LAHORE: The Lahore High Court has ruled that the collection of an ‘unadjustable, advance’ income tax from a person not liable to pay income tax or file income tax returns is unconstitutional.

However, Justice Shahid Jamil Khan while exercising judicial restraint referred the matter to the attorney general of Pakistan and the Federal Board of Revenue (FBR) for suitable amendments in the law within 90 days.

The judge passed the ruling allowing dozens of petitions assailing the amendment in Section 236D of the Income Tax Ordinance, 2001 brought through the Finance Act, 2018, whereby minimum slab for collection of the advance tax was fixed at Rs20,000, 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 income tax returns.

One of the petitioners was a widow, drawing a pension of Rs5,000. While her income was not taxable as she was not liable to file returns under the law, she was being subjected to tax on payments made to cellular companies against mobile phone services.

In his judgement, Justice Khan observed that the absence of a person in active taxpayer list and a person not required to file income tax returns could not be treated in same manner.

The judge questioned how a person, having marriage hall business at a lower level, would verify whether a person booking or managing a function was on the active taxpayer’s list or wait for 30 days for the commissioner’s response before finalising bills.

The judge noted that for FBR, withholding tax was 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. However, he expressed concern over the increasing trend of indiscriminate withholding, ignoring whether a person being burdened with the tax was liable to pay income tax, which should necessarily be proportionate to earning capacity.

Justice Khan noted that a person, below the taxable slab or not earning, was already paying indirect taxes even on essential items at the same rate as was being paid by wealthy people. He maintained that the income tax was meant to be charged on income proportionality but could not 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,” he said, explaining that it was a globally settled principle of taxation law that a tax could not be expropriatory or confiscatory.

He said the act of the parliament, levying a tax, should not offend fundamental rights. Income tax was meant to be charged from citizens who were earning income whereas those not earning deserved to be compensated by the state, the judge explained.

He says the government’s representation showed it was adamant to charge advance tax, ignoring its expropriatory and confiscatory character from the persons not liable to pay tax. However, the judge exercised judicial restraint from declaring the impugned law as ultra vires for avoiding an impediment against the state’s tax collection system and referred the matter to the AG and FBR for suitable amendments within 90 days.

Published in Dawn, November 16th, 2022