Supreme Court of Pakistan on 29 May 2017 in Sindh Revenue Board v Civil Aviation Authority (SRB v CAA) has declared that a provincial government cannot impose a tax on an entity controlled by the federal government of Pakistan.
The Supreme Court extended the tax exemption available to the federal government to a statutory body controlled by the federal government irrespective of commercial or non-commercial activities. The court rejected the argument on behalf of Sindh provincial government that in view of the 18th amendment to the constitution of Pakistan a provincial government can legislate to impose a tax on all commercial activities within its territorial jurisdiction as provided by Sindh Sale Tax on Services Act 2011.
Civil Aviation Authority (CAA) is a statutory body established by the federal government of Pakistan under Civil Aviation Authority Ordinance 182. CAA had challenged the imposition of sale tax before High Court of Sindh and the High Court allowed the constitutional petition moved by CAA and declared that CAA is not liable to pay the sale tax. The High Court held that Article 165(1) of the Constitution provides immunity to the income of the federal government from taxation and if a broad meaning is given to the word income it would include sales tax.
Sindh government appealed to Supreme Court of Pakistan.
Defending the provincial government’s legislation it was argued that in Central Board of Revenue v Water and Power Development Authority PLD 2014 Supreme Court of Pakistan 766 (CBR v WAPDA) it was decided that WAPDA, a federally controlled entity, was not exempt from tax under Article 165(1) of the Constitution.
The Supreme Court held that ratio of CBR v WAPDA was not applicable because in that case imposition of a tax by the federal government was in issue and the constitutional powers of the provinces vis-à-vis the Federation was not at issue. Moreover, in that case, it was concluded that WAPDA was not a federal government and “has been given free hand” to run its business and its corporate veil cannot be lifted.
The court noted that most of the functions of CAA as provided by Civil Aviation Ordinance 1982 are covered by different items in part 1 of the federal legislative list of the Constitution and if any function is not covered in the federal list it shall be deemed to be covered in view of item 59 part 1 which provides “Matters incidental or ancillary to any matter enumerated in this Part.” The court also noted that Article 142 (a) of the Constitution states that the federal legislature has exclusive powers to make laws with respect to any matter in the Federal Legislative List.
On the point of legislative powers of a federation different case law was cited which included the cases decided by; Australian High Court, Supreme Court of United States, Supreme Court of Canada and Indian Supreme Court.
The court noted that the Constitution of both Pakistan and India are modelled on the constitution of United States of America and the tenth amendment to the US Constitution had the same effect as the removal of the Concurrent Legislative List from the Constitution of Pakistan.
The Court discussed different US cases and concluded that reasoning of M’Culloch v Maryland,1819, 17 US 316 was applicable to the case in hand. In that case, it was held that the Congress had the power to legislate the creation of national bank although the Congress was not specifically empowered to legislate to establish a national bank.
The Supreme Court noted that Sindh High Court wrongly assumed that the Sindh Legislature was constitutionally competent to impose the sales tax on services but CAA is exempt under Article 165 (1) of the Constitution. The court held that Sindh Legislature was not competent at all to impose any tax on CAA.
The decision is significant because of much commented provincial autonomy with reference to the 18th amendment to the Constitution of Pakistan.
By: Basharat Ahmad
MA, LLB, GDLP
Plaiche and Martin Lawyers
Barristers and Solicitors
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