Karachi, July 21, 2023 (PPI-OT): Islamabad High Court Terms Super Tax ultra vires
The Islamabad High court issued a ruling yesterday stating Super Tax imposed in the FY23 budget shall be applicable prospectively from Tax Year 2023 but not Tax Year 2022, citing the application of such taxes as not in-line with Constitution. Earlier, Sindh High court also issued a similar decision stating that Super Tax imposed in the FY23 budget should only be applicable from Tax Year 2023 onwards.
In addition, Lahore High court did not annul the tax, however, declared different rates being discriminatory and ordered a reduced rate for Super Tax to be charged at 4% instead of 10%, in-line with remaining income generating sectors. The said orders are applicable on companies within their respective jurisdictions.
After the Sindh High court and Lahore High court orders, matters were referred to Supreme Court, the top court later, in Feb-2023, ordered that companies pay super tax at a same rate of 4% across the board and directed to remit 50% of their super tax liability on which most companies followed.
To recall, the government had imposed a Super Tax in the FY23 budget announced in Jun-22 on 13 sectors. These aggressive revenue targets were set to help the government achieve fiscal discipline paving way to meet IMF program recommendations.
Islamabad High Court Terms Super tax ultra vires...
Islamabad High Court yesterday stated that Super Tax on high earning persons imposed last year in FY23 budget shall not be applicable retrospectively for Tax Year 2022. The said tax was imposed under section 4C (Super Tax on High Earning Persons) of the Income Tax Ordinance 2001.
This order is applicable on companies within Islamabad jurisdiction where petitioners had contested the constitutionality of Section 4C, and provisions added pursuant to Finance Act 2022, claiming that they unlawfully impair rights accrued in previous and closed transactions, are discriminatory, lack rationality and amount to double taxation. The court affirmed the petitioners’ view declaring the tax to be discriminatory and ultra vires to the Constitution.
Post decision from previous courts
As per our knowledge, after Sindh High Court’s (SHC) ruling, companies in Punjab and Peshawar also filed similar petitions to the respective high courts basing their case on the SHC order which had issued a brief ruling in Dec-2022, invalidating the previous fiscal year's tax implementation. Even though, Lahore High court did not annul the tax altogether but declared different rates being discriminatory and ordered that a reduced rate for super tax be charged at 4% instead of 10%.
The Supreme Court later, in Feb-2023, ordered that companies pay Super Tax at an equal rate of 4% across the board and directed to remit 50% of their Super Tax liability, on which most companies have already complied. In light of the reasons put out in SHC order terming the clause (4C) discriminatory, 6% additional super tax provision was also reversed by many companies based in Sindh in their Dec-2022 Income Statements.
Finance Act 2023 had levied Super Tax on 13 sectors
For background, the major tax imposition in last year’s Finance Act was the additional tax charge dubbed as Super Tax by govt on the thirteen sectors mentioned in the table for Tax Year 2022. A 10% Tax on these 13 sectors was applicable if they earned more than Rs300mn during Tax Year 2022. Most companies from our universe booked this charge on their Profit and Loss statements during June quarter of 2022. The retrospective applicability for companies that report on calendar year basis was highlighted since the additional super tax was applicable on Banking sector for CY22 and not applied retrospectively. Banks are therefore not the subject of any of these high court judgments.
Significance of IHC Judgment for Tax Year 2023
This judgment of the IHC holds significant importance for the Tax Year 2023 as well (the ongoing year) due to the amendment brought about by the recent Finance Act, 2023, which raised the tax rate from 4 to 10%. Recent court rulings on the subject show a clear stance that taxes cannot be implemented retrospectively and as per Supreme court, at least not at discriminatory rates.
We believe it is unlikely to see major tax reversals of any sort in the foreseeable future as the tax assists the government in maintaining fiscal discipline, especially under the IMF program having tall revenue targets. However, we are of the view that the government may seek a review against this verdict and the matter will likely be taken to the Supreme court ultimately. We believe that the Supreme court may follow its previous decision where it directed to deposit 50% of the said tax liability at a uniform rate.
Additional implications of IHC Judgment
The judgment of the IHC also mentions that adjustment for brought forward depreciation and brought forward losses shall be available to companies. Moreover, income subject to final tax will not be subject to Super Tax. Furthermore, Super Tax shall not be applicable for Oil Exploration companies as they operate under the Mining Act. We await clarity on the same, which may lead to reversals from the sector in the future.