ISLAMABAD: The Federal Constitutional Court (FCC) of Pakistan has upheld the constitutionality of the Super Tax regime, imposed under Section 4B and 4C of the Income Tax Ordinance 2001, vindicating the stance of Federal Board of Revenue (FBR).
However, the court exempted capital gains on disposal of immoveable property or securities either, for being held beyond a certain period.
The Federal Constitutional Court of Pakistan, in a judgment in M/s DG Khan Cement Company Limited & Others v. Federation of Pakistan and connected appeals, upheld the constitutionality of the super tax regime. This judgment vindicates the position pursued by the Federation of Pakistan and the FBR.
The FCC, in its judgment, stated that it is, however, clarified and held that super tax is an additional tax on income drawing its legislative sanction from entry 47 Part 1 of Federal Legislative List of Constitution. The necessary corollary to the above is that if a certain class of income is exempt from tax under the law regulating it i.e. the ordinance. For instance, where no tax is payable on capital gains arising on disposal of immoveable property or securities either for being held beyond a certain period or is inherited or is otherwise exempted from the ordinance, no super tax shall be payable on such capital gains on disposal of immoveable property or securities. Likewise, the same principle shall apply to any capital gains on disposal of agriculture property which even otherwise cannot be subjected on income arising therefrom either by usage or by disposal.
Top official sources in the FBR said that the tax machinery so far collected Rs290 billion on account of Super Tax in the first nine months in the current fiscal year and it might go up to Rs315 billion till end of June 2026.
In the extensive and detailed almost 300-page judgment, the court critically examined a number of complex taxation issues.
The court held that the super tax levied under Section 4B (introduced by the Finance Act, 2015 for the rehabilitation of temporarily displaced persons from tax years 2015-2022)) and Section 4C (introduced by the Finance Act, 2022 imposed on ‘High Earning Persons’ from tax year 2022 and onwards) is a valid exercise of parliament’s taxing power under Entry 47 of the Federal Legislative List of the Constitution of Pakistan, being a tax on income. In the case of section 4B, the court rejected the argument that the levy was a fee and not a tax, holding that the mere mention of a purpose did not automatically render the tax a fee in the absence of any direct service linkage to any beneficiary. The court placed Section 4B squarely within the domain of taxation, validly passed through the Finance Act, thereby upholding all the high courts’ judgments to this effect.
In respect of Section 4C Super Tax, the court further held that the provision is a self-contained provision with its own charge, assessment and payment mechanism, there is no constitutional bar on so-called “double taxation”, that retrospective taxation is permissible in fiscal legislation unless expressly prohibited, that “income” can be defined to mean different amounts, and that the higher rate on 15 identified sectors under the first proviso to Division IIB of the First Schedule to Section 4C is sustainable on the basis of permissible classification based on the super-normal profits of such businesses in the tax year 2022. High court findings to the contrary were set aside.
Significantly, the court reaffirmed the doctrine of judicial restraint in fiscal matters, holding that the wisdom and policy of taxation lie with the legislature, and that judicial review is confined to questions of legislative competence, constitutional compliance and absence of arbitrariness. In another significant finding on the jurisdictional side, the court found the FBR and Commissioner Inland Revenue (if properly authorised) to enjoy the powers of instituting and defending proceedings relating to tax matters arising from constitutional challenges.
