According to a press report, the Pakistan Tehreek-i-Insaf (PTI) government has agreed to make amendments in the Income Tax Ordinance, 2001, to withdraw tax exemptions before the release of a $500 million tranche by the International Monetary Fund (IMF). Resultantly, the president, in exercise of the powers conferred by Article 89(1) of the Constitution, promulgated Ordinance VII of 2021 on March 22, with immediate effect. The notification says that this Ordinance “shall be called the Tax Laws (Second Amendment) Ordinance, 2021”.

Through the ordinance, among many other changes, the exemption available to the IT exports till tax year 2025 has been converted into a 100 percent tax credit on the fulfilment of a number of conditions that were not imposed earlier and cannot be met retrospectively. This led to uproar in the National Assembly on March 29, and a strong protest was lodged by the chairman of the Pakistan Software Houses Association.

On the very first sitting of the 31st session of the National Assembly on March 29, [prorogued sine die following lack of quorum on April 5], the opposition called the ordinance unconstitutional on the basis of the following provision of the Constitution as amended by the Constitution (Eighteenth Amendment) Act, 2010:

“73 (1) Notwithstanding anything contained in Article 70, a Money Bill shall originate in the National Assembly:

Provided that simultaneously when a Money Bill, including the Finance Bill containing the Annual Budget Statement, is presented in the National Assembly, a copy thereof shall be transmitted to the Senate which may, within fourteen days, make recommendations thereon to the National Assembly.”

According to a press report, “The opposition parties in the National Assembly... strongly protested against the promulgation of the Income Tax Ordinance and the State Bank of Pakistan Ordinance, terming the moves to impose an additional Rs 700 billion taxes on the masses unconstitutional and demanding withdrawal of the two ordinances”.

The report adds: “Federal Ministers Hammad Azhar, Dr Shireen Mazari and Adviser to the Prime Minister on Parliamentary Affairs Dr Babar Awan, however, said that no violation of the Constitution was committed in promulgation of the ordinance.”

Speaker Asad Qaiser, after giving a ruling in favour of the government, invited legal experts from both the treasury and the opposition benches to further deliberate on the matter.

The principle of “no taxation without representation” embodied in Article 77, read with Article 162 of the Constitution, has been flagrantly violated in Pakistan by the governments since 2008. The prime culprits are legislators who have been delegating their legislative power of levying taxes to the Executive. This is in utter violation of Article 77 of the Constitution.

In the past, many FBR stalwarts [including Dr Muhammad Iqbal, the former member in charge of policy, et al] have insisted that the words “by or under the authority of Act” as used in Article 77 of the Constitution, authorise “taxation by delegation” as well which they considered justified doing so through Statutory Regulatory Orders (SROs). However, before the Supreme Court in Messrs Mustafa Impex, Karachi vs Government of Pakistan (2016) 114 Tax 241 (S.C Pak.), Additional Attorney General submitted: “...the levy and exemption of tax is the function of Parliament under Article 77 of the Constitution and… power of exemption if given to the Executive per se, would amount to the negation of the doctrine of parliamentary supremacy and the doctrine of separation of powers.”

The issuance of statutory regulatory orders (SROs) for extending any kind of exemption or concession or withdrawing the same in respect of any tax or even through a presidential ordinance, unless emergent situation exists, is a gross violation of Article 162 of the Constitution which says, “162. Prior sanction of President required to Bills affecting taxation in which Provinces are interested: – No Bill or amendment which imposes or varies a tax or duty the whole or part of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression ‘agricultural income’ as defined for the purposes of the enactments relating to income-tax, or which affects the principles on which under any of the foregoing provisions of this chapter, moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President.”

In the light of the above, can the president promulgate any ordinance in the nature of money bill? Obviously, nobody told the IMF and the National Assembly speaker. The legal team of Prime Minister Imran Khan also misguided him about the scope of Article 89 read with Articles 73, 77 and 162 of the Constitution. Hopefully, this malpractice of imposing or waiving taxes through delegated powers will end.

The ordinance issued to secure a tranche of the IMF loan was a bad move, even if not strictly against the Constitution — confirming our complete economic subjugation that the PTI, before coming to power, had promised to end.

The impact of immediate applicability of Tax Laws (Second Amendment) Ordinance, 2021 from March 22, is the withdrawal of exemption under Clause (133), Part I, Second Schedule to the Income tax Ordinance, 2001 to exporters of IT and IT-enabled services. The omitted clause reads as under, “(133) Income from exports of computer software or IT services or IT enabled services up to the period ending on 30th day of June, 2025: Provided that eighty percent of the export proceeds is brought into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels.

Explanation– For the purpose of this clause:

“IT Services” include software development, software maintenance, system integration, web design, web development, web hosting, and network design, and

“IT enabled services” include inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centres, data entry operations, locally produced television programs and insurance claims processing”.

From March 22, with only three months left to close the books for tax year 2021, the Tax Laws (Second Amendment) Ordinance, 2021 requires from above mentioned class of taxpayers and new startups vide newly inserted Section 65F of the Income Tax Ordinance, 2001 to avail 100 percent tax credit meeting the above conditions and additionally the following conditions:

tax required to be deducted or collected has been deducted or collected and paid;

withholding tax statements for the immediately preceding tax year have been filed;

sales tax returns for the tax periods corresponding to relevant tax year have been filed; and

their case can be selected for audit through computer balloting or by the Commissioner of Inland Revenue on whim.

The same conditions have been applied to Thar Coal Project under China-Pakistan Economic Corridor (CPEC) enjoying unconditional exemption that is now withdrawn retrospectively, which is a matter of great concern as it is for “persons engaged in coal mining projects in Sindh supplying coal exclusively to power generation projects”.

On the other hand, unconditional income tax exemption available to the existing Independent Power Producers (IPPs) funded by International Finance Corporation (IFC) and other World Bank institutions would continue and not be subjected to the above conditions. Tax will be levied only on new plants established after June 30.

The same should have been the case for successful Chinese projects under the CPEC — as a matter of uniform policy for all. If an emergent situation existed, was it only to damage local IT industry and Chinese projects under the CPEC? This is a crucial question showing the real agenda of the IMF of destroying our ability to earn billions of dollars through IT exports and hamper economic progress under the CPEC to get rid of external loans.

It is pertinent to mention that exports of information and communication technology (ICT) services increased 40 percent during the first half of the current financial year and the Ministry of Commerce is expecting that these would cross $2 billion this year. The most significant increase in exports was witnessed in telecom and ICT services — increasing to $958 million in the first half of the current fiscal year as compared to $684 million in the same period of the previous year.

The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)