ISLAMABAD: The Federal Constitutional Court (FCC) was told that the tax imposed on deemed income under Section 7E of the Income Tax Ordinance, 2001, is unconstitutional and should be invalidated.
A two-member bench headed by Chief Justice Amin-ud-Din Khan on Wednesday heard appeals linked to earlier rulings by the Sindh, Lahore, Peshawar, and Islamabad High Courts on the legality of the tax introduced through the Finance Act, 2022.
Section 7E applies to certain immovable properties—excluding a taxpayer’s first property, rented units, business premises, and agricultural land by assigning them a notional rental income equal to 20% of their FBR value. This deemed income is then taxed at 5%, resulting in an effective annual tax of around 1% of the property’s value.
Representing taxpayers, Raashid Anwer argued that the levy effectively taxes the capital value of assets and therefore falls outside the federal government’s constitutional authority. He said the key issue was whether the tax could be justified under Entry 50 of the Fourth Schedule, which covers taxes on capital value excluding immovable property, or Entry 47, which relates to taxes on income other than agricultural income. He maintained that it fits neither category and is thus unconstitutional.
Anwer further contended that amendments made through the 18th Amendment to Entry 50 specifically the removal of the phrase “capital gains on”indicate a clear intent to exclude immovable property from federal taxation based on capital value. He cited FBR Circular No. 3 of 2012 as evidence that the federation lacks authority to impose such a tax, arguing that Section 7E effectively does so and is therefore ultra vires the Constitution.
He also argued that the levy cannot be justified under Entry 47 because it targets properties that generate no actual income, noting that income-producing assets are excluded from its scope.
Referring to the Supreme Court’s ruling in the Elahi Cotton case, Anwer said the judgment upheld turnover tax under a different constitutional provision and does not support the idea that income can be arbitrarily assumed. He emphasized that deeming provisions are only valid where there is an underlying economic activity.
