FCC declares super tax valid, sets aside high court rulings

2026-01-28 - 03:11

• Affirms parliament’s exclusive power to levy taxes • Verdict settles over 2,200 cases, protects Rs310bn in revenue • Court says tax policy, slabs and rates fall solely within parliament’s domain • Petroleum sector granted limited relief over concession agreements • Industry warns of inflation, production curbs as fallout of ruling ISLAMABAD: In a landmark ruling with far-reaching constitutional and fiscal implications, the Federal Constitutional Court (FCC) on Tuesday, while accepting parliament’s competence to legislate for the imposition of taxes, upheld the vires of the super tax, ruling that certain provisions of the Income Tax Ordinance (ITO) 2001 will apply from the dates on which they were levied at the prescribed rates. Various businesspersons, banks and companies had challenged the imposition of the super tax before the high courts, arguing that its retrospective application amounted to double taxation. Later, appeals were filed in the Supreme Court against judgements of the Sindh, Lahore and Islamabad High Courts concerning the levy of super tax through Sections 4-B and 4-C, inserted into the ITO 2001 through the Finance Acts of 2015 and 2022, respectively. After 71 hearings before the Supreme Court, the cases were transferred to the FCC following the passage of the 27th Amendment. Headed by Chief Justice of the FCC Aminuddin Khan, a three-judge bench comprising Justice Syed Hasan Azhar Rizvi and Justice Syed Arshad Hussain Shah announced the much-anticipated short order in the afternoon, following a brief morning hearing, at which the court had reserved its verdict. The detailed judgement will be issued later. According to a senior counsel representing Revenue Secretary Hafiz Ahsaan Ahmad Khokhar, the FCC decided more than 2,200 long-pending tax cases relating to Sections 4-B and 4-C of the ITO, thereby safeguarding an estimated Rs310 billion in public revenue. The tax was initially imposed in 2015 through a money bill, with the stated purpose of rehabilitating areas affected by Operation Zarb-i-Azb against terrorism. It was introduced as a one-time measure to fund the rehabilitation of areas devastated by the military operation. An additional five per cent super tax was levied on annual profits exceeding Rs300 million. In 2022, however, the super tax was extended to individuals earning more than Rs150m annually, with a maximum rate of 10 per cent. Introduced by the PML-N government in 2015, the super tax applies to wealthy individuals, associations of persons and companies earning above Rs500m. It imposes a tax rate of four per cent on the income of banking companies and three per cent on other sectors, aimed at funding the rehabilitation of temporarily displaced persons. In its ruling, the FCC held Sections 4(b) and 4(c) to be intra vires of the Constitution, reaffirmed Parliament’s exclusive authority to determine taxation under these provisions, and clarified that the courts’ role was limited to interpretation. The court declared that the high courts’ judgements striking down or reading down Section 4(c) were constitutionally invalid as they had exceeded their jurisdiction and therefore stood set aside. The FCC held that courts could not re-determine tax slabs, rates, thresholds or fiscal policy, and that the high courts had committed judicial overreach in violation of the doctrine of separation of powers. All appeals filed by the Secretary, the Federal Board of Revenue (FBR) and the Commissioner Inland Revenue were declared maintainable. The court ruled that the super taxes were valid, with specific exclusions for benevolent funds. It also allowed oil and gas exploration companies to approach the relevant tax commissioner individually for exemptions, to be assessed on a case-by-case basis under the 1948 concessions regime. Petroleum sector gets relief A senior counsel, speaking on condition of anonymity, said the petroleum sector was the only one granted relief on the basis of petroleum concessions signed by the President with exploration companies. He recalled that it had been argued before the FCC that imposing taxes beyond what was agreed under these concessions could lead to international arbitration, potentially resulting in heavy damages, as seen in past cases such as Reko Diq and rental power projects. During the hearing, it was contended that the government could not breach the agreed tax ceiling without violating petroleum concession agreements. The counsel added that the association of petroleum companies had also served a notice on the federation, warning of the possibility of invoking international arbitration. He said it appeared that this argument had proved persuasive. Commenting on the implications of the judgement, senior counsel Isaac Ali Qazi told Dawn that to offset the impact of the super tax, industry might adopt two strategies: companies close to the super tax threshold might freeze sales and production to avoid the levy, or they might pass on the tax burden by factoring it into profit margins, which could fuel inflation. Published in Dawn, January 28th, 2026