Anomalies in the Income Tax Ordinance 2001

This is a letter written by MIRZA MUNAWAR HUSSAIN, MA, MBA, LLB, FPFA, FCIS, FCMA, Ex-President, Pakistan Institute of Public Finance Accountants, Ex-Member National Council, Institute of Cost and Management Accountants of Pakistan Ex-Member PAIB, Committee of South Asian Federation of Accountants (SAFA), Ex-Technical Advisor PAIB Committee of International Federation of Accountants (IFAC) Member Executive Committee of Lahore Tax Bar Association, to Mr. Naeem Akhtar Sheikh, Chairman, Anomaly Committee – Technical, Federal Board of Revenue, Islamabad on Anomalies in the Income Tax Ordinance 2001.

It is to mention that I am a serious student of Taxation Laws.  While studying the Income Tax Ordinance, 2001, I observed that:

Certain amendments were made in the Income Tax Ordinance, 2001 through Ordinances promulgated by the President under the authority of Article 89(1) of the Constitution of the Islamic Republic of Pakistan. A substantial number of such Ordinances was later on converted into Acts of the Parliament.  However, some of those never presented in the Parliament as is mandatory under Article 89(2) of the Constitution, thus lapsed after expiry of 120 days (or after further 120 days if so extended by the National Assembly by a resolution). Two of such Ordinances are discussed below:

Anomalies in the Income Tax Ordinance 2001

(A)    Income Tax (Amendment) Ordinance, 2015, Promulgated on : 11-07-2015   &   Valid Upto : 07-11-2015

This Ordinance inserted a proviso in Division XXI of Part IV of First Schedule, which lapsed after its validity date. It was unconstitutionally treated as “in force” and certain SROs were issued under its authority.

Later on, in the same Division XXI a different proviso was inserted by the Income Tax (Amendment) Act, 2016, dated 29-01-2016. That proviso was erroneously treated as second proviso while keeping alive the proviso inserted by the Income Tax (Amendment) Ordinance, 2015 as first proviso.

That proviso too was omitted by the Finance Act, 2018, dated 22-05-2018.

After omission of the above-referred provisos, no further action is desired.  However, it is for the concerned authorities to look into it for future consideration.

(B)    Tax Laws (Amendment) Ordinance, 2016 | Promulgated on : 31-08-2016  &      Originally Valid Upto : 28-12-2016

(a)      The National Assembly (as allowed by Article 89(2) of the Constitution) extended validity of this Ordinance upto 26-04-2017 through its resolution of 28-11-2016.

(b)     This Ordinance lapsed from 27-04-2017, i.e., after expiry of the extended period of 120 days.

(c)      Provisions of this Ordinance never became part of any Act of the Parliament.

However, official version of the Income Tax Ordinance, 2001 available on FBR’s website not only retains its provisions as operative and “in force” but also makes further amendments in those sections, etc., inserted or amended through this Ordinance.

(d)     Section 3 of the Tax Laws (Amendment) Ordinance, 2016 made the following amendments in the Income Tax Ordinance, 2001:

(i)      Inserted section 5AA and imposed “Tax on return on investments in sukuks”.

(ii)     Amended section 8.

(iii)     Amended section 28(2).

(iv)    Inserted section 150A, whereby “Deduction of tax by special purpose vehicle” was imposed.

(v)     Amended section 153(5)(g).

(vi)    Inserted proviso in sub-section (1) of section 236C.

(vii)   Omitted sub-section (4) of section 236C.

(viii)   Inserted Division-IIIB in Part-I of First Schedule.

(ix)    Inserted Division-IB in Part-III of First Schedule.

(x)     Amended clause (136) of Part-I of Second Schedule

(xi)    Amended clause (38) of Part-IV of Second Schedule

Anomalies in the Income Tax Ordinance 2001

It is customary that during a financial year certain amendments are made through SROs in the Second Schedule to the Income Tax Ordinance, 2001. SROs are issued under the authority of sub-section (2) of Section 53 of the Income Tax Ordinance, 2001.

However, sub-section (3) of section 53 of the Income Tax Ordinance, 2001 makes it mandatory (by using the word “shall”) for the Federal Government to place before the National Assembly all amendments made by it to the Second Schedule to in a financial year.

It  is  observed  with  great  concern that  a  substantial  number  of  amendments  (insertions, deletions, modifications, etc.) made in the Second Schedule through SROs are never placed before the National Assembly, thus lacking legal sanctity.

Constitutional & Legal Provisions:

Tax to be Levied by Law Only [Article – 73 of the Constitution]

No tax shall be levied for the purposes of the Federation except by or under the authority of Act of Majlis-e-Shoora (Parliament).

Act of Majlis-e-Shoora (Parliament) [Article – 75(3) of the Constitution]

When the President has assented or is deemed to have assented to a Bill, it shall become law and be called an Act of the Majlis-e-Shoora (Parliament).

Power of President to Promulgate Ordinances [Article – 89 of the Constitution]

(a)     President may promulgate Ordinance where the Senate or National Assembly is not in session; and

(b)     Ordinance dealing with matters specified in Article 73(2) shall be laid before the National Assembly. It shall lapse maximum after expiry of 120 days from its promulgation. The National Assembly (in case of money matters) may by a resolution extend an Ordinance for a further period of 120 days.  In this case it shall stand repealed at the expiration of the extended period.

Exemptions and Tax Concessions in the Second Schedule [Section – 53 of Income Tax Ordinance, 2001]

(a)     With certain conditions and under specified circumstances the Federal Government is empowered to make amendments (addition, omission & modification) in the Second Schedule by a notification in the official Gazette; and

(b)     The Federal Government shall place before the National Assembly all amendments made by it to the Second Schedule in a financial year.

Anomalies in the Income Tax Ordinance 2001

Conclusion:

1. Tax can be levied only by “law”, which term is defined by the Constitution.
2. President may promulgate Ordinances, but those are for temporary arrangements. Such Ordinances are treated as repealed under certain circumstances or after expiry of a certain specified period.
3. After an Ordinance becomes repealed, it does not remain a “law”.
4. Any tax levied, collected and paid under a repealed Ordinance is unconstitutional, thus has no legal sanctity.
5. Exemptions granted or withdrawn, etc., through SROs are valid till the end of the financial year in which SRO is issued, if not placed before the National Assembly. Violation of section 53(3) will render an SRO illegal and ultra vires the Income Tax Ordinance, 2001. Practice of continued and unchecked violation will not legitimate the practice.

Insertion of sub-section (4) in section 53 by the Finance Act, 2015 has the following impacts:

(i)      Sub-section (3) was and is still functional part of the law, which restricts the authority granted under sub-section (2) of section 53 of the Income Tax Ordinance, 2001.

(ii)     Sub-section (4) provides a mechanism for notification issued after 01-07-2015.  It does not restrict the application of sub-section (3) on notification issued till 30-06-2015. If those are considered still in force, it will be a legal and constitutional mistake.

Recommendations:

It is a fact that all provisions made through Ordinances (not converted into Act by the National Assembly) and repealed due to operation of Article 89(2) of the Constitution are unconstitutional and have no legal existence.  Same is the position of amendments in the Second Schedule made through such SROs which were not presented before the National Assembly.  The Constitution prohibits levy of taxes through such illegal and unconstitutional pieces of papers, thus cannot be continued.

In this grave situation I may recommend that Finance Bill, 2021 may be amended considering the following options:

1. Abolish unconstitutional legislation being considered as valid; or
2. Insert those provisions afresh in the Income Tax Ordinance, 2001.

Under both the options the proposed amendments in the Finance Bill, 2021 must provide for protection of the acts already taken under those unconstitutional and illegal provisions of the law.

Additional Submissions:

1. For understanding   the   mess   created   by   continuation   of   unconstitutional   legislation   a comparative study of section 236C of the Income Tax Ordinance, 2001 will be useful. Below are the versions of this section as is according to FBR and as it should have been according to the status of notified official Gazette (after incorporation of the proposed amendments by the Finance Bill, 2021.

SECTION 236C

AS PER FEDERAL BOARD OF REVENUE
(As amended Upto Finance Bill, 2021)

236C. Advance Tax on sale or transfer of immovable Property.—

(1)     Any  person  responsible  for  registering    ²[,recording]  or  attesting  transfer  of  any immovable property shall at the time of registering ³[,recording] or attesting the transfer shall collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule:

Explanation,—For removal of doubt, it is clarified that the person responsible for registering, recording or attesting transfer includes person responsible for registering, recording or attesting transfer for local authority, housing authority, housing society, cooperative society and registrar of properties.

Provided that this sub-section shall not apply to a seller, being the dependant of a Shaheed belonging to Pakistan Armed Forces or a person who dies while in the service of the Pakistan Armed Forces or the service of Federal or Provincial Government, in respect of first sale of immovable property acquired from or allotted by the Federal Government or Provincial Government or any authority duly certified by the official allotment authority, and the property acquired or allotted is in recognition of or for services rendered by the Shaheed or the person who dies in service:

Anomalies in the Income Tax Ordinance 2001

[Provided further that if the seller or transferor is a non-resident individual holding Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) or Computerized National ID Card (CNIC) who had acquired the said immovable property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA) maintained with authorized banks in Pakistan under the foreign exchange regulations issued by the State Bank of Pakistan, the tax collected under this section from such persons shall be final discharge of tax liability in lieu of capital gains taxable under section 37 earned by the seller or transferor from the property so disposed of.

(2)     The Advance tax collected under sub-section (1) shall be adjustable :

Provided that where immovable property referred to in subsection (1) is acquired and disposed of within the same tax year, the tax collected under this section shall be minimum tax.

(3)  Advance tax under sub-section (1) shall not be collected if the immovable property is held for a period exceeding ¹¹[four years].]

(4) Sub-section (1) shall not apply to:-

(a)     a seller, if the seller is dependent of:

(i)      a seller, if the seller is dependent of: a Shaheed belonging to PakistanArmed Forces; or

(ii)      a person who dies while in the service of the Pakistan Armed Forces or the Federal and provincial Government; and

(b)     to the first sale of immovable property which has been acquired or allotted as an original allottee, duly certified by the official allotment authority.

1. Inserted by the Finance Act, 2012.
2. Inserted by the Finance Act, 2017.
3. Inserted by the Finance Act, 2017.
4. Full stop substituted by the Presidential Order No.F.2(1)/2016-Pub dated 31.08.2016.
5. Added by the Finance Act, 2017.
6. Added by the Presidential Order No.F.2(1)/2016-Pub dated 31.08.2016.

Anomalies in the Income Tax Ordinance 2001

6a.       Substituted for full stop by the Finance Bill, 2021.

6b.       Second proviso inserted by the Finance Bill, 2021.

1. Full stop substituted by the Finance Act, 2017.
2. Inserted by the Finance Act, 2017.
3. Sub-section (3) omitted by the Finance Act 2015. The omitted sub-section read as follows:

“(3)      The advance tax under this section shall not be collected in the case of Federal Government, Provincial Government or a Local Government.”

1. Added by the Finance Act, 2016.
2. The words “five” substituted by Finance Act, 2020, dated 30^th June, 2020.
3. Added by the Income Tax (Fourth Amendment) Act, 2016 dated 02.12.2016.
4. Sub-section (4) omitted by the Presidential Order No.F.2(1)/2016-Pub dated 31.08.2016. The omitted sub-section read as follows:-

“(4)    Sub-section (1) shall not apply to:—

(a)       a seller, if the seller is dependent of:

(i)        a Shaheed belonging to Pakistan Armed Forces; or

(ii)       a person who dies while in the service of the Pakistan Armed Forces or the Federal and Provincial Governments; and

(b)       to the first sale of immovable property which has been acquired or allotted as an original allottee, duly certified by the official allotment authority.”

1. Inserted by section 2(3)(b) of the Income Tax (Fourth Amendment) Act, 2016, dated 02-12-2016.

As Per Valid and In-force Gazette Notifications

236C.Advance Tax on sale or transfer of immovable Property.

(1)     Any  person  responsible  for  registering 2[,  recording]  or  attesting  transfer  of  any immovable property shall at the time of registering, recording] or attesting the transfer shall collect from the seller or transferor advance tax at ⁴he rate specified in Division X of Part IV of the First Schedule .

Provided further that if the seller or transferor is a non-resident individual holding Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) or Computerized National ID Card (CNIC) who had acquired the said immovable property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA) maintained with authorized banks in Pakistan under the foreign exchange regulations issued by the State Bank of Pakistan, the tax collected under this section from such persons shall be final discharge of tax liability in lieu of capital gains taxable under section 37 earned by the seller or transferor from the property so disposed of.

Explanation.- For removal of doubt, it is clarified that the person responsible for registering, recording or attesting transfer includes person responsible for registering, recording or attesting transfer for local authority, housing authority, housing society, co-operative society, public and private real estate projects registered/governed under any law, joint ventures, private commercial concerns] and registrar of properties.

(2)     The Advance tax collected under sub-section (1) shall be adjustable:

Provided that where immovable property referred to in sub-section (1) is acquired and disposed of within the same tax year, the tax collected under this section shall be minimum tax.

(3) Advance tax under sub-section (1) shall not be collected if the immovable property is held for a period exceeding ¹³[four] years].]

(4) Sub-section (1) shall not apply to:-

(a)     a seller, if the seller is dependent of:

(i)      a seller, if the seller is dependent of:] a Shaheed belonging to Pakistan Armed Forces; or

(ii)      a person who dies while in the service of the Pakistan Armed Forces or the Federal and provincial Government; and

(b)     to the first sale of immovable property which has been acquired or allotted as an original allottee, duly certified by the official allotment authority.

1. Section “236C” inserted by the Finance Act, 2012, dated 27-06-2012.
2. Word, etc., inserted by the Finance Act, 2017, dated 20-06-2017.
3. Word, etc., inserted by the Finance Act, 2017, dated 20-06-2017.
4. Should have been “the” instead of “he”.
5. Substituted for full stop by section 3(6)(a) of the Tax Laws (Amendment) Ordinance, 2016, dated

31-08-2016 effective from 01-07-2016. That Ordinance was valid upto 28-12-2016 and extended upto 26-04-2017 by a resolution of National Assembly passed on 28-11-2016, thereafter it lapsed. Thus, the law came to the position as it was before that amendment.

1. Proviso inserted by section 3(6)(a) of the Tax Laws (Amendment) Ordinance, 2016, dated 31-08-2016 effective from 01-07-2016. This Ordinance was valid upto 28-12-2016 and extended upto 26-04-2017 by a resolution of National Assembly passed on 28-11-2016, thereafter it lapsed. Thus, the law came to the position as it was before that amendment. The Proviso sought to be inserted read as below:

“Provided that this sub-section shall not apply to a seller, being the dependant of a Shaheed belonging to Pakistan Armed Forces or a person who dies while in the service of the Pakistan Armed Forces or the service of Federal Government or Provincial Government, in respect of first sale of immovable property acquired from or allotted by the Federal Government or Provincial Government or any authority duly certified by the official allotment authority, and the property acquired or allotted is in recognition of or for services rendered by the Shaheed or the person who dies in service.”

1. Proviso inserted by the Finance Bill, 2021. Earlier the same was inserted by the Tax Laws (Amendment) Ordinance, 2021, dated 19-02-2021.

The Finance Act, 2021 inserts it as second proviso, whereas the proviso inserted by the Tax Laws (Amendment) Ordinance, 2016 does not exist as explained in the preceding foot note. Hence, it should have been the only proviso.

1. Explanation inserted by the Finance Act, 2017, dated 20-06-2017.
2. Words, etc., inserted by the Finance Bill, 2021.
3. Substituted for full stop by the Finance Act, 2017, dated 20-06-2017.
4. Proviso inserted by the Finance Act, 2017, dated 20-06-2017.
5. Sub-section (3) inserted by section 5(44) of the Finance Act, 2016, dated 24-06-2016. Earlier it

was omitted by section 9(59) of the Finance Act, 2015, dated 30-06-2015. Before omission it read as below:

“(3)      The advance tax under this section shall not be collected in the case of Federal Government, Provincial Government or a Local Government.”

1. Substituted “four” for “five” by section 6(61) of the Finance Act, 2020, dated 30-06-2020. Earlier substituted “five” for “three” by section 13(60) of the Finance Act, 2019, dated 30-06-2019. Earlier “three years” were substituted for “five years” by section 2(3)(a) of the Income Tax Laws (Fourth Amendment) Act, 2016, dated 06-12-2016.  Earlier the same amendment was made by section 2(2)(a) of the Income Tax (Amendment) Ordinance, 2016, dated 31-07-2016, which lapsed on its presentation before the National Assembly on 11-08-2016.

1. Sub-section (4) inserted by section 2(3)(b) of the Income Tax (Fourth Amendment) Act, 2016, dated 06-12-2016.

Earlier it was omitted by section 3(6)(b) of the Tax Laws (Amendment) Ordinance, 2016, dated 31-08-2016 effective from 01-07-2016. Earlier it was inserted by section 2(2)(b) of the Income Tax (Amendment) Ordinance, 2016, dated 31-07-2016. This section as sought to be inserted and later on omitted by the Income Tax (Amendment) Ordinance, 2016 & the Tax Laws (Amendment) Ordinance, 2016 read as below:

“(4)      Sub-section (1) shall not apply to:-

(a)       a seller, if the seller is dependent of:

(i)        a Shaheed belonging to Pakistan Armed Forces; or

(ii)       a person who dies while in the service of the Pakistan Armed Forces or the Federal and provincial Government; and

(b)       to the first sale of immovable property which has been acquired or allotted as an original allottee, duly certified by the official allotment authority.”

1. Words already appear in the Gazette as beginning paragraph of clause (a), hence, seems to be superfluous.
2. The Finance Bill, 2021 also needs some editorial and technical amendments, e.g.:

S. #	Section of Bill	Proposed Amendment
1	5(1)(M)(i)	Word to be used  should be “omitted” instead of “substituted”
2	5(3)	Proposed substitution in marginal note is erroneous Needs consequential changes in the section as well
3	5(12)(a)(i)	Should have been “and (3B)” instead of “and 3B”
4	5(16)(a)	Should have been “23A,” instead of “23A”
5	5(16)(b)	Should have been “23A,” instead of “23A”
6	5(26)	Section 65G, sub-sections (2) & (3): Words “eligible investment” and “eligible person” being definitions, should have been within inverted commas
7	5(41)(a)	Place comma before “after making…..”

8             5(45)(e)          Full stop is missing at the end of sub-section (5) inserted

9             5(45)(f)           Full stop is missing at the end of sub-section (6A) inserted

10            5(46)(b)          Should have been numbered as 5(46A)

11              5(49)            Word “and” or “or” to be inserted before “collect tax…”

12              5(56)            Sub-section (2) of section 156A: Should have been “fulfillment” instead of “fulfilment” Word “and” at the end of clause (b) should be deleted and the same should be inserted at the end of clause (c)

13            5(57)(b)          Insert full stop at the end of the Explanation

14            5(84)(b)          In light of main discussion on Tax Laws (Amendment) Ordinance, 2016, the proviso being referred here does not exist. So necessary amendments are needed

15              5(85)            Should have been “tyres” instead of “tyers”

16              5(86)            Should have been “tyres” instead of “tyers”

I kept myself confined to the Income Tax Ordinance, 2001 only. There is likelihood that same sort of anomalies exist in other laws such as Sales Tax Act, 1990, Federal Excise Act, 2005 and Customs Act, 1969.  There is a need to peruse all revenue laws afresh to ensure the legal sanctity of these laws.

It is hoped that above submissions will be given due weightage and necessary actions shall be taken so as to keep the law in tact and free from legal and constitutional shortcomings.

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