The Lahore High Court (LHC) has expressed concern that the Federal Board of Revenue (FBR) has considered withholding tax as the easiest way of collecting tax, by avoiding the orthodox procedure of taxing a person’s income, at the end of the tax year, by allowing expenses, allowances, credits, etc. for arriving at net taxable income.
These observations have been made by the LHC, in a recent judgment, while declaring that collection of an adjustable advance income tax from a person not liable to pay income tax or file an income tax return, is without lawful authority and unconstitutional.
The LHC has also directed the FBR to revise tax policy where withholding agents should be treated rationally and equitably without putting an extra burden of compliance on them.
Another alarming aspect is the increasing trend of indiscriminate withholding tax while ignoring whether a person being burdened with the tax is liable to pay income tax, which should necessarily be proportionate to earning capacity.
A person, below the taxable slab or not earning being jobless, is already paying indirect taxes, even on items essential for living at the same ratio as is being paid by the richest person. In pursuit of collecting advance tax on transactions, if the essential aspect of its adjustment against a payable tax is not ensured, the tax so imposed is confiscatory and expropriatory, LHC observed.
According to the judgment of LHC, the matter is referred to the Attorney General and FBR for suitable amendments within 90 days. For addressing the grievances of the petitioners, this and connected petitions are converted into representations under Section 7 of the Federal Board of Revenue Act, 2007 (“Act of 2007”) and sent to the FBR chairman, who shall forthwith consult, the Attorney General of Pakistan on the concerns and legal position. On so consulting, the Attorney General shall advise FBR through its chairman on the legality of procedure and manner impugned in these petitions with advice for suitable amendment in the Income Tax Ordinance 2001.
The petitioners have assailed the amendment in Section 236D of the Income Tax Ordinance, 2001 (“Ordinance of 2001”), brought through the Finance Act, 2018, whereby the minimum slab for collection of the advance tax was fixed at Rs. 20,000, which was to be collected from a person receiving services of or holding/arranging function in a marriage hall, irrespective of the fact, whether the person was liable to file an income tax return.
Court’s concern, in this and connected cases, is whether, the unadjustable advance tax being recovered from a widow using mobile service and other similarly placed persons, not liable to pay tax or file a return is justified and within the competence of the legislature. The income tax is meant to be charged on income proportionality but cannot be allowed to be charged in the absence of or without determining the income. A tax that diminishes the original property, moveable or immovable, is expropriatory and a tax withheld/deducted and not adjusted against any income tax liability is confiscatory.
It is a globally settled principle of taxation law that a tax cannot be expropriatory or confiscatory, which takes away a citizen’s property without compensation or destroys the business of a taxpayer. The State is meant to serve the citizen and for running its affairs, attribute of charging tax is bestowed by Article 7 of the Constitution but a tax can be levied by or under the authority of Parliament under Article 77.
The act of the Parliament, levying a tax, should not offend any of the fundamental rights guaranteed by the Constitution. An unreasonable taxing procedure, if destroys a business, offends the right under Article 18 and an income tax taking away property without compensation offends Articles 23 and 24. Income tax is meant to be charged to citizens, who are earning income, and citizen, who are not earning any income, deserves to be compensated by the State to meet their basic and essential requirement for living.
Unfortunately, the latter class of citizens is being already subjected to indirect taxes, and is now taxed through an unadjustable advance income tax, which can only be termed as expropriatory and confiscatory. The Constitutional Courts have been observing judicial restraint from declaring such laws as ultra vires, for avoiding an impediment against the State’s tax collection system.
Nevertheless, as it appears from the representation from the respondents’ side, the government is adamant to charge advance tax, ignoring its expropriatory and confiscatory character from the persons not liable to pay tax. Imposing an obligation of tax collection on private persons ignoring reasonability and prejudice to their business, cannot be ignored by Courts, in judicial review.
The citizens in the tax net, who are burdened with the obligation to withhold tax by declaring them an agent, are also required to be treated rationally and equitably. Putting an extra burden of compliance which is not in the normal course of business and that too without remuneration or concession in tax liability, needs to be revisited by the government as well as tax administrators, LHC added.
GOOD decision by LHC.