(IHC) has declared the current state of Section 4C regarding Super Tax as unconstitutional
On Thursday, the Islamabad
High Court (IHC) approved the petitions submitted by various companies and
organizations and ruled that Section 4C (Super Tax on High Earning Persons) of
the Income Tax Ordinance 2001, in its current form, is unconstitutional.
The judgment, delivered by
Justice Sardar Ejaz Ishaq Khan, stated that the existing Section 4C is in
violation of fundamental rights under Articles 18, 23, and 24, when read in
conjunction with Article 4 of the Constitution. This decision has the potential
to impact the government's tax revenue target.
The verdict stated that
Section 4C of the Income Tax Ordinance is deemed to be in conflict with the
Constitution's principles and should either be interpreted in a more limited
manner or declared as beyond the scope of the Constitution for the reasons
provided in this judgment.
However, the court, with a
preference for preserving rather than abolishing, ruled that Section 4C should
be interpreted more narrowly in the calculation of taxable income subject to
super tax, specifically: (a) excluding all types of income mentioned therein,
for which the tax is considered final under other provisions of the Ordinance,
and (b) separating the exclusions related to carried forward depreciation,
business losses, and amortization allowances available to taxpayers under other
existing provisions of the Ordinance.
The revised Section 4C will
have a prospective application only, meaning it will not apply to any
transactions or events that occurred before June 30, 2022. Additionally,
benevolent funds holding exemptions from tax under other provisions of the Ordinance
will not be subject to the revised Section 4C. Similarly, petroleum and
exploration companies will not be affected by the revised Section 4C if its
application would result in taxing such companies beyond the specified
thresholds in Rule 4 of the Fifth Schedule to the Ordinance.
Furthermore, all notices of
demand or recovery that were challenged in the petitions are nullified, but
this doesn't prevent the revenue authorities from issuing fresh notices that
align with the court's judgment.
In Technical Release
2/2023, the Islamabad High Court (IHC) has issued a comprehensive judgment on
the matter of Super Tax, introduced in the Income Tax Ordinance, 2001 through
Section 4C. Initially assumed to be a one-time tax in the Finance Act of 2022,
it has now become a permanent feature, resulting in increased rates of 10%
starting from the year 2023.
The imposition of Super Tax
was also challenged in the Sindh High Court and the Lahore High Court. The
Sindh High Court ruled that the tax is applicable for Tax Year 2023, not for
Tax Year 2022, and that there should not be a discriminatory rate of 10%
compared to 4%.
The Lahore High Court
decided that Super Tax at the rate of 4% is valid for Tax Year 2022, but it
agreed that there cannot be a charge at the rate of 10%.
The matter is still under
consideration in the Supreme Court of Pakistan, which has ordered payment of
50% of the demand while the case is ongoing.
The
Islamabad High Court took a further step and made the following decisions:
1. The revised Section 4C
will have a prospective application only, and it will not apply to any past
transactions or events closed on or before 30th June 2022.
2. The adjustment for
brought forward depreciation and brought forward losses will be available for
calculating Super Tax.
3. Income subject to final
tax will be exempt from Super Tax.
4. Super Tax will not be
applicable to oil exploration companies operating under the Mining Act.
This judgment is crucial
for Tax Year 2023 since the rate of tax has been increased from 4% to 10%
through the Finance Act of 2023. Based on the decisions of the Islamabad High
Court and the Sindh High Court, the increased rate cannot be applied for Tax
Year 2023.
As advance tax and other
liabilities are linked to the discharge of Super Tax, it is recommended to seek
appropriate legal advice and take necessary action, especially for companies
with a year-end before June 30, 2023, as the increased rate does not seem to
apply to such cases for Tax Year 2023.
