Federal Constitutional Court issues written order on super tax cases, sets aside high court rulings

The Federal Constitutional Court (FCC) has issued its written order in a batch of super tax cases, upholding the constitutional validity of sections 4B and 4C of the Income Tax Ordinance, 2001, and setting aside judgments of the Sindh, Lahore and Islamabad High Courts that had declared parts of the levy discriminatory or inapplicable.

In a detailed written order issued on Wednesday, a three-judge bench set aside earlier judgments of the Sindh, Lahore and Islamabad High Courts to the extent they had declared the First Proviso to Division IIB and section 4C to be discriminatory or inapplicable to certain tax years. The order was authored following hearings in a batch of super tax cases.

The court held that the classification introduced through section 4C, including the 10% rate applicable to specified sectors for tax year 2022, is based on an intelligible differentia and has a rational nexus with the objective of raising revenue from higher-income segments. It ruled that both sections 4B and 4C fall within Parliament’s legislative competence under Entry 47 of the Fourth Schedule, which covers taxes on income.

The bench declared that section 4B applies as enacted from tax year 2015 onwards at rates prescribed in Division IIA of the First Schedule, and that the provision does not create any unreasonable or hostile discrimination. Any hardship arising from its application, the court said, is a matter for the legislature and does not warrant judicial intervention.

On section 4C, the court held that it applies as enacted for tax year 2022 and onwards, rejecting the view that the closing of accounts for a tax year bars the imposition of a new charge. It ruled that returns for tax year 2022 had not yet been filed when the levy was introduced, and therefore retrospective application was permissible. The court also upheld the application of amended rates introduced through the Finance Act 2023 for tax year 2023.

The court rejected objections raised by taxpayers regarding the maintainability of appeals, holding that the Federation of Pakistan could be transposed as an appellant where required. It also ruled that directions issued by the Islamabad High Court to the Federal Board of Revenue to issue implementation circulars were beyond the high court’s jurisdiction and were set aside.

The judgment clarified that super tax is a standalone tax on income, independent of the general income tax charged under section 4 of the Ordinance, and that it applies to capital gains falling within the scope of section 4C.

For exploration and production companies, the court held that sections 4B and 4C would apply only to the extent that the aggregate tax does not exceed thresholds prescribed under the Fifth Schedule and their respective petroleum concession agreements. It directed commissioners inland revenue to reassess liabilities on a case-by-case basis and issue fresh notices after providing an opportunity of hearing.

The court further ruled that section 4C does not apply where it would override sector-specific safeguards, including those applicable to E&P companies and exempt benevolent and provident funds. It held that funds enjoying valid exemptions under the Second and Ninth Schedules are not liable to super tax in the absence of express legislative intent to withdraw those exemptions.

In the case of banking companies, the court held that section 4C applies from tax year 2023 onwards at rates amended under the Finance Act 2023.

With these findings, the court upheld the constitutional validity of the super tax framework while clarifying its scope, sectoral limits and method of application.