The Islamabad High Court (IHC) has made a groundbreaking decision by declaring Section 7E of the Finance Act, 2022, as unconstitutional and void ab initio. This section, introduced through the Finance Act, 2022, imposed a tax on the fair market value of capital assets located in Pakistan for tax year 2022 and onwards. However, the IHC deemed this provision to be ultra vires the Constitution, citing its confiscatory and discriminatory nature, which violates Article 25 of the Constitution.
Section 7E was introduced in the Income Tax Ordinance 2001 whereby, for tax year 2022 and onwards, every resident person has been treated to have derived as income, an amount equal to five per cent of the fair market value of the capital asset situated in Pakistan subject to some exclusions provided therein.
In its judgement, the IHC highlighted several flaws in Section 7E, including its failure to provide a proper basis for exemptions from tax payment and the absence of machinery for determining fair market value and recovery mechanism. The court concluded that these deficiencies warrant the striking down of the statute. Consequently, all notices issued under Section 7E are set aside for being without lawful authority.
Justice Syed Arshad Ali, held; “In view of the clear bar as provided under Entry No 50 of the Fourth Schedule to the Constitution, the Parliament has no jurisdiction to impose income tax on immoveable property
This decision follows similar rulings by other high courts, including the recent judgment by the Peshawar High Court (PHC), which also declared Section 7E of the Income Tax Ordinance, 2001, unconstitutional. The PHC held that the Parliament lacked jurisdiction to impose income tax on immovable property, as specified under Entry No. 50 of the Fourth Schedule to the Constitution, that Section 7E of the Income Tax Ordinance, 2001, does not qualify the test of Capital Value of Assets and, therefore, is beyond the legislative competence of the Parliament; hence, the same is hereby struck down. As a result, the Federal Board of Revenue (FBR) has directed field formations in Punjab to implement Section 7E from February 15, 2024, in cases falling under the jurisdiction of the Lahore High Court.
