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Taxation sans constitutionalism

“The Constitution is supreme and each organ of the state has to perform its duties and functions in accordance with the constitutional scheme…. An official action or act, which violates any of the provisions of the Constitution or the law reflects arbitrariness, which results in mis-governance, non-governance and consequently, injustice”-speech at the beginning of the new judicial year 2017-18 by Mian Saqib Nisar, Chief Justice of Pakistan

“It will not be out of context at this stage to observe that our country has a Federal System of Government, which is based on trichotomy of power, each organ of the State is required to function/operate within the bounds specified in the Constitution”-Syed Masroor Ahsan and others v Ardeshir Cowasjee and others PLD 1998 SC 823

Although constitutionalism is sometimes regarded as a synonym for limited government, that is only one interpretation and by no means the most prominent one historically. More generally constitutionalism refers to efforts to prevent arbitrary government – Richard Bellamy, Encyclopedia Britannica

Article 77 of the Constitution of Pakistan categorically says that no tax shall be levied for the purposes of the Federation except by or under the authority of the Act of Parliament. The Supreme Court of Pakistan in its landmark judgement, Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.), held that “neither a Secretary, nor a Minister and nor the Prime Minister are the Federal Government and the exercise, or purported exercise, of a statutory power exercisable by the Federal Government by any of them, especially, in relation to fiscal matters, is constitutionally invalid and a nullity in the eyes of the law. Similarly budgetary expenditure or discretionary governmental expenditure can only be authorised by the Federal Government ie the Cabinet, and not the Prime Minister on his own.”

Unfortunately, the ousted Prime Minister and his Finance Minister had been violating the command of the supreme law of the land and dictum of Supreme Court with impunity by levying taxes and varying tax rates through Statutory Regulatory Orders (SROs). Ishaq Dar through the Finance Act, 2017, endorsed blindly by all MNAs of PML-N present, even inserted provisions in various tax codes aimed at nullifying the judgement of the Supreme Court. The Finance Act 2017 also unconstitutionally empowered Federal Board of Revenue (FBR) to enhance the rate of sales tax with the approval of “Minister Incharge”. FBR unlawfully exercised this power vide SRO 713(I)/2017 dated July 31, 2017 even without approval of Minister Incharge. Through this SRO, high speed diesel was subjected to a rate of 40% and motor spirit excluding HOBO to 23.5% against standard rate of 17% under the Sales Tax Act, 1990.

Visibly irritated by the landmark judgement of the Supreme Court, wizards sitting in FBR, proposed amendments through the Finance Bill 2017 in the Customs Act, 1969 [section 221A], the Sales Tax Act, 1990 [section 74A], the Income Tax Ordinance, 2001 [section 241] and the Federal Excise Act, 2005 [section 43A] to nullify the judgement of Supreme Court in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.) and it was approved by parliamentarians in utter disregard of Article 77 of the Constitution.

It is regrettable that members of Parliament did not apply their independent mind and without any difficulty Ishaq Dar obtained their approval of the above-mentioned unconstitutional provisions included in the Finance Act 2017. After the ouster of Nawaz Sharif, the new Prime Minister retained Ishaq Dar, who is an accused in a fresh reference filed by National Accountability Bureau (NAB) on the directions of Supreme Court of Pakistan. This confirms the continuity of rule of the accused-those facing trials for corruption and plundering of national wealth. Blatant violations of Article 77 of the Constitution of Pakistan are said to be taking place even under the new Premier Shahid Khan Abbasi-the latest example is levy of 40% sales tax through SRO 867(I)/2017 dated 31 August 2017.

Levy of taxation through SROs is a naked and blatant violation of Article 77 of the Constitution that categorically says that no tax shall be levied for the purposes of the Federation except by or under the authority of the Act of Parliament. FBR stalwarts have been insisting that words “by or under the authority of Act”, as used in Article 77 of the Constitution, authorise “taxation by delegation” through SROs. However, before the Supreme Court in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.), Additional Attorney General submitted that “the levy and exemption of tax is the function of Parliament under Article 77 of the Constitution and…… power of exemption if given to the executive per se, would amount to the negation of the doctrine of parliamentary supremacy and the doctrine of separation of powers”. This submission was against the view of FBR and was confirmed by the Apex Court.

The ill-advised attempt to nullify the judgement of Supreme Court in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.) by the government of ousted Prime Minister and his cronies has not only proved their disrespect of the apex court but also the supreme law of the land. Strangely, the Law Minister of Nawaz (continuing with Shahid Khaqan Khan Abbasi) and Attorney General of Pakistan, both seasoned lawyers, did not brief and/or advise the Finance Minister that validation clauses inserted to nullify the judgement of Supreme Court, Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.), were ultra vires and the only remedy was amendment in Constitution.

It is shocking that after the binding judgements of Supreme Court in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.) and Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)], FBR under the incumbent Prime Minister is imposing new taxes or varying rate of taxes through SROs violating not only Article 77 but also openly defying Article 189 of the Constitution. Premier Shahid Khan Abbasi is either unaware of it or he is helpless before Ishaq Dar who is behind the insertion of the following unconstitutional provisions in various tax codes:

Customs Act, 1969 [section 221A]

Validation: All notifications and orders issued and notified in exercise of the powers conferred upon the Federal Government, before the commencement of Finance Act, 2017, shall be deemed to have been validly issued and notified in exercise of those powers, notwithstanding anything contained in any judgement of the High Court or Supreme Court.

Sales Tax Act, 1990 [section 74A] 

Validation: All notifications and orders issued and notified in exercise of the powers conferred upon the Federal Government, before the commencement of Finance Act, 2017, shall be deemed to have been validly issued and notified in exercise of those powers, notwithstanding anything contained in any judgement of the High Court or Supreme Court

Income Tax Ordinance, 2001 [section 241] 

Validation: All notifications and orders issued and notified, in exercise of the powers conferred upon the Federal Government, before the first day of July, 2017 shall be deemed to have been validly issued and notified in exercise of those powers.

Federal Excise Act, 2005 [section 43A]

Validation: All notifications and orders issued and notified in exercise of the powers conferred upon the Federal Government, before the commencement of Finance Act, 2017, shall be deemed to have been validly issued and notified in exercise of those powers, notwithstanding anything contained in any judgement of a High Court or the Supreme Court.

The above insertions are ultra vires of Constitution of Pakistan and in utter violation of verdicts of the Supreme Court of Pakistan. What makes the situation more painful is the criminal silence of even experienced parliamentarians of the ruling party fully conversant with law that the only remedy to undo the verdict of Supreme Court in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.) is amendment in the Constitution itself and not through Money Bill.

It is also strange that till today, the parliamentarians of Pakistan People’s Party and Pakistan Tahreek-i-Insaf have not moved a resolution in the National Assembly and Senate asking the government to present a Bill for removing the unconstitutional provisions cited above. In case they fail to do so, any citizen can move contempt application in the Apex Court. The Counsel who represented the parties in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.) have also not bothered to brought the issue to the notice of Supreme Court by way of contempt proceedings.

The Supreme Court has already disapproved taxation by Executive in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)] as under:

“It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd V. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993 SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192).” [Page 18, Para 20]

The principle of “no taxation without representation”, embodied in Article 77 read with Article 162 of the Constitution, has perpetually and flagrantly been violated. Executive authority could not be given power to levy tax through notification. The delegation of legislative power to the federal government and/or Federal Board of Revenue (FBR) for levying taxes is in utter disregard of Article 77 read with Article 162 of the Constitution which says:

“162. Prior sanction of President required to Bills affecting taxation in which Provinces are interested: – No Bill or amendment which imposes or varies a tax or duty the whole or part of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression “agricultural income” as defined for the purposes of the enactments relating to income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter, moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President.”

The delegated power to an executive authority to issue SROs is in utter violation of Article 162 as parliament itself is not authorised to consider any Bill or amendment that imposes or varies a tax or duty, the whole or part of the net proceeds whereof is assigned to any province, unless the same is first approved by the President. Exercise of delegated powers by FBR to vary the rate of a tax or duty through SRO is a blatant violation of Article 162.

Enforcement of Rule of Law determines the failure or success of a society. In the context of tax laws, it means that taxes are imposed through parliamentary process and as per Constitution, rather than through SROs by Executive. Thus delegation of legislative power to the Executive to vary a tax or duty rate renders the entire tax system unconstitutional.

It is shocking that even after the exit of Nawaz Sharif (Badshah Salamat), his loyal Vazir-e-Khazana (Finance Minister) is violating with impunity the supreme law of the land by varying tax rates through SROs. This confirms that not only the political elite but its hand-picked bureaucrats have no respect for the Constitution as explained by Supreme Court in Messers Mustafa Impex, Karachi v Government of Pakistan (2016) 114 Tax 241 (S.C Pak.) and Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak). What makes the situation more painful is the fact that members of Parliament also delegated powers to FBR in violation of Constitution. It is high time that Premier Shahid Khaqan Abbasi and the entire Parliament take serious note of this matter.

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)

Huzaima Bukhari and Dr ikramul Haq, "Taxation sans constitutionalism," Business Recorder. 2017-09-22.
Keywords: Economics , Sales tax , Tax , Constitution , Pakistan , PLD , FBR , NAB

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