The passage of Constitution (Twenty-fifth Amendment) Act, 2018 ["25thConstitutional Amendment"] that received the assent of president on May 31, 2018, finally ended the indecipherable status of Pakistan into taxable and non-taxable territories. Before this constitutional amendment, areas mentioned in Article 246 of the Constitution of Islamic Republic of Pakistan [‘the Constitution"] were outside the operation of tax laws, enacted by the parliaments, both federal and provincial.

Prior to the 25^th Constitutional Amendment, there was no chargeability of taxes in the Federally Administered Tribal Areas (Fata) and Provincially Administered Tribal Areas (Pata) due to bar imposed by erstwhile Article 247(3) of the Constitution as tax laws were not specifically extended by president or governors, as the case was, to such areas. Since there was no application of tax laws, no question of exemptions could have arisen. After the application of all tax laws, special exemptions were given by the federal government, which read as under:

"Profits and gains derived by individuals from any source in the districts of Chitral, Dir and Swat (which includes Kalam), the former Tribal Area in Kohistan district, Malakand former Protected Areas the former Tribal Area adjoining Mansehra district, the former State of Amb, Zhob district, Loralai district (excluding Duki Tehsil), Dalbandin Tehsil of Chagai district and Marri and former Bugti Tribal territories of Sibi district, former Tribal Areas adjoining the districts of Peshawar, Kohat, Bannu, Lakki Marwat, Dera Ismail Khan, Tank as well as former Tribal Areas i.e. Bajaur Agency, Orakzai Agency, Mohmand Agency, Khyber Agency, Kurram Agency, North Waziristan Agency and South Waziristan Agency, provided that existing business set ups register themselves with field offices of FBR by 30th September, 2018"--(Clause (144), Part I, Second Schedule to the Income Tax Ordinance, 2001).

"Profits and gains of existing businesses conducted by association of persons and companies from any source in the districts of Chitral, Dir and Swat (which includes Kalam), the former Tribal Area in Kohistan district, Malakand former Protected Areas, the former Tribal Area adjoining Mansehra district, the former State of Amb, Zhob district, Loralai district (excluding Duki Tehsil), Dalbandin Tehsil of Chagai district and Marri and former Bugti Tribal territories of Sibi district, former Tribal Areas adjoining the districts of Peshawar, Kohat, Bannu, Lakki Marwat, Dera Ismail Khan, Tank as well as former Tribal Areas i.e. Bajaur Agency, Orakzai Agency, Mohmand Agency, Khyber Agency, Kurram Agency, North Waziristan Agency and South Waziristan Agency, provided that existing business set ups register themselves with field offices of FBR by 30th September, 2018.

Provided further that the exemption under this clause shall be restricted to the association of persons and companies whose registered offices are in the aforesaid Areas"--(Clause (145), Part I, Second Schedule to the Income Tax Ordinance, 2001).

"              The provisions of sections in Division Ill of Part V of Chapter X and Chapter XII of the Ordinance for deduction or collection of tax shall not apply in the districts of Chitral, Dir and Swat (which includes Kalam), the former Tribal Area in Kohistan district, Malakand former Protected Areas the former Tribal Area adjoining Mansehra district, the former State of Amb, Zhob district, Loralai district (excluding Duki Tehsil), Dalbandin Tehsil of Chagai district and Marri and former Bugti tribal territories of Sibi district, former Tribal Areas adjoining the districts of Peshawar, Kohat, Bannu, Lakki Marwat, Dera Ismail Khan, Tank as well as former Tribal Areas i.e. Bajaur Agency, Orakzai Agency, Mohmand Agency, Khyber Agency, Kurram Agency, North Waziristan Agency and South Waziristan Agency, if the payer and the recipient are residents of the aforesaid areas.

Provided the provision of section 149 shall not apply in respect of persons working in the aforesaid areas even if the payer resides outside the aforesaid areas"--(Clause (106), Part IV, Second Schedule to the Income Tax Ordinance, 2001).

The withholding of taxes in above stated areas have been waived if the payer and the recipient are ‘residents’ of these areas. However, the withholding under the head salary [section 149 of Income Tax Ordinance, 2001] shall not apply in respect of persons working in these areas and the payer resides outside the exempted areas.

The above three exemption clauses, inserted through SRO 887(I)/2018 dated July 23, 2018, issued by the Federal Government in exercise of the powers conferred by sub-section (2) of section 53 of the Income Tax Ordinance, 2001 ["the Ordinance"], are faulty and legally erroneous inter alia for the following:

In proviso to clause (146), Part 1 of Second Schedule to the Ordinance, exemption is restricted to AOPs and Companies whose registered offices are in the areas mentioned in the clause. There are no offices of Registrar of Firms in these areas as prior to the 25thConstitutional Amendment no laws passed by Parliament extended to these areas. The same is true for Security & Exchange Commission of Pakistan (SECP) that registers companies that has jurisdiction in the said areas prior to 25thConstitutional Amendment. Any company registered by SECP can work anywhere and its registration is not based on working for a particular area of Pakistan--the expression defined in Article 1(2) of the Constitution. Many companies like banking companies have various branches located in the areas mentioned in exemption clauses. These companies are registered for all areas of Pakistan including those mentioned in Article 246 of the Constitution and therefore, benefit of exemption cannot be denied.

The application of clause (106), Part IV, Second Schedule is restricted to ‘resident’ payer and recipient of the areas mentioned therein. Under the Ordinance residential status is determined in the light of sections 2(50), 2(51) & 2(52) read with sections 81, 82 and 83 of the Ordinance. As per section 82 of the Ordinance, a resident individual is one whose stay in Pakistan is more than 183 days in aggregate during the relevant tax year. How will this period be determined? There are no border controls between areas mentioned in Article 246 and rest of the areas of Pakistan. The word ‘resident’ is erroneously used. All residents of such areas are residents of Pakistan and the same is true for all citizens of Pakistan. Any individual having domicile of the said area cannot be compelled to show his stay of 183 days there in order to claim exemption! How can tax authorities determine the same in any case when there are no restrictions of movement for any citizen within Pakistan.

It is strange, rather shocking, that some genius draftsman of FBR prepared these faulty exemption clauses and the same were issued by the caretaker setup without any independent application of mind. The caretaker prime minister was former Chief Justice of Supreme Court and under his chair the cabinet approved such an erroneous piece of legislation. It is hoped that the new law minister will look into it and rectify the blunders committed by his predecessor.