ISLAMABAD: The Federal Constitutional Court (FCC) was informed on Wednesday that the levy of tax on deemed income under Section 7E of the Income Tax Ordinance, 2001, is unconstitutional and should be struck down.
A two-member bench headed by Chief Justice Amin-ud-Din Khan heard a series of appeals arising from judgments of the Sindh, Lahore, Peshawar, and Islamabad High Courts regarding the validity of the tax introduced through the Finance Act, 2022.
Under Section 7E, immovable properties owned by a taxpayer—excluding the first property if not rented out, self-owned business premises, and agricultural land—are treated as if they generate rental income equal to 20% of their FBR-assessed value. This “deemed rent” is taxed at 5%, resulting in an effective annual levy of around 1% of the property’s FBR value.
Counsel for taxpayers Raashid Anwer argued that the levy is effectively a tax on the capital value of immovable assets and therefore falls outside the federal government’s constitutional taxing powers.
He maintained that the key question before the court is whether Section 7E can be justified under Entry 50 of the Fourth Schedule of the Constitution—relating to taxes on the capital value of assets—or under Entry 47, which covers taxes on income other than agricultural income.
According to the petitioner, the provision does not fit within either category and is therefore unconstitutional.
The counsel further argued that after the 18th Constitutional Amendment, Entry 50 was modified, reflecting legislative intent to exclude immovable property from federal taxation on capital value. He said this supports the view that Section 7E is beyond constitutional limits.
He also cited FBR Circular No. 3 of 2012, arguing that the Federal Board of Revenue itself acknowledged limitations on taxing the capital value of immovable property.
The petitioner further contended that Section 7E cannot be justified as an income tax because it applies even where no actual income is generated. He argued that excluding rented or income-generating properties while taxing idle assets highlights that the provision is not a genuine income tax but a disguised levy on ownership.
Referring to the Supreme Court’s decision in the Elahi Cotton case, he argued that while deemed taxation has been upheld in certain contexts, it must be tied to real economic activity and cannot arbitrarily treat non-income assets as income-generating.
The court is expected to further examine constitutional arguments surrounding the scope of federal taxing powers and the validity of deeming provisions under income tax law.
