Islamabad High Court Judicial Review of Section 4C of Income Tax Ordinance, 2001:

The IHC in the case of Writ Petition No 4027 of 2022 has issued a detailed judgement on the matter of Super Tax brought in the Income Tax Ordinance, 2001 by way of Section 4C of the Ordinance;

This tax which was assumed to be one time tax introduced in the Finance Act, 2022 has now been made a permanent feature effectively increasing the rates to 10% from Year 2023 onwards also;

Levy of Super Tax was also challenged before the Sindh High Court and the Lahore High Court. The Sindh High Court decided that this tax is applicable for the Tax 2023 and not for the Tax year 2022. Furthermore it was decided that there cannot be any discriminatory rate of 10 % as against 4%.

The Lahore High Court has decided that Super Tax at the rate of 4% is valid for the Tax Year 2022, however, they have also agreed that there cannot be any charge at the rate of 10%.

The matter is pending before the Supreme Court of Pakistan and the court has asked to pay 50% of the demand;

The Islamabad High Court has moved a step further. The judgment deals separately with grounds common to all petitioners and with grounds specific to certain industries, interleaved with the heading of fundamental rights.

Common Ground

1. Retrospective legislation: Retrospective legislation by Parliament should not take away inherent natural rights, such as the right to earn and keep one's income. These rights are fundamental and not granted by any legislative or executive act. Legislation can only affect such rights prospectively, not retroactively. This distinction is important and was overlooked in past judgments concerning retroactive laws that revoke vested rights.

2. Past and Closed Transactions: The principle that past and closed transactions cannot be altered by new laws was not disputed. However, it is crucial to recognize that retrospective laws cannot override fundamental rights or affect transactions that have already concluded. For example, Fauji Foundation's tax obligations were finalized before the introduction of the super tax in 2022, making any attempt to impose this tax on earlier transactions invalid. The company's financial decisions were made without knowledge of the future tax, which would have influenced its actions.

3. Crystallisation of Tax Liability: Tax liability is determined at the close of the financial year when the income accrues. Any tax imposed after this point cannot apply retroactively to the previous tax year. The taxable events for a given year are fixed by the laws in effect at that year's end.

4. Section 4B Cases Challenges: Section 4B of the Ordinance, which is similar to Section 4C, were rejected by three High Courts. However, the current petitions present new arguments that merit consideration.

5. Irreconcilable Conflict of New Income Category: Section 4C of the Ordinance creates a new category of income by excluding previously allowed losses and allowances, conflicting with existing tax laws. This new category is taxed separately, which is not considered double taxation but creates an inconsistency within the Ordinance. Taxing income already subject to final tax under other sections contradicts the law, violating constitutional protections of property rights.

Fundamental Rights

6. Presumptive Taxation: The computation of income under Section 4C is based on presumptive taxation, creating an artificially inflated income figure. This approach undermines the coherence of the tax system and is seen as a distortion of the Ordinance.

7. Ex-Ante Certainty of Tax: Businesses have a fundamental right to know their tax obligations in advance. Retrospective taxation, such as that imposed by Section 4C, violates this right by imposing unexpected liabilities, which disrupts business operations.

8. Windfall Profits Argument: The argument that super tax targets windfall profits is flawed. The tax is imposed on high earners based on an exaggerated income calculation, not actual windfall profits. This artificial inflation of income through re-taxation and exclusion of losses is misleading and unjustified.

9. Real vs. Imaginary Income: For income to be taxable, it must represent a real, tangible amount. Section 4C's approach of stacking existing income categories to create a new taxable figure does not reflect actual income, making it an illegitimate target for taxation.

10. Due Process Rights: Taxing transactions that were completed before the introduction of super tax violates due process rights. Imposing unexpected liabilities is arbitrary and unreasonable, conflicting with constitutional rights to property and business.

11. Unlawful Discrimination: The super tax's 10% levy on certain industries is discriminatory and violates the constitutional right to equal treatment under the law.

Industry-Specific Grounds:

Benevolent Funds and Petroleum Industry:

Benevolent funds and petroleum companies with tax exemptions should not be subjected to super tax. These exemptions were valid when the transactions occurred, and any attempt to apply super tax retroactively is unlawful.

Conclusion and Orders:

Section 4C is declared unconstitutional as it violates fundamental rights. It should be applied prospectively, not retroactively, and should exclude certain income categories and exemptions. All recovery notices related to super tax under Section 4C are invalidated.