Islamabad: The Federal Constitutional Court (FCC) on Thursday struck down Section 7E of the Income Tax Ordinance (ITO) 2001, declaring the provision unconstitutional and void from the outset.
The ruling is expected to have major implications for the Federal Board of Revenue’s (FBR) property taxation framework, as Section 7E allowed authorities to impose tax on “deemed income” derived from certain immovable properties.
Introduced through the Finance Act 2022 for tax year 2023, the provision applied to taxpayers holding immovable properties worth more than Rs25 million. It treated five per cent of a property’s FBR-defined fair market value as deemed income, taxed at 20 per cent, effectively resulting in a one per cent annual tax on the capital value of undeveloped or non-rented properties.
A two-member FCC bench comprising Chief Justice Aminuddin Khan and Justice Ali Baqar Najafi announced the short order in open court.
“Having heard the learned counsel for the parties at considerable length and upon due deliberation, we are persuaded to hold that Section 7E of ITO, 2001, is ultra vires the Constitution and is accordingly struck down, being void ab initio,” the order stated.
The court said detailed reasons for the judgment would be issued later.
The FCC converted civil petitions filed by taxpayers against judgments of the Lahore High Court (LHC) and Sindh High Court (SHC) into appeals and allowed them. At the same time, petitions filed by the FBR and Commissioner Inland Revenue (CIR) against rulings of the Peshawar High Court (PHC) and Balochistan High Court (BHC) were dismissed.
As a result, all proceedings, notices, and actions initiated by the FBR under Section 7E were declared without lawful authority and set aside.
The provision had faced constitutional challenges in all provincial high courts as well as the Islamabad High Court (IHC). The PHC and BHC had earlier declared the law unconstitutional, while the IHC partially struck down subsection (2) of the provision. The SHC dismissed petitions challenging the law, whereas an LHC single bench ruling against Section 7E was later overturned by a division bench.
Petitioners argued that Section 7E imposed tax without actual accrual or receipt of income and effectively amounted to a property tax disguised as income tax. They also contended that the law created artificial income and violated constitutional guarantees of equality.
The federal government defended the provision as a legitimate fiscal measure aimed at broadening the tax base and targeting untaxed wealth, arguing that deemed income taxation fell within Parliament’s constitutional powers.
The FCC’s detailed judgment is expected to clarify the constitutional limits of taxing deemed or notional income in Pakistan’s tax regime.
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