Karachi, December 23, 2022 (PPI-OT): Sindh High Court grants stay on Super Tax

The Sindh High court issued a brief ruling yesterday stating that Super Tax imposed in the FY23 budget shall be applicable prospectively from tax year 2023 but not tax year 2022, citing the application of taxes as not in-line with Constitution.

The said order is applicable on companies within the Sindh jurisdiction. As per our knowledge, companies in Punjab are now also applying for the stay basing their case on the Sindh High court order.

To recall, the government had imposed a Super Tax in the budget announced in Jun-22 on 13 sectors. These aggressive revenue targets were set to help the new government achieve fiscal discipline paving way for the IMF program resumption.

Sindh High Court issues short order, other courts to follow

The Sindh High court issued a brief ruling yesterday stating that the Super Tax on high earning persons imposed in FY23 budget shall be applicable prospectively from tax year 2023 and beyond but not 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. The order is applicable on companies within Sindh’s jurisdiction. As per our knowledge, companies in Punjab are now also applying for the stay basing their case on the Sindh High court order. 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.

The court order will be suspended for sixty days. In essence, an interim relief has been granted where by the petitioners will be allowed to file returns for the year excluding the impact of Super tax. The companies would however be required to retain cash in lieu of the one-time tax charge. We hence believe it is unlikely to see any reversals in the foreseeable future.

Super Tax was imposed on 13 sectors for tax year 2022

The major announcement in Federal Budget FY23 was the additional tax charge dubbed as Super Tax by government 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 have booked this charge on their Profit and Loss statements during June quarter of 2022. The retrospective applicability is unclear for companies with June year end but companies that report on calendar year basis apparently have a relatively stronger claim. Since the additional super tax was applicable on Banking sector for CY22 and not applied retrospectively, banks are not the subject of this judgment.

We expect a detailed judgment in the coming days. We also believe that the government may seek a review against this verdict in the respective high courts and the matter will likely be taken to the Supreme court ultimately. The Supreme court had granted a conditional stay last time such a tax was imposed and had directed to deposit 50% of the disputed amount in order for the stay to be effective.