In May 2018, the Constitution (Twenty-fifth Amendment) Act was enacted merging the erstwhile Federally Administered Tribal Areas (Fata) and Provincially Administered Tribal Areas (Pata) with Khyber Pakhtunkhwa.

Before the merger, the inhabitants of those areas were enjoying immunity from imposition of several taxes as the relevant taxation laws were not extended to them.

One of the major apprehensions of the inhabitants of those areas prior to the merger was related to exemption from taxation and to address those apprehensions the federal government had assured them exemption for five years from payment of different taxes and in this regard some SROs were also issued.

While over a year has passed since the merger of tribal areas into the province, legal disputes have still been arising regarding taxation issues.

Recently, the Peshawar High Court bench at Mingora (Darul Qaza) has allowed five identical petitions filed by several construction firms and individuals in erstwhile Pata challenging the deduction of advance income tax by the provincial government, acting as collecting agent for the Federal Board of Revenue (FBR), from their current bills for the work which they had done within the limit of former Pata.

In this important judgment, a bench of Justice Syed Arshad Ali and Justice Wiqar Ahmad has ruled: “The profit and gain/income of the present petitioners from the construction business which is completely located within the territorial limits of erstwhile Pata is immune from payment of income tax.”

About the major dispute between the petitioners and the government that the former should submit exemption certificates while seeking exemption from payment of taxes, the bench ruled that the petitioners were not required to obtain exemption certificate under section 159 of the Income Tax Ordinance from the commissioner income tax/FBR.

The bench in its detailed judgment ruled that the government had no authority to collect income tax from the petitioners in respect of their work which they were executing within the territorial limits of erstwhile Pata.

The bench decided the petitions on March 3 and had later released the detailed judgment which was authored by Justice Syed Arshad Ali.

The petitioners, including M/S Ikramullah Associates and several others, had claimed that they were carrying out their business either in their individual or through corporate names and all of them were permanent residents of former Pata and derive their income from construction business.

All of them had contended that despite their income was exempted from imposition of income tax the provincial government, acting as collecting agent of FBR, was deducting advance income tax from their bills for the work which they had carried out in Pata.

While the FBR did not dispute their exemptions from payment of income tax, it had asserted that in order to avail of exemption from levy of income tax, all the petitioners were required to approach the commissioner income tax for obtaining exemption certificates under section 159 of the Income Tax Ordinance 2001.

The bench has observed that before the enactment of the Constitution (Twenty-fifth) Amendment Act the income of the persons who were settled/located within the territory of Pata were enjoying immunity from payment of income tax provided they were generating their income from their business located within the territory of erstwhile Pata.

The bench observed that after the said constitutional amendment the legal barrier in form of Article 247 of the Constitution was removed and thus, the provision of Income Tax Ordinance became applicable to all persons/corporate entities located in former Pata and as such their income was subject to imposition of income tax.

The court pointed out that section 53 of the Ordinance empowered the federal government not only to grant exemption to any person or class of persons from the payment of income tax, but can also exempt/partially exempt any person from the application of the said ordinance.

The court pointed out that in order to provide exemption to the individuals/corporate entities in ex-Pata from the payment of income tax, clause 144 and 145 were inserted in the Second Schedule to the Income Tax Ordinance through SRO No 887(1)/ 2018 on Jul 23, 2018 thereby granting them exemption from tax on profit and gain of the person/ association of persons located in erstwhile Pata.

Subsequently, another SRO No 1213(1) /2018 was issued on Oct 5, 2018, and a new clause No. 146 was inserted in the ordinance. The effect of the newly-inserted Clause 146 is that the income of the individuals and companies, etc. domiciled in Pata were held completely immune from the imposition of income tax.

The bench ruled that it was now an admitted position that the income/profit and gain of individuals domiciled in ex-Pata was exempted from imposition of income tax under the ordinance. It was further ruled that provision of section 159 of the ordinance envisaging for exemption certificate would not be applicable to the petitioners.

“Thus, when section 159 itself excludes the amount/income of the present petitioners for obtaining exemption certificate then the demand of the Revenue/FBR that the present petitioners should obtain exemption certificates from the commissioner concerned, is beyond comprehension,” the bench ruled.

The bench has also referred to an earlier judgment of the PHC reported as 2019 PTD 1652, wherein a bench headed by Justice Roohul Amin Khan, had declared as illegal the imposition of different taxes in electricity bills of industrial units in erstwhile Fata.

The said bench had last year accepted around 25 writ petitions filed by scores of steel mills located in former Fata and held them immune from payment of taxes such as Advanced Income Tax, Sales Tax, Extra Tax, F-Tax (Further Tax), additional tax and several other duties in electricity bills issued to them after merger of tribal areas into KP.

Published in Dawn, April 14th, 2020