Income Tax (Amendment) Ordinance, 2011 (Ordinance IV of 2011), promulgated on 15th March 2011, levied 15% surcharge vide section 4A of the Income Tax Ordinance, 2001 for a period of three and a half months. Through this measure, the Federal Board of Revenue (FBR) estimated to generate Rs 36 billion for rehabilitation of flood-affected people.
In September 2011, the Chairman FBR disclosed before the Parliamentary Standing Committee on Finance that actual collection under the head 'flood surcharge' was just Rs 8 billion. He conceded before the Committee that due to inapt drafting of section 4A, companies having calendar year as tax year refused to pay the surcharge.
To overcome the unsuitable drafting of the Income Tax (amendment) Ordinance, 2011, the FBR issued Circular No 11 of 2011 on September 12, 2011 and SRO 977(I)/2011 on October 19, 2011 providing that surcharge of 15% under section 4A of the Income Tax Ordinance, 2001 "is payable for tax year 2011 irrespective of tax year ending on 31st December 2010, 30th June 2011 or any other date" and that "amount of surcharge payable on the income tax liability for tax year 2011under section 4A shall be computed on the proportionate amount of income tax liability for three and a half months".
FBR, while issuing Circular No 11 of 2011 and SRO 977(I)/2011, has failed to realise that levy of surcharge through re-promulgation of Income Tax (Amendment) Ordinance, 2011 of March 15, 2011 on May 30, 2011 is unconstitutional, being violative of Article 89 of the 1973 Constitution as amended after 18th Constitutional Amendment. Power conferred on the President under Article 89 of the Constitution is circumscribed by the following conditions:
1. At the time the Ordinance is promulgated, the Senate or National Assembly must not be in session and circumstances exist which render it necessary to take immediate action for promulgation of the Ordinance.
2. The Ordinance issued under Article 89 has to be placed before the National Assembly if it pertains to matters specified in Article 73(2) of the Constitution and in all other cases before both Houses. It shall stand repealed within 120 days of its promulgation, unless it is earlier disapproved by the National Assembly or Parliament, as the case may be.
3. The President cannot re-enact the same Ordinance and only Parliament through a resolution can only once extend it for another 120 days.
It is shocking that the President, by promulgating Income Tax (Amendment) Ordinance, 2011 on May 30, 2011, which was verbatim re-enactment of Income Tax (Amendment) Ordinance, 2011 of March 15, 2011, blatantly violated the command of Article 89, but so far neither Parliament nor any Court has taken cognisance of this defiance. It is pertinent to mention that Income Tax (Amendment) Ordinance, 2011 issued on May 30, 2011 was not placed before the National Assembly as ordained in Article 89(2)(i) of the supreme law of the land.
Section 4A of the Income Tax Ordinance, 2001, originally inserted through Income Tax (Amendment) Ordinance, 2011 of March 15, 2011, read as under:
"4A. Surcharge.- (1) Subject to this Ordinance, a surcharge shall be payable by every taxpayer at the rate of fifteen percent of the income tax payable under this Ordinance including the tax payable under Part V of Chapter X or Chapter XII, as the case may be, for the period commencing from the promulgation of this Ordinance, till the 30th June, 2011.
(2) Surcharge shall be paid, collected, deducted and deposited at the same time and in the same manner as the tax is paid, collected, deducted and deposited under this Ordinance including Chapter X or XII as the case may be: Provided that this surcharge shall not be payable for the tax year 2010 and prior tax years and shall be applicable, subject to the provisions of sub-section (1), for the tax year 2011 only."
The Income Tax (Amendment) Ordinance, 2011 of March 15, 2011 contained some mistakes for which a corrigendum was issued on May 27, 2011. Strangely, on May 30, 2011, section 4A was reinserted in the Income Tax Ordinance, 2001 through Income Tax (Amendment) Ordinance, 2011 issued on May 30, 2011, which was verbatim re-promulgation of Income Tax (Amendment) Ordinance, 2011 of March 15, 2011, violating Article 89 of the Constitution. The language of section 4A was the same as inserted through Income Tax (Amendment) Ordinance, 2011 of March 15, 2011, but this time more and serious errors were committed [highlighted in parentheses below] as evident from the below:
"4A. Surcharge.- (1) Subject to this Ordinance, a surcharge shall be payable by every taxpayer at the rate of fifteen percent of the income tax payable under this Ordinance including the tax payable under Part V of Chapter X of [it should have been 'or'] Chapter XIII [it should have been 'XII'], as the case may be, for the period commencing from the promulgation of this Ordinance, till the 30th June, 2011.
(2) Surcharge shall be paid, collected, educated [it should have been 'deducted'] and deposited at the same time and in the same manner as the tax is paid, collected, deducted and deposited under this Ordinance including Chapter X or XII as the case may be:
Provided that this surcharge shall not be payable for the tax year 2010 and prior tax years and shall be applicable, subject to the provisions of sub-section (1), for the tax year 2011 only".
Section 4A of the Income Tax Ordinance, 2001 exemplifies the worst form of legal drafting. Manifestly, the intention behind this provision was collecting extra revenue from March 15 to June 30, 2011, but Department interpreted it as if applicable to all transactions whether falling in the said period or not. Section 4A(2) extends 15% surcharge on all items mentioned in chapter X and XII - these cover advance tax and taxes withheld at source.
Obviously, in respect of withholding taxes, there could have been no possibility of recovering tax retrospectively ie transactions completed prior to March 15, 2011. There was confusion in respect of taxpayers not subjected to withholding tax during this period or having special tax years. In their case, liability under section 4A at the time of filing returns for tax year 2011 was doubtful.
The liability to pay surcharge under the law, restricted from 15 March to June 30, 2011, could not be extended by implication. Another question was whether a taxpayer at the time of filing of return for accounting year ending on 31st December 2010 (tax year 2011) would pay surcharge for the income tax payable for full year or proportionately for three and a half months.
Finally, the FBR admitted in Circular No 11 of 2011 and SRO 977(I)/2011 of 19 October 2011 that liability under section 4A for all cases will be on a proportionate basis for three and a half months. Even this clarification created undue or extra burden for those who had no income tax liability during the period of March 15 to June 30, 2011.
The more important issue that remains unattended is determination of legality of the second Ordinance promulgated on May 30, 2011. Undoubtedly, it was unconstitutional on the part of President to issue Ordinance upon Ordinance on the same subject in utter violation of Article 89 of the Constitution after 18th Amendment.
Resultantly, the levy of surcharge under section 4A became unenforceable after May 30, 2011. A challenge under Article 199 of the Constitution on this ground would certainly render section 4A of the Income Tax Ordinance, 2001 unlawful. Its insertion vide Income Tax (Amendment) Ordinance, 2011 dated May 30, 2011 was in violation of Article 89 of the Constitution - an obvious unconstitutional act on the part of President of Pakistan. Apropos The politics of 'protests' by Huzaima Bukhari and Dr Ikramul Haq, the newspaper carried it in its yesterday's issue because of some technical glitches as this article first appeared in these columns on November 4, 2011.
(The writers, tax lawyers and authors of many books on Pakistani tax laws, are Adjunct Professors at Lahore University of Management Sciences)