Pakistan’s Islamabad High Court (IHC) has ruled Section 7E of the Income Tax Ordinance, 2022, unconstitutional. This section, introduced through the Finance Act, 2022, aimed to tax residents on a notional 5% annual income derived from the fair market value of their capital assets (primarily property) in Pakistan.
The Court’s Reasoning:
The IHC judgment highlights several issues with Section 7E:
- Confiscatory and Discriminatory: The court deemed the tax excessive and unfairly applied, potentially violating Article 25 of the Constitution, which guarantees equality before the law.
- Unreasonable Restrictions: The court argued the tax exceeded the “reasonable restrictions” allowed under Article 23 of the Constitution.
- Flawed Classification: The exemptions provided in the law were deemed arbitrary and lacking justification, violating Article 25’s requirement for reasonable classification.
- Missing Implementation Details: The law lacked clear procedures for determining fair market value and tax collection, raising concerns similar to those in the “Elahi Cotton Mills” case.
Court’s Decision:
Based on these arguments, the IHC declared Section 7E “ultra vires” (beyond) the Constitution and hence, void from the beginning. Consequently, all notices issued by the tax department under this section are also nullified.
Similar Ruling by Peshawar High Court:
This decision follows a similar ruling by the Peshawar High Court (PHC) last month, which also struck down Section 7E based on arguments of legislative incompetence and exceeding the scope of “Capital Value of Assets” taxation.
Federal Board of Revenue’s Response:
Despite these rulings, the Federal Board of Revenue (FBR) continues to enforce Section 7E. However, with the IHC’s decision, the future of this tax provision remains uncertain.
Conclusion:
The IHC’s ruling is a significant development for Pakistani taxpayers. It remains to be seen if the FBR will appeal the decision or revise Section 7E to address the court’s concerns. Taxpayers in Pakistan, especially those with substantial property holdings, should stay updated on further developments regarding this tax.
