The Islamabad High Court (IHC) has issued a stay order against the Federal Board of Revenue (FBR) on its tax computation approach for banks, halting any further proceedings until the case is heard at a later date.
The FBR’s method of taxing bank income based on a gross advances-to-deposit ratio has sparked legal opposition, with banks challenging the agency’s authority in the matter.
At the core of the issue is Rule 6C(6A) of the 7th Schedule to the Income Tax Ordinance, 2001, which the FBR is using to impose tax on income from federal government securities. The petitioner, a prominent banking institution, asserts that the FBR lacks the jurisdiction to regulate banking business, a power that the State Bank of Pakistan (SBP) solely holds under the State Bank of Pakistan Act, 1956. The IHC has directed that no coercive actions be undertaken by the tax authority against the petitioner based on computations made under the impugned rule until the next court hearing.
The IHC has also issued notices to the FBR and the Attorney General, requiring them to submit comprehensive reports and point-by-point responses within a two-week timeframe. This interim order underscores the judiciary’s recognition of the gravity of the regulatory and jurisdictional dispute, as well as the potential repercussions for the financial sector.
Counsel for the petitioner contended that the FBR’s tax formula, which relies on the gross advances-to-deposit ratio, unfairly extends beyond the purview of a Money Bill, thereby violating Article 73 of the Constitution. The counsel argued that the FBR’s approach constitutes an overreach into banking regulation, an area entrusted exclusively to the SBP. According to the petitioner, the retroactive imposition of taxes on investments in federal securities is legally untenable, as these investments have not yet matured and cannot be taxed retrospectively.
Additionally, the petitioner emphasized that the impugned rule conflicts with Section 46B(3) of the State Bank of Pakistan Act, which endows the SBP with exclusive authority over regulatory directives to banks and explicitly restricts other public authorities from issuing directions that could counter the SBP’s declared policies.
The petitioner asserts that it operates under SBP’s prudential regulations, rejecting any authority other than the central bank’s right to direct its business conduct. By challenging Rule 6C(6A), the petitioner aims to uphold the SBP’s regulatory supremacy and preserve the established legislative boundaries that distinguish the roles of the SBP and the FBR.
The IHC’s intervention highlights the importance of regulatory clarity in Pakistan’s financial sector, where dual oversight can lead to complexities. The upcoming hearings are expected to provide judicial guidance on the interplay between tax regulations and central bank authority, a critical issue for financial institutions operating in the country.
