The Tenth Schedule is examined, insertion of which is admission of legal position that a person not required to file return and pay tax, cannot be subjected to advance tax. The procedure in its Rule 2 is impracticable and unreasonable, whereby the person receiving the bill (withholding agent) or the person from whom the tax is to be collected, is burdened to issue notice to the Commissioner for knowing whether a person is liable to file return and wait for thirty days before finalizing the bill, with or without collection of advance tax.
Absence of a person in active taxpayer list and a person not required to file income tax return cannot be equated, because a person filing return may be deleted from active taxpayer’s list by any tax authority for a noncompliance under the Ordinance of 2001. How would a person, having marriage hall business at a lower level, would verify wether person booking or managing a function is on active taxpayer’s list or would wait for thirty days for Commissioner’s response and finalize bill thereafter. Imposition of statutory duty to withhold another person’s tax and deposit in the exchequer may be justified on transaction in usual course of business. Under the impugned provisions, the burden is imposed, in an unusual manner upon a person, who is recipient of money against services or supply, therefore, is confiscatory for having adverse impact on the business. This procedure, being impracticable and casting an unreasonable irrational burden is, hence, declared void.
Advance Tax was meant, originally, to facilitate the taxpayer as well as department to pay tax in advance based on the tax determined and paid in last tax year, which facilitates the taxpayer for payment of tax in installments, besides timely recovery of tax. Later, withholding tax was introduced on transaction with the rational of collecting data of the transactions with minimal tax collection. The tax so withheld was adjustable against final tax liability. Eventually, the tax withheld on business transactions was brought into Presumptive Tax Regime (“PTR”) by treating the same as final liability. It is important to observe here that for collection of data of business transactions, at various stages of value addition, Sales Tax Act, 1990 (“Act of 1990”) is serving the purpose. By introducing this concept in the Income Tax Law, and allowing it to be a final tax, under PTR, practically, it has become an indirect tax, burden of which passes on to end consumer.
For FBR, withholding tax is the easiest way of collecting tax, by avoiding the orthodox procedure of taxing a person’s income, at the end of tax year, by allowing expenses, allowances, credits etc. for arriving at net taxable income.
Another alarming aspect is the increasing trend of indiscriminate withholding, 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 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.
Court’s concern, in this and connected cases, is whether, unadjustable advance tax being recovered from a widow using mobile service and other similarly placed persons, not liable to pay tax or file return is justified and within the competence of the legislature. The income tax is meant to be charged on income proportionality but cannot allow to be charged in absence or without determining the income. A tax which diminishes the original property, moveable or immoveable, is expropriatory and a tax withhold/deducted and not adjusted against any income tax liability is confiscatory.
It is 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 business, offends the right under Article 18 and an income tax taking away property without compensation offends Article 23 and 24.
Income tax is meant to be charged from citizens, who are earning income and citizen, who are not earning any income, deserves to be compensated by the State to meet their and essential requirement for living. Unfortunately, the later class of citizens is being already subjected to indirect taxes, is now taxed through 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 respondents’ side, 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 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 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.
It is, therefore, held that collection of an unadjustable advance income tax from a person not liable to pay income tax or file income tax return, is without lawful authority and unconstitutional. Nevertheless, observing restraint again, 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 Chairman, FBR, 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 an advice for suitable amendment in the Ordinance of 2001.
Needful be done within 90-days from the date of judgment. Compliance report shall be submitted before the Deputy Registrar (Judl.) of this Court.
Till decision, as directed, interim relief already granted, in this and connected petitions, shall continue.
W.P.No.228757 of 2018
Rao Tariq Islam, etc. Versus. Federation of Pakistan, etc.
Date of hearing 11.11.2022
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