This Blog is written by Mr. Abdul Hafeez, Senior Manager Taxation Advisory Services. Please read this blog and provide your valued comments.
Implication of Super Tax under section 4b of Income Tax Ordinance 2001.
Through Finance Act, 2015, section 4B was inserted whereby a one-time Super tax was levied for the rehabilitation of temporary displaced persons. Although this tax was levied one time only for tax year 2015 however the Federal Government has extended this levy every year and through Finance Act, 2018, this levy has been extended to tax year 2020.
The Super tax is levied on following persons:
- The Banking Companies shall pay super tax for tax year 2019 at the rate of 4%. The tax rate will be reduced by 1% for each year up to Tax year 2021.
- Persons other than banking companies having income equal or exceeding Rs. 500 million shall pay super tax for tax year 2018 at the rate of 3%. The tax rate will be reduced by 1% for each year ultimately 0% for tax year 2021.
For purpose of levy of Super tax, income is defined in section 4B(2) as following:
Quote: “(2) For the purposes of this section, “income” shall be the sum of the following:—
- profit on debt, dividend, capital gains, brokerage and commission;
- taxable income (other than brought forward depreciation and brought forward business losses) under section (9) of this Ordinance, if not included in clause (i);
- imputable income as defined in clause (28A) of section 2 excluding amounts specified in clause (i); and
(iv) income computed under Fourth, Fifth, Seventh and Eighth Schedules.” Unquote
Against the levy of super tax, numbers of petitions were filed before high courts and there are conflicting judgments against the recovery of Super tax. The Sindh High Court stayed the recovery of Super tax however the Lahore High Court through its decision W.P.No.38612/2015 dismissed the petition for stay against recovery of super tax under section 4B of ITO, 2001.
The Sindh High Court passed the order in suits No. 2211, 2181, 2182, and 2183 whereby following relief was granted:
Quote: “In view of the above, the plaintiff may file its tax return manually within the due date. In case of any deficiency in the said tax return, the defendants will be at liberty to act strictly in accordance with law. However, in case of any deficiency therein on account of non-payment of the impugned super tax, no coercive action shall be taken against the plaintiff till the next date. By consent, adjourned to 04.12.2015.” Unquote
The Lahore High Court did not follow the view taken by Sindh High Court for the reason that the relief granted by Sindh High Court effectively renders the provisions of section 4B of ITO, 2001 as redundant and inoperative.
Quote: “The learned counsel for the petitioner requests that the same relief be granted to the petitioner company as this would promote consistency and comity in the decisions rendered by the different High Courts. However, I am not inclined to follow the view taken by the High Court of Sindh for the reasons which have been spelt out hereinabove. The relief granted by the High Court of Sindh effectively renders the provisions of section 4B of the Ordinance, 2001 as redundant and inoperative. These shall run counter to the rule laid down by the superior courts.” Unquote
The Lahore High Court through its judgment in W.P.No. 38612 of 2015 dated December 22, 2017 dismissed all petitions filed against imposition of super tax and held the provisions of section 4B of ITO, 2001 to be constitutional and valid.
The petitioners contended that super tax is not a tax and therefore could not have been levied through a money bill by the Parliament and consequently its imposition through the Finance Act, 2015 was ultra vires and unconstitutional.
The Court held that:
Quote: “The distinction between a tax and a fee is well entrenched and need not be referred to in detail for the purpose of this opinion. Suffice to say that the power of tax is an attribute of sovereignty of the State and held to be an essential and inherent aspect of sovereignty and “a tax is an enforced contribution to provide for the support of Government”. (Justice Scalia in Healthcare case). The subtle but important observation with regard to the tax given in Durrani Ceramics was that a tax is a common burden for raising revenue and upon collection becomes part of public revenue of the State. This is one of the more important elements which will be seen while analyzing the nature of a particular tax.” Unquote
Secondly and as an alternate argument, it was argued by petitioners that even if it is deemed that super tax could have been imposed through the Finance Act, 2015, the said levy is in the nature of double taxation and ought to be struck down on that account as outwith the powers of the legislature.
The Court held that that there was nothing in the Constitution from which it could be culled out that there was such a constitutional vice as double taxation if on the same subject matter the legislature chose to levy tax twice over.
Quote: “Firstly, the rule against double taxation is a judge-made rule and does not have a constitutional basis. This means that if the learned counsel for the petitioners invite this Court to hold that super tax ought to be declared invalid, a constitutional basis for the doctrine of double taxation ought to be proved and established, for this Court in the exercise of judicial review can only declare a statutory provision unconstitutional if it runs counter to the express mandate of any constitutional provision.” Unquote
On grounds of nature of the levy, the LHC held super tax to be in nature of tax, it is therefore passed legally vide Finance Act and on ground of double taxation, the LHC held that double taxation falls under domain of federal government except when the law prohibits it.