ISLAMABAD – The Federal Constitutional Court (FCC) has declared Section 7E of the Income Tax Ordinance 2001 unconstitutional, striking it down as “ultra vires” and void from the beginning. The provision had allowed tax authorities to impose levy on “deemed income” from immovable property.
The decision carries major implications for the Federal Board of Revenue (FBR), which had been collecting tax under the disputed law introduced through the Finance Act 2022 for tax year 2023.
Section 7E had created a legal mechanism to tax notional income based on ownership of certain properties, with exemptions for primary residences, agricultural land and other specified categories under the law.
Under the scheme, immovable assets valued above Rs25 million were subject to taxation on deemed income. The mechanism calculated tax on five per cent of the FBR-assessed fair market value, which at a 20 per cent rate translated into an effective annual levy of around one per cent on the capital value of non-rented or undeveloped properties.
A two-member FCC bench comprising Chief Justice Aminuddin Khan and Justice Ali Baqar Najafi announced a brief verdict in open court, stating that Section 7E could not survive constitutional scrutiny.
“After hearing detailed arguments, we hold Section 7E of the Income Tax Ordinance 2001 to be unconstitutional and void ab initio,” the short order said. The court noted that detailed reasons would follow in a written judgment.
The FCC converted several taxpayer petitions into appeals and granted them relief by overturning adverse findings of the Sindh High Court and Lahore High Court. At the same time, it dismissed petitions filed by the Federal Board of Revenue and the Commissioner Inland Revenue against judgments of the Peshawar and Balochistan High Courts.
As a result, all notices, assessments, and proceedings initiated under Section 7E were declared without lawful authority and set aside.
The constitutional validity of Section 7E had been challenged across multiple high courts in the country. The Peshawar and Balochistan High Courts had already struck down the provision, while the Islamabad High Court did not invalidate it entirely and instead interpreted parts of it as unconstitutional. The Lahore and Sindh High Courts had delivered differing outcomes at various stages of litigation.
Taxpayers argued that the law effectively imposed a property tax under the guise of income tax, despite the absence of actual income. They also contended that it exceeded Parliament’s taxing powers under Article 77 read with Entry 47 of the Federal Legislative List and violated Article 25 by creating unequal treatment among taxpayers.
On the other hand, the federal government and tax authorities maintained that Section 7E was a legitimate fiscal tool aimed at broadening the tax net. They argued that deemed income is an established concept in tax law and falls within legislative competence.
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