FCC order and extraterritorial taxation

A two-page unreported order of the Federal Constitutional Court (FCC) of Pakistan in the Mirpurkhas Sugar Mills Limited v Province of Sindh [CPLA No. 1104 of 2025, decided on February 2, 2026], is already being read by some self-styled tax experts (sic) as validating every provincial attempt to tax services received from outside its borders.

This reading is fallacious, as constitutional experts know that Article 141 of the Constitution only gives power to national Parliament to enact laws having extraterritorial implications. Provinces can only enact laws within their geographical boundaries.

The Court refused leave against an order requiring the taxpayer to answer a show-cause notice. Although it also found section 3(2) of the Sindh Sales Tax on Services Act, 2011 (“the Act”) intra vires, the controversy before it was narrow: whether a listed service supplied by a non-resident to a resident person in the course of economic activity could be treated as taxable. It was not a considered judgment on the territorial limits of provincial legislation.

A speaking order refusing leave may carry weight for what it necessarily decides, but it cannot be enlarged beyond the questions examined. The Court did not convert the petition into an appeal, frame constitutional questions, receive evidence about the place of performance or consumption, or test competing provincial claims.

FCC’s observation that the statute was within Sindh’s legislative power must be read with the facts and the reproduced provision. It cannot operate sub silentio as an overruling of earlier judicial pronouncements on Article 141 of the Constitution, still less as approval of every notice issued under materially different legislation by any provincial tax authority authorised to collect sales tax on services.

The order reproduces section 3(2) of the Act, refers to Entry 49, Part I of the Federal Legislative List, Fourth Schedule to the Constitution and concludes that sales tax on services falls within the provincial domain. That identifies the subject of legislation, but not its permissible geographical reach.

Entry 49 mentions who may tax services; Article 141 of the constitution answers where that legislative power may operate. Parliament may legislate for Pakistan, including through laws having extra-territorial operation. A Provincial Assembly may legislate only for its province or any part thereof. The constitutional text deliberately withholds extra-territorial authority from provinces. This distinction was authoritatively recognised in the Sui Southern Gas Company Limited v Federation of Pakistan (2018 SCMR 802).

The Supreme Court held in 2018 SCMR 802 that a provincial legislature does not possess extra-territorial competence and cannot legislate regarding establishments operating beyond provincial boundaries. The principle was not confined to labour law. It arose from the distribution of legislative power under Articles 141 and 142 of the Constitution and is equally relevant when a provincial revenue authority taxes a transaction, supplier or recipient extending across Pakistan. The FCC order neither considers nor distinguishes this binding precedent.

A reverse-charge mechanism is machinery, not an independent source of legislative competence. It may shift collection from a foreign or unregistered supplier to a local recipient, but it cannot manufacture a provincial nexus that the Constitution explicitly denies.

Before imposing tax, the statute must identify a service whose legally relevant consumption occurs within the taxing province. Mere residence of a company, the existence of some branches, payment from a central account, or a proportion based on nationwide branch count cannot convert an indivisible, trans-provincial service into four separately taxable supplies.

The internal danger is obvious. Sindh has relied upon origination; other provincial regimes increasingly invoke receipt, destination, consumption or termination. If every Province claims the whole transaction on one of these connecting factors, the same service could be taxed several times.

Banks, telecommunications companies, payment systems and digital platforms operate through unified national networks, not four watertight markets. Provincial autonomy cannot mean fiscal Balkanisation.

Article 151 of the Constitution consequently cannot be ignored. It declares trade, commerce and intercourse throughout Pakistan freely and reserves to Parliament the power to impose restrictions required in public interest. Its detailed non-discrimination clauses refer to goods, but the opening guarantee is deliberately wider.

In the Province of Punjab v Murree Brewery Company Limited (2021 SCMR 298), arising from a levy on production destined for other provinces, the court rejected provincial taxation that burdened inter-provincial commerce beyond Punjab. A tax is not invariably a restriction, but duplicative, unapportioned and conflicting levies can become one. National businesses cannot be compelled to satisfy mutually inconsistent provincial situs rules without a harmonised allocation and credit mechanism.

Comparative constitutional jurisprudence points in the same direction. In the GVK Industries Ltd v Income Tax Officer (2011) 4 SCC 36, the Indian Supreme Court held that even Parliament’s express extra-territorial power requires a real connection with India.

Earlier Indian decisions, including the State of Bombay v R.M.D. Chamarbaugwala (AIR 1957 SC 699), accepted State legislation only where the territorial nexus was sufficient and the liability was connected to that nexus. Pakistan’s provinces possess a narrower textual mandate than those in the Indian Union.

American jurisprudence is also instructive. The South Dakota v Wayfair 585 U.S. 162 (2018) discarded the physical-presence rule for remote sellers, but it did not authorise taxation wherever revenue authorities could locate a digital signal.

The governing test still requires substantial nexus, fair apportionment, non-discrimination against interstate commerce and a fair relationship to services supplied by the taxing State. Japan Line Ltd v County of Los Angeles 441 U.S. 434 (1979) added, for foreign commerce, protection against international multiple taxation and the need for the federation to speak with one voice. Those safeguards closely illuminate the concerns embedded in Articles 141 and 151 of the Constitution.

Cross-border card-network services require additional care. Visa and MasterCard entities resident in the United States may claim the Pakistan-United States income-tax treaty. Article III protects the industrial or commercial profits of a United States enterprise from Pakistan tax unless it carries on business through a permanent establishment here. The precise result depends upon the contracting entity, character of payment and existence of a permanent establishment.

A provincial sales tax is an indirect tax and does not automatically fall within an income-tax treaty. Nevertheless, a province cannot evade treaty discipline in substance simply by relabelling the charge or transferring collection to a Pakistani bank. Treaty issues, federal foreign-relations competence and the legal incidence of reverse charge require adjudication; none was considered in Mirpurkhas Sugar Mills.

The international tax structure must also be described accurately. In a joint article for International Bureau of Fiscal Documentation (IBFD), ‘Taxing the Digital Economy: Domestic and Global Challenges’, Dr. Ikramul Haq and Muhammad Ashfaq Ahmed, former Chairman FBR, stressed the need for a coherent approach rather than overlapping burdens that inhibit Pakistan’s digital development.

Pillar One concerns allocation of a share of the profits of the largest and most profitable multinational enterprises to market jurisdictions and contemplates removal of digital-services taxes and similar measures. Pillar Two concerns a minimum effective corporate income tax. Neither abolishes VAT or GST on cross-border digital services.

For consumption taxes, the controlling international benchmark is the ‘OECD International VAT/GST Guidelines’. They adopt the destination principle: tax should accrue where final consumption occurs, exports should remain free of VAT, and imports should be taxed like equivalent domestic supplies. Their purpose is to avoid double taxation and unintended non-taxation through coordinated place-of-taxation rules.

Pakistan’s present provincial patchwork does the opposite when origination, receipt and termination are asserted cumulatively without mandatory apportionment, mutual adjustment or an effective clearing system.

The Mirpurkhas Sugar Mills from the perspective of law of binding precedents in Pakistan has limited implications. It supports the facial validity of a reverse-charge provision where a listed service is genuinely consumed within Sindh and confirms that a taxpayer should ordinarily answer a show-cause notice before invoking constitutional jurisdiction.

It does not decide where the disputed consultancy was performed or consumed; whether a sufficient territorial nexus existed; how an integrated service should be apportioned; whether another province could tax the same supply; or whether Articles 141 and 151 of the Constitution, treaty obligations and international norms were satisfied.

The proper response is not to deny provinces their legitimate revenue. It is to require constitutional discipline. Parliament and the Provinces, through the Council of Common Interests, should agree on one destination-based place-of-supply code, binding apportionment rules, reciprocal input adjustment and a common dispute-resolution mechanism. Until then, revenue authorities must prove a real provincial nexus and confine tax to the portion properly attributable to their territory. A terse refusal of leave cannot become a licence for four provinces to tax the same national or international service four times.

Copyright Business Recorder, 2026