stripped of fiscal relevance. The contradiction is now constitutional, not merely theological.

The violation of the Constitution is stark. On one hand, the State is constitutionally bound to eliminate riba. On the other, the tax statute institutionalises its methodology as normative standard and nullifies alternative Shariah treatment for fiscal purposes. This is not administrative oversight. It is legislative repudiation of Article 227 of the Constitution.

Taxation is indeed an attribute of sovereignty, but the same is bounded by constitutional supremacy. The power to tax is destructive in nature and must be exercised strictly within constitutional limits. Parliament cannot enact what the Constitution forbids. Nor can it indirectly nullify constitutional commitments through fiscal drafting.

The more disturbing dimension, however, is institutional. The result is bureaucratic supremacy in fiscal policy. When executive agencies dominate legislative space, constitutional boundaries blur. The doctrine of separation of powers becomes meaningless. Parliament ceases to function as guardian of constitutional morality and becomes a conduit for executive drafting.

Who has drafted the Seventh Schedule? The Federal Board of Revenue (FBR).Who meaningfully debates such clauses in Parliament? Almost no one. Finance Bills are presented annually as political confidence exercises rather than deliberative legislative acts. Clause-by-clause scrutiny is practically non-existent or minimal. Expert constitutional review is absent. Treasury members have to vote along party lines to avoid defection leading to disqualification.

Resultantly, the bureaucracy legislates in substance, while Parliament formalises in procedure.

FBR has effectively become de facto legislature in federal tax matters. When the same executive agency drafts fiscal provisions, interprets them administratively, enforces them coercively, and defends them in courts—while Parliament just functions as a rubber stamp—separation of power erodes quietly. On the contrary, unambiguous command of Article 77 requires:

“No tax shall be levied for the purposes of the Federation except by or under the authority of Act of Majlis-e-Shoora (Parliament)”.

Authority presupposes deliberation. Rubber-stamping is not deliberation. Rule 3 of Seventh Schedule to the Income Tax Ordinance, 2001could not have survived rigorous parliamentary debate, if happened or takes place in future.

Basic constitutional questions remain: If Article 227 of the Constitution mandates conformity with Islamic injunctions, how can tax law disregard Shariah-compliant methodology? If elimination of riba is constitutionally mandated, how can fiscal computation remain anchored exclusively in conventional accounting logic?

How can a statute override special treatment under Shariah-compliant transaction, approved by SBP itself? None of these questions have been asked till today by anyone. The implications extend beyond Islamic banking. When Parliament abdicates scrutiny, constitutional discipline across fiscal legislation weakens and presumptive regimes detached from real income proliferate.

Rule 3 of Seventh Schedule is one of the worst examples of notional constructs to expand tax base artificially, beyond economic substance.

The same is the case with section 4C (recently approved by Federal Constitutional Court of Pakistan) and section 7E of the Income Tax Ordinance, 2001, still pending for final adjudication before what is now dubbed as highest (sic) constitutional court of the country.

Rule 3 of the Seventh Schedule is, in fact, emblematic of a larger malaise: fiscal law drafted for revenue overreach without constitutional alignment. A State cannot simultaneously proclaim Islamic constitutional identity and codify statutory disregard of Shariah-compliant methodology.

Such duality undermines legitimacy. Citizens observe the contradiction. Compliance becomes fear-driven rather than trust-based.

The solution is not rhetorical reaffirmation of prevalent Islamic finance. It is institutional reform. Finance Bills must undergo structured committee scrutiny with constitutional experts. Impactful assessments must precede enactments. FBR must cease to function as sole drafter of complex fiscal provisions without legislative counterbalance.

Rule 3 of the Seventh Schedule to the Income Tax Ordinance, 2001 must be revisited—not to grant undue concession—but to align fiscal computation with economic substance and constitutional mandate.

Tax neutrality can be achieved without negating Shariah-based treatment. What cannot be justified is constitutional defiance disguised as technical accounting rule.

Pakistan’s fiscal crisis is not about insufficient (sic) revenue. It is about lack of constitutional discipline. When Parliament abdicates and bureaucracy legislates, the Constitution becomes aspirational rather than operational. The Seventh Schedule is not just a tax provision, it is a mirror reflecting legislative silence and bureaucratic ascendancy.

A tax system gains legitimacy not through coercive capacity, but from constitutional coherence. When statutory provisions contradict constitutional commands, legal fragility increases, litigation multiplies, and investors’ confidence erodes.

The Constitution remains supreme law of the land. It binds Parliament and executive alike. Today, Pakistan confronts twin challenges: revenue overreach and constitutional inconsistency. Without addressing the latter, the former will persist.

The most pivotal question remains: how sincere is Parliament in enforcement of Constitution and rule of law? Under the circumstances, when its own legitimacy is questionable, such a desire becomes worthless. What a tragedy that a House that exists primarily to protect the supremacy of Constitution is violating it with impunity.

Copyright Business Recorder, 2026