The Federal Constitutional Court was informed on Wednesday that the controversial tax imposed on “deemed income” from immovable property under Section 7E of the Income Tax Ordinance, 2001, violates the Constitution and should be declared invalid.
A two-member bench headed by Chief Justice Amin-ud-Din Khan heard multiple appeals stemming from decisions of the Sindh, Lahore, Peshawar, and Islamabad High Courts regarding the legality of the levy introduced through the Finance Act 2022.
Section 7E requires taxpayers owning more than one property to pay tax even if the property does not generate any real income. Under the law, such properties are assumed to earn rental income equal to 20 percent of their FBR-determined value. A five percent tax is then applied on this amount which makes it equal an annual tax close to one percent of the property’s declared capital value.
The counsel argued before the court that the measure is effectively a tax on the capital value of immovable assets rather than a legitimate income tax. He maintained that the federation lacks constitutional authority to impose such a levy.
According to the counsel, the central legal question is whether the tax can be justified under Entry 50 of the Fourth Schedule of the Constitution, dealing with taxes on capital value of assets, or Entry 47, which allows taxation of income other than agricultural income. He submitted that the levy fits neither category and therefore cannot survive constitutional scrutiny.
He argued that Section 7E attempts to bypass these constitutional limits by disguising a capital tax as an income tax.
The lawyer further submitted that rental properties and other income-generating assets fall outside the scope of the law, demonstrating, he said, that the measure specifically targets assets with no economic activity.
He argued that the government cannot arbitrarily label a non-existent earning as income merely to impose tax liability.
The court adjourned proceedings after hearing all arguments.