Constitutionality of Retrospective Amendments in Law

In Commissioner Inland Revenue vs. Mekotex (Private) Limited & others (2024 SCP 316), the Supreme Court of Pakistan reviewed the constitutionality of the amendments made to Section 65B of the Income Tax Ordinance, 2001, by the Finance Act, 2019. The key issue was whether the 2019 amendments, which reduced the tax credit rate and shortened the eligibility period for investment in plant and machinery, infringed on the vested rights of taxpayer companies.

Background:

Section 65B was introduced as a tax incentive provision, granting companies a 10% tax credit for investment in the purchase and installation of plant and machinery. The Finance Act, 2019, amended the section by reducing the credit rate to 5% and limiting the eligibility period for availing the credit to the tax year 2019. The amendments were challenged by various companies who had made investments before the 2019 amendments, arguing that they had vested rights to avail the tax credit at the original rate of 10% and for the period extending to 2021. The High Court of Sindh ruled in favor of the companies, holding that the amendments could not vitiate their vested rights. The Federal Board of Revenue (FBR) appealed this decision to the Supreme Court.

Key Issues:

Retrospective Application of Tax Amendments: Whether the amendments introduced by the Finance Act, 2019, could retrospectively affect the tax credit entitlements of companies that had already made investments in plant and machinery.

Vested Rights of Taxpayer Companies: Whether the companies had acquired vested rights to avail the tax credit at the original rate of 10% based on their investments before the 2019 amendments.

Constitutionality of the Amendments: Whether the amendments violated the fundamental rights of the taxpayers to conduct business and property ownership, as guaranteed by the Constitution of Pakistan.

Court’s Analysis:

Retrospective Application: The Court held that the legislature has the power to enact laws with retrospective effect, including tax laws. However, such retrospective amendments must be clear and explicit. The Court found that the 2019 amendments did not contain clear language to justify a retrospective application affecting past transactions and investments.

Vested Rights: The Court affirmed the High Court’s decision, ruling that the taxpayer companies had acquired vested rights to claim the 10% tax credit, as their investments in plant and machinery were made before the enactment of the 2019 amendments. The Court noted that retrospective amendments should not reopen past and closed transactions unless the legislative intent is explicit.

Constitutional Protections: The Court agreed with the respondents that the 2019 amendments, if applied retrospectively, would infringe upon the companies’ fundamental rights under Articles 18, 23, 24, and 25 of the Constitution, which guarantee the right to conduct lawful business and protection of property rights.

Court’s Conclusion: The Supreme Court dismissed the appeals filed by the Commissioner Inland Revenue, upholding the High Court’s decision. The Court ruled that the taxpayer companies’ vested rights to avail the tax credit at the original rate of 10% and for the extended period remained intact. The 2019 amendments could not be applied retrospectively to investments made before their enactment.

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