PTBP Web Desk
The Federal Constitutional Court was informed on Wednesday that the controversial Section 7E tax on deemed income from immovable property violates constitutional provisions and should be declared void. The case has emerged as a critical legal test for Pakistan’s evolving tax framework, particularly concerning property taxation and federal authority.
A two-member bench headed by Chief Justice Amin-ud-Din Khan heard a series of appeals arising from earlier verdicts of the Sindh, Lahore, Peshawar, and Islamabad High Courts. These cases collectively question the legality of the levy introduced through the Finance Act 2022, which has remained contentious since its enforcement.
Section 7E requires individuals owning more than one property to pay tax even if those properties do not generate any actual income. Under the provision, such assets are assumed to yield rental income equal to 20 percent of their value as determined by the Federal Board of Revenue (FBR). A five percent tax is then imposed on this notional income, effectively translating into an annual tax liability of nearly one percent of the property’s declared capital value.
Legal Concerns Over Deemed Income Tax
During the hearing, counsel for the petitioners argued that the Section 7E tax on deemed income is, in essence, a tax on the capital value of immovable assets rather than a genuine income tax. He maintained that the federal government lacks the constitutional authority to impose such a levy.
The counsel highlighted that the central issue revolves around whether the tax falls under Entry 50 or Entry 47 of the Fourth Schedule of the Constitution. Entry 50 relates to taxes on the capital value of assets, while Entry 47 permits taxation of income excluding agricultural income. According to the argument presented, the levy does not align with either category.
Disguised Capital Tax Allegation
The lawyer further contended that Section 7E attempts to bypass constitutional limitations by presenting a capital tax as an income tax. He emphasized that taxation must be based on real income, not hypothetical or assumed earnings.
Another key point raised was that rental properties and other income-generating assets are excluded from the scope of the law. This, according to the counsel, clearly shows that the measure specifically targets non-income-generating properties. Such selective application raises serious concerns about fairness and legality.
He argued that the government cannot arbitrarily assign income to a property that does not produce any economic return. Doing so, he added, undermines the basic principles of taxation and violates constitutional safeguards.
Court Proceedings Adjourned
After hearing detailed arguments, the Federal Constitutional Court adjourned the proceedings without issuing an immediate ruling. The case is expected to continue, with its outcome likely to have significant implications for property taxation and fiscal policy in Pakistan.
If the court declares Section 7E unconstitutional, it could force a major policy shift and impact ongoing efforts to broaden the tax base. Conversely, if upheld, the ruling may strengthen the government’s position in introducing similar taxation measures.
