Const. Petition No.D-2342 of 2013
Present
Mr. Justice Aqeel Ahmed Abbasi.
Mr. Justice Muhammad Junaid Ghaffar.
Imran Ahmed……….………………………………………………Petitioner
Versus
Federation of Pakistan & another…………………...…….Respondents
Date of hearing 10.10.2013
Date of judgment 25.10.2013
M/s Naveed A. Andrabi, Anwar Kashif Mumtaz, Ammar Athar Saeed and M. Usman Alam, advocates for the petitioner.
Mr. Amjad Javaid Hashmi, advocate for Respondent/Department.
Shaikh Liaquat Hussain, Standing Counsel.
-----------------
Aqeel Ahmed Abbasi, J : Through instant petition, the petitioner who is a salaried individual has challenged the vires and legality of the table inserted through Finance Act, 2012 in Clause (1A) of Division-1 of Part-1 of the First Schedule to the Income Tax Ordinance, 2001 with the following prayer:
(1) The Table inserted through Finance Act, 2012 in Clause 1A of Division-1 of Part-1 of the First Schedule to the Ordinance be declared to be arbitrary, illegal and ultra vires of the Constitution.
(b) That pending adjudication, the Respondent # 4 be directed not to withhold tax on the arbitrary rates as prescribed in the Table as inserted through Finance Act, 2012 in Clause 1A of Division-1 of Part-1 of the First Schedule to the Ordinance.
(c) The cost of this Petition may graciously be awarded to the petitioner.
(d) Any other relief, which this Honourable Court deems fit may also be granted to the Petitioner.
2. Brief facts as stated in the petition are that the petitioner is a salaried individual and an existing assesse of the Income Tax, who pays his taxes regularly on the income earned from salary, whereas for the tax year 2013 the petitioner has drawn a taxable salary to more than Rs.2.7 (Million). Respondent No.4, who is the employer of the petitioner is required to withhold tax from the payment of salary made to the petitioner under Section 149 read with Clause (1A) of Division-1 of Part-1 of the First Schedule to the Income Tax Ordinance, 2001, which in the case of the petitioner was regularly withhold with effect from beginning of tax year 2013 as prescribed under the Ordinance. However, by virtue of Finance Act, 2012, the applicable rates of withholding tax on salary were changed and a new table with gradually increased rates was inserted, which has given the cause of grievance to the petitioner, who has filed instant petition with the prayer as referred to hereinabove.
3. Learned counsel for the petitioner has submitted that the table inserted through Finance Act, 2012 in Clause (1A) of the Division-1 of Part-1 of the First Schedule to the Income Tax Ordinance, 2001 is arbitrary, illegal and ultra vires of the Constitution as the rates prescribed therein have no rationale or reasonable basis when compared with the other rates prescribed in the First Schedule. It has been further contended by the learned counsel that the rates which were prescribed and proposed through Finance Bill 2012 and those which have been enacted through Finance Act, 2012 do not co-relate to each other, hence illegal and without lawful authority. Per learned counsel, the arbitrary change in the rates and exorbitant increase as prescribed in the table are perverse, unreasonable, unjust, oppressive and discriminatory and has no legal basis. It has been contended that rates so prescribed are liable to be rationalized keeping in view the set pattern and the mathematical basis which is provided in the table itself for different slabs of income, therefore, per learned counsel, in the absence of any rational basis or intelligible differentia the arbitrary increase in the tax rates mentioned at S.No. 4, 5 and 6 of the table, has no legal sanctity, hence liable to be set aside and alternatively liable to be rectified in terms of the pattern and mathematical basis which was applicable for the previous tax years upto tax year 2012.
4. Learned counsel for the petitioner has further submitted that without prejudice to hereinabove challenge to the vires of the subject tax rates on the legal grounds, the petitioner would dispute the rates of income tax as prescribed in the table at S.No.4,5 and 6 of the table under Clause (1A) of Divison-1 of Part-1 of the First Schedule to the Ordinance, 2001, for having been mentioned either due to inadvertence of the draftsman or on account of the miscalculation, which according to learned counsel for the petitioner, has resulted in the anomaly, as referred to hereinabove, whereby, the tax liability of the salaried individuals including the petitioner has increased tremendously without any rational basis. Learned counsel further submits that this anomaly in the tax rates of the salaried individuals for the tax year 2013 was not available in the tax rates for the previous years nor the same exists in the tax rates for the subsequent tax year 2014, whereas, the worthy Finance Minister, while referring to tax rates of salaried individuals for tax year 2014 in his budget speech has referred to such anomaly and stated that the error which crept in the table for the tax year 2013 has duly been removed in the table for tax year 2014. Per learned counsel, inspite of having noted such anomaly, no corrective measures in the table for tax year 2013 have been taken by the Federal Government to save the salaried individuals from paying exorbitant and arbitrary increased amount of income tax for the tax year 2013. Such treatment, according to learned counsel, to the petitioner and other salaried individuals is discriminatory and violative of the express provisions of Article 4, 10-A, 24 and 25 of the Constitution of Islamic Republic of Pakistan, 1973.
5. While concluding his arguments, learned counsel for the petitioner has referred to Annexure “C” at page 17 of the instant petition, wherein the petitioner has given the three tables of the salaried individuals as per Finance Bill 2012, Finance Act, 2012 and as per calculation made by the taxpayer, which according to learned counsel for the petitioner, contains the correct and lawful rates and calculation of the income tax required to be paid by a salaried individual for the tax year 2013, after reducing the amount of tax arbitrarily increased due to inadvertence and on account of miscalculation by the draftsman. While explaining the tax calculation in the table of salaried individuals at S.No.4, 5 and 6, learned counsel for the petitioner has submitted that the minimum rate of tax in Column No.3 at S.No. 4 of the table on income of Rs.15,00,000/- works out as Rs.92,500/- (i.e. Rs.17,500+10% of the amount exceeding Rs.750,000/-), hence the same was required to be reflected in column 3 at S.No.4 of the table instead of Rs.95,000/-. Similarly, per learned counsel, at S.No.5 in column 3 of the table an amount of Rs.167,500/- instead of Rs.175,000/-, whereas at S.No.6 in column 3 of the table an amount of Rs.255,000/- instead of Rs.420,000/- was required to be reflected. It has been prayed by the learned counsel for the petitioner that arbitrary and exorbitant increased rates as reflected in S.No.4, 5 and 6 of the table under Clause (1A) of Division-1, Part-1 of the First Schedule to the Income Tax Ordinance, 2001 may be declared to be ultra vires, illegal and of no legal effect, whereas the table as shown by the petitioner in Annexure “C” at page 17 of the instant petition containing the correct rates of tax by reducing the arbitrary increased therein may be declared as the valid table under Clause (1A) of Division – 1 Part – 1 of the First Schedule to the Income Tax Ordinance 2001, containing the correct amount of tax and the tax rates of salaried individuals for the tax year 2013.
6. Conversely, Mr. Amjad Javaid Hashmi, learned counsel for the respondent No.5 i.e. Income Tax Department has controverted the submissions made by the learned counsel for the petitioner and has opposed the maintainability of the instant petition, which according to learned counsel is not maintainable in law and facts. It has been contended by the learned counsel that chargeability of income and fixation of tax rates is the prerogative of the legislature as provided under the Constitution of Islamic Republic of Pakistan, 1973. Per learned counsel, charge of income tax has been provided in terms of Section 4 of the Income Tax Ordinance, 2001, whereas rates of income tax have been specified in Division-1, Part-1 of the First Schedule, whereas, for salaried individuals the said rates are specified in Clause (1A) of Division-1 of Part-1 of the First Schedule, which are relevant for the purposes of instant petition. Per learned counsel, fixation of different tax rates for different class of persons is the domain of the legislature, whereas such rates can be fixed, increased and modified for each tax year, as according to learned counsel, every tax year is an independent year, hence the legislature is competent to prescribe different tax rates for each tax year through Finance Act. It has been further contended by the learned counsel that in the table under Clause (1A) of Division-1, Part-1 of the First Schedule to the Income Tax Ordinance, 2001 for the tax year 2013 relating to salaried individuals there is a rationale and wisdom of the legislature, whereby, different tax rates for various slabs of income have been prescribed, therefore, it cannot be said, as alleged by the petitioner, that there is no rational basis for prescribing such rates of tax in the impugned table. Per learned counsel, the tax rates as prescribed by the legislature in the table under dispute for the tax year 2013 do not contain any error or anomaly and the same have been prescribed by conscious application of mind. In support of his contention, learned counsel for the respondent has referred to an extract from a Chapter in Bindra’s Interpretation of Statutes 2012 Edition at page 1282 and submitted that public policy, political wisdom and hardship in tax matters cannot be regarded as valid grounds, particularly, when the legislative competence is not under dispute. Per learned counsel, since the legislative competence to charge income tax and to fix tax rates thereon has not been disputed by the petitioner in the instant case, and fixation of tax rates for the salaried individuals for tax year 2013 has been disputed on the ground of hardship alone, therefore, instant Constitution Petition filed by the petitioner is misconceived, hence liable to be dismissed.
7. Learned Standing Counsel representing the respondents Nos.1 to 3 has adopted the arguments advanced by the learned counsel for respondent No.5 and submits that instant petition is misconceived, which may be dismissed in limine.
8. We have heard both the learned counsel as well as learned Standing Counsel and perused the record. The precise controversy raised by the petitioner in the instant petition relates to the dispute regarding validity of the table containing tax rates for salaried individuals inserted through Finance Act, 2012 in Clause (1A) of Division-I of Part-I of the First Schedule to the Income Tax Ordinance, 2001. The petitioner has challenged the vires of aforesaid table containing tax rates for salaried individuals for the tax year 2013 as prescribed at S.No.4, 5 and 6 of the impugned table on the grounds being arbitrary, perverse, unjust, unreasonable, oppressive, discriminatory and confiscatory in nature. The ground of absence of any rational basis and intelligible differentia in tax rates as mentioned at S.No.4, 5 and 6 of the table has also been raised. Alternatively, the petitioner has disputed the tax calculation with particular reference to S.No.4, 5 and 6 of the table under Clause (1A) of Division-1 of Part-1 of the First Schedule to the Income Tax Ordinance, 2001 for having been mentioned either due to inadvertence of the draftsman or on account of miscalculation of the amount of tax liable to be paid by the salaried individuals whose income is falling under slabs of income as mentioned at S.No.4, 5 and 6 of the table slab as referred to hereinabove. In nut-shell the income tax calculated in the case of petitioner and other salaried individuals, whose income for the tax year 2013 falls within the slabs at S.No.4, 5 and 6 of the table inserted through Finance Act, 2012 has been disputed on the grounds as referred to hereinabove.
9. Since an objection with regard to validity of the tax rates for the tax year 2013 as mentioned at S.No.4, 5 and 6 of the table under Clause (1A) of Division-1 of Part-1 of the First Schedule to the Income Tax Ordinance, 2001 inserted through Finance Act, 2012 has been raised by the petitioner, it will be advantageous to reproduce hereunder the table (s) containing rates of tax for salaried individuals as proposed through Finance Bill 2012 and as enacted through Finance Act, 2012, as well as the table, which according to the learned counsel for the petitioner reflects the correct amount of tax payable on the basis of proper calculation by reducing the amount of arbitrary increase in tax.
Table of Salaried Individuals
As per Finance Bill 2012
TABLE “A”
|
S.No. |
Taxable Income |
Rate of Tax |
|
1. |
Where the taxable income does not exceed Rs.400,000/- |
0 % |
|
2. |
Where the taxable income exceeds RS.400,000 but does not exceed Rs.750,000/- |
5% of the amount exceeding Rs.400,000 |
|
3. |
Where the taxable income exceeds Rs.750,000 but does not exceed Rs.1,500,000/- |
Rs.17,500+10% of the amount exceeding Rs.750,000/- |
|
4. |
Where the taxable income exceeds Rs.1,500,000 but does not exceed Rs.2,500,000/- |
Rs.92,500+15% of the amount exceeding 1,500,000/- |
|
5. |
Where the taxable income exceeds Rs.2,500,000 |
Rs.242,500+20% of the amount exceeding 2,500,000/- |
Table of Salaried Individuals
As per Finance Act, 2012
TABLE “B”
|
S.No. |
Taxable Income |
Rate of Tax |
|
1. |
Where the taxable income does not exceed Rs.400,000/- |
0 % |
|
2. |
Where the taxable income exceeds Rs.400,000 but does not exceed Rs.750,000/- |
5 % of the amount exceeding Rs.400,000/- |
|
3. |
Where the taxable income exceeds Rs.750,000 but does not exceed Rs.1,500,000/- |
Rs.17,500+10% of the amount exceeding Rs.750,000/- |
|
4. |
Where the taxable income exceeds Rs.1,500,000 but does not exceed Rs.2,000,000/- |
Rs.95,000+15% of the amount exceeding 1,500,000/- |
|
5. |
Where the taxable income exceeds Rs.2,000,000 but does not exceed Rs.2,500,000/- |
Rs.175,000+17.5% of the amount exceeding 2,000,000/- |
|
6. |
Where the taxable income exceeds Rs.2,500,000 and above |
Rs.420,000+20% of the amount exceeding 2,500,000/- |
Table under Clause (1A) as proposed by petitioner
TABLE “C”
|
S.No. |
Taxable Income |
Rate of Tax |
|
1. |
Where the taxable income does not exceed Rs.400,000 |
0 % |
|
2. |
Where the taxable income exceeds Rs.400,000 but does not exceed Rs.750,000 |
5 % of the amount exceeding Rs.400,000/- |
|
3. |
Where the taxable income exceeds Rs.750,000 but does not exceed Rs.1,500,000/- |
Rs.17,500+10% of the amount exceeding Rs.750,000/- |
|
4. |
Where the taxable income exceeds Rs.1,500,000 but does not exceed Rs.2,000,000/- |
Rs.92,500+15% of the amount exceeding 1,500,000/- |
|
5. |
Where the taxable income exceeds Rs.2,000,000 but does not exceed Rs.2,500,000/- |
Rs.167,500+17.5% of the amount exceeding 2,000,000/- |
|
6. |
Where the taxable income exceeds Rs.2,500,000 and above |
Rs.255,000+20% of the amount exceeding 2,500,000/- |
10. From perusal of hereinabove table A and B containing the rates of income tax for salaried individuals for tax year 2013, either proposed through Finance Bill 2012 or as enacted by Finance Act, 2012, it is pertinent to note that it contain a set pattern whereby the taxable income of salaried individuals has been divided into different slabs, whereas, gradually increased rates of tax have been prescribed thereon for each slab of such taxable income. It is further noted that there is continuity in each slab of taxable income with corresponding gradual increase in the tax rates and the amount of tax calculated thereon. As per Table ‘A’ hereinabove, there were initially five different slabs of taxable income with corresponding tax rates, which were proposed through Finance Bill 2012. All the five slabs of taxable income and rate of tax as mentioned in table ‘A’ relating to salaried individuals as per Finance Bill 2012 have a continued link and reflect proper arithmetic calculation of tax in terms of tax rates as prescribed therein and do not contain any amount of tax which does not co-relate either with the slab of taxable income or the rate of tax which is to be applied for each slab.
11. However, from perusal of the table ‘B’, hereinabove containing the rates of salaried individuals for tax year 2013, which has been inserted through Finance Act, 2012, it may be seen that the taxable income of the salaried individuals has been divided into six different slabs, instead of five, as proposed in the Finance Bill 2012. First three slabs of taxable income and the corresponding rates and the amount of tax calculated thereon have remained intact. Whereas, change has been introduced in the slab of taxable income at S.No.4 by creating a slab of taxable income of Rs.15,00,000/- upto Rs.20,00,000/- instead of Rs.15,00,000/- upto Rs.25,00,000/-, however, the tax rate of 15% to be applied on the amount of taxable income exceeding Rs.15,00,000/- has remained the same. Similarly, a change has also been introduced in the slab of taxable income at S.No.5, by creating a slab of taxable income of Rs.20,00,000/- upto Rs.25,00,000/- instead of taxable income which exceeds Rs.25,00,000/-,whereas the tax rate of 20% which was required to be applied on the amount of taxable income exceeding Rs.25,00,000/- has been reduced to 17.5% of the amount exceeding Rs.20,00,000/-. Having brought aforesaid changes in the slabs of taxable income and the corresponding tax rates at S.No.4 and 5 of table ‘B’, another slab at S.No.6 has been added which refers to the taxable income exceeding Rs.25,00,000/- and above, whereas corresponding rate of tax to be applied on the amount exceeding Rs.25,00,000/- has been prescribed at the rate of 20%. It is pertinent to mention that through instant petition the petitioner has neither challenged the validity of creation of different slabs of taxable income nor disputed the fixation of corresponding tax rates thereon, however, the grievance has been expressed with regard to the amount of tax so calculated and mentioned against the column of lower taxable income of each slab as mentioned at S.No.4, 5 and 6 of the table. According to the petitioner the amount of Rs.95,000/- instead of Rs.92,500/-, at S.No.4 amount of Rs.1,75000/- at S.No.5 instead of Rs.167,500/- and amount of Rs.4,20,000/- at S.No.6, instead of Rs.2,55,000/- respectively has no legal or arithmetical basis which requires to be set-aside and replaced by the correct calculation of tax as referred to hereinabove.
12. There is no cavil to the proposition that legislature has vast powers to levy and impose tax on the income of a person pursuant to Entry No.47 of the Federal Legislative List of the Fourth Schedule to the Constitution of Islamic Republic of Pakistan, 1973 and to prescribe the tax rates thereon by introducing the Bill in terms of Article 73 of the Constitution of Islamic Republic of Pakistan, 1973. However, such legislation has to undergo the test of constitutional constraints. Similarly, the legislative competence of imposing taxes is also subject to the scrutiny by this Court under Article 199 as well as by the Hon’ble Supreme Court under Article 185 of the Constitution of Islamic Republic of Pakistan, 1973, particularly, if a levy or enactment has been challenged for being discriminatory, confiscatory or violative of the fundamental rights as guaranteed under the constitution.
13. The concept of absolute authority to impose tax by rulers on their subjects, without having any representation of the people in such legislation, is no more available under the Modern Democratic System of Governments, which are run by the elective representative of the people under their respective Constitutions. The unbridled powers and authority to impose tax arbitrarily, without having any rationale or reasonableness, is now being regulated under the Constitutional restraints, whereby, taxes are to be imposed reasonably, without discrimination and in such a manner that those may not encroach upon the fundamental rights of a person as guaranteed under the Constitution. The art of taxation is regarded as the art of plucking a goose so as to gather the largest amount of feather by causing least squealling. Adam Smith, who is regarded as Father of Modern Economic System, in 18th Century in his book ‘The Wealth of Nations” (1776), has defined following four cannons of taxation i.e. (i) equality, (ii) certainty, (iii) convenience of payment and (iv) economy in collection. While explaining the first two cannons of taxation as referred to hereinabove i.e. equality and certainty, the Author has propounded that the “subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion of their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state”. In other words, the incidence of tax must fall equally on all subjects with particular reference to their class without any discrimination amongst them. Similarly, it has been further propounded that “the tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. The uncertainty of taxation encourages the insolence and favours the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality, it appears, is not so great an evil as a very small degree of uncertainty”.
14. Reverting back to the controversy involved in the instant petition whereby, in substance, the validity of the amount of tax calculated for the salaried individuals for tax year 2013, under slab of taxable income at S.No.4, 5 and 6 of table “B” has been challenged, we would examine arithmetical impact of various slabs of taxable income with reference to tax rates and the quantification of the amount of tax thereon.
15. The first slab at S.No.1 of the table “B” reflects that if the taxable income of a salaried individual is upto Rs.4,00,000/- then no tax is payable thereon. The second slab at S.No.2 of the table “B” reflects that if the taxable income of a salaried individual is between Rs.4,00,000/- and Rs.750,000/-, the tax rate of 5% of the amount exceeding Rs.4,00,000/- shall be applied meaning thereby that on the upper income of second slab i.e. Rs.750,000/- an amount of Rs.4,00,000/- will be reduced and 5% tax rate will be applied on the remaining amount of Rs.350,000/- which is worked out to be Rs.17,500/-. The third slab at S.No.3 of the table “B” reflects that if the income of a salaried individual is between Rs.750,000/- and Rs.15,00,000/- the tax calculated thereon will include the amount of Rs.17,500/- i.e. tax on income of Rs.750,000/- plus 10% of the amount exceeding Rs.750,000/- meaning thereby that if the income of a salaried individual is Rs.15,00,000/- the total tax payable will be Rs.17,500/- plus 10% of Rs.750,000/- i.e. Rs.75,000/- equal to Rs.92,500/-. The petitioner has no grievance upto slab of taxable income and the tax thereon upto S.No.3 of table “B”. The fourth slab at S.No.4 of the table “B” reflects that if the taxable income of a salaried individual is between Rs.15,00,000/- and Rs.20,00,000/- the total tax payable will be Rs.95,000/- (instead of Rs.92,500/- i.e. tax on Rs.15,00,000/-) plus 15% of the amount exceeding Rs.15,00,000/- i.e. 15% of Rs.5,00,000/- =75,000/-, totaling to Rs.1,70,000/- (instead of Rs.1,67,500/-). The fifth slab at S.No.5 of the table “B” reflects that if the income of a salaried individual is between Rs.20,00,000/- and Rs.2,500,000/- the taxable income will be Rs.175,000/- (instead of Rs.1,67,500/-) plus 17.5% of the amount exceeding Rs.20,00,000/- i.e. 17.5% of Rs.5,00,000/- = 87,500/- totaling to Rs.2,62,500/- (instead of Rs.2,55,000/-). The sixth slab at S.No.6 reflects that if taxable income of a salaried individual is Rs.2,500,000/- and above the tax payable will be Rs.420,000/- (instead of Rs.2,55,000/- i.e. tax on taxable income of Rs.2,000,000/-) plus 20% of the amount exceeding Rs.2,000,000/-The above calculation of tax at S.No.4, 5 and 6 of table “B” clearly shows that it has no rational basis and contains incorrect arithmetic calculation.
16. We are of the view that the anomaly in the calculation and quantification of tax at S.No.4, 5 and 6 of the Table-B as referred to hereinabove, has crept in due to inadvertence and on account of incorrect arithmetic calculation as there is no rational basis or reasonableness whatsoever in such determination of the tax liability. We are of the opinion that the amount of tax as calculated under slabs of taxable income at S.No.4, 5 and 6 of table “B” is without any conscious application of mind. It also lacks certainty of charge and is devoid of any rationale basis and has resulted in creation of additional burden of tax upon a particular group of salaried individuals without legal sanction. It is pertinent to note that this anomaly in tax calculation for salaried individuals neither existed for the earlier tax years, whereas, by Finance Act, 2013, it has been rectified for the tax year 2014 in similar set pattern of tax calculation on the basis continued gradual increase of tax rate as discussed hereinabove.
17. Accordingly, we hold that the table inserted by Finance Act, 2012 for the tax year 2013 in respect of rates of tax for salaried individuals with particular reference to amount of tax calculated under slabs of income at S.No.4, 5 and 6 of table “B” as referred to hereinabove, is ultra vires of the Constitution, the Income Tax Ordinance, 2001 and also inconsistent with the slabs of taxable income of the table “B” itself, hence of no legal effect.
18. In view of hereinabove, instant petition is allowed. The table inserted through Finance Act, 2012 in Clause (1A) of Division-1 of Part-1 of the First Schedule to the Income Tax Ordinance, 2001 is declared to be illegal, arbitrary and of no legal value, whereas the Table-C as referred in para-9 at page 10 hereinabove is the correct and valid table under Clause (1A) of Division – 1 of Part 1 of the First Schedule to the Income Tax Ordinance, 2001, as it contains the correct arithmetic calculation of tax of the salaried individuals falling under different slabs of income as detailed therein. The respondents are directed to make necessary correction in the table by removing the anomaly and to notify the tax rates of salaried individuals for the tax year 2013 in conformity with the judgment of this Court at the earliest.
19. Before parting with this judgment we would also direct the respondents to issue refund of tax to all the salaried individuals whose tax has been withheld and deposited in treasury pursuant to incorrect amount of tax as prescribed under Table-B as referred to hereinabove in para-9, which was introduced by Finance Act, 2012, within a period of one month from the date of filing such return.
Petition stands allowed in the above terms alongwith listed applications.
J U D G E
J U D G E