The power to tax

Tax is a compulsory exaction of money from people by the state in exercise of its sovereign power. Owing to the constitutional evolution in England, the taxation power shifted from the king to parliament.

A tax can be levied only by the legislature. This is also provided in Article 77 of Pakistan’s constitution. The constitutional principle is that the executive makes a demand of money usually through an annual budget proposal and money is supplied by parliament by levying taxes. Parliament also needs to pass law for appropriation to allow the supply of money to the executive.

Another related principle is that as tax is a common burden, it is levied by the commons – that is: by a House that represents popular will and not by a House that is hereditary or indirectly elected. For taxation and appropriation, usually a special legislative procedure is provided than an ordinary law.

This too has its origin in English constitutional history. It is called the money bill. Every money bill is introduced in and passed by the House of the people. The other chamber can make suggestions but cannot vote on it. The speaker of the House issues a certificate which it is a Money Bill. The certificate of the speaker is non-justiciable in all other jurisdictions except India and Pakistan.

The taxing power in a federal state is shared between parliament and the provincial/state assemblies. To make things simple, legislative powers, including taxing fields, are elaborately provided in the legislative lists given in the constitution or appended therewith. This division of legislative fields is a very tedious job. Experience shows that there is no scientific formula for it. It largely depends on the constitutional arrangements agreed upon by the constituent assembly or convention representing different interests.

As the legislative fields are amorphous and ever growing, therefore, new situations are met by the amendment procedure or interpretation by the courts. These legislative lists can be as numerous as three, like India, Union List, State List and a Concurrent List or like America, which has clearly defined legislative powers of the Congress in Article I section 8 and all other powers not enumerated therein are vested in the states under the X Amendment. The Australian constitution has also followed the American pattern and under sections 51 to 55 thereof, legislative powers of the federal parliament are given.

Canada is the second oldest federation in the common law countries founded by the British North America Act, 1867. It has two legislative lists. One for the Union Government under section 91 and the other is a provincial list under section 92.

In addition to the elaborate legislative lists, constitutions sometimes grant residuary powers (powers not mentioned in any list either to the union/federal or provincial governments). In India, residuary powers are vested in the Union. In Australia, residuary powers are vested in the provinces. Canada has granted residuary powers to provinces. But taxation power is specifically granted to either of the legislatures and it cannot be implied. The doctrine of ultra vires in that context means that taxation power regarding a subject is not vested in Parliament. For that, it is also necessary to show that this power vests in the other legislature.

Pakistan was destined to be a federation. It had five provinces and many acceding states in 1947. Constitution-making was highly difficult. Despite huge difficulties, the Constituent Assembly succeeded in framing a constitution by October 1954. However, before this constitution was given unto people, the assembly was dismissed. The first constitution saw the light of day on March 23, 1956. It was drafted on the Indian model. It had three clearly devised legislative lists. Both constitutions were mainly based on the Government of India Act, 1935. It clearly laid down taxing powers in the federal list as well as in the provincial list.

The constitution of 1962 was unique in many ways. It was not given a constituent body. After the abrogation of the constitution of 1956 on October 8, 1958, a constitution commission was set up in 1960 under the auspices former CJ Shahabuddin; it had many prominent members including the late Sharifuddin Pirzada. It submitted its report in 1961.

The Constitution of 1962 had a single legislative list contained in schedule III thereof under Article 131. Over and above the legislative list, under Article 131(2) special powers were vested in the central legislature to legislate upon matters of national importance. The taxation power of the federation was clearly provided under that List. All residuary powers were vested in the provinces. This constitution was abrogated on March 25, 1969.

After framing an interim constitution in 1972, the constituent assembly gave this nation its new constitution of 1973 on April 12, 1973. Under this constitution, the taxation power of the federation has been given in the Fourth Schedule made pursuant to Article 142(1). In addition thereto, the power to levy and collect Excise Duty on petroleum and natural gas is provided in Article 154. Originally, there were two legislative lists in the Fourth Schedule, the federal and concurrent lists – but after 37 years, the concurrent list was abolished. There were no taxing powers in the concurrent list.

The constitution of Pakistan envisages unitary taxing power. All taxation power has been given to parliament. The tax collected is then divided amongst the provinces and the federal government in accordance with the provisions of Article 160, which envisages a National Finance Commission entrusted with the duty to give an Award for the division of taxes according to the Award.

The taxation power of the federation has two basic foundations. The tax power in respect of all matters in the Federal Legislative List is vested in parliament whether the taxing events have been enumerated therein or not. Provinces have no taxation power in respect of those matters unless expressly given by the constitution.

Sales tax on services fell within the exclusive domain of parliament prior to year 2000. General Musharraf gave this power to the provinces. Similarly, under entry 50, tax on the capital value of immovable property was given to the provinces. It is essentially a tax on the gains of the property keeping in view the legislative history. Thus courts, while examining the vires of any taxing statute or interpreting legislative entries, must keep in mind that taxing power is either vested in Parliament or expressly given to the provinces as mentioned above.

The taxation scheme and interpretation of the Indian constitution does not apply to the 1973 constitution. Moreover, if a matter is given in the Federal Legislative List, then all legislation including tax is vested in parliament. To hold that a matter is assigned to parliament but its taxing power or taxing event is qualified can only mean that taxation power in that matter is given to the provincial legislature. This would amount to amending the constitution whereby a taxing power shall stand transferred to provinces by an interpretation.

The view that taxing power has to be expressly given in the Legislative List as held by the Indian Supreme Court is to be seen in the context of the division of taxing powers under the Indian constitution where those powers are shared.

In the UK no specific list is there. Parliament can tax any subject. The word ‘matter’ used in Article 142 (1) of the constitution refers to both taxing and general entries. Under entry 58 of the Fourth Schedule, parliament can legislate upon matters assigned to Parliament by the Constitution or relate Federation. Legislative entries are to be interpreted liberally but in taxing entries an additional aspect figures in. If a subject is assigned to a particular legislature then the taxation power in respect thereof cannot be given to another legislature.

The writer is an advocate of the Supreme Court and former

additional attorney generalfor Pakistan.

Email: mwaqarrana@yahoo.com