The Federal Constitutional Court was told on Wednesday that the tax imposed on so-called “deemed income” from immovable property 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 challenging earlier rulings of the Sindh, Lahore, Peshawar and Islamabad High Courts on 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 actual income. Under the provision, properties that are not rented out — excluding the first residential property, self-owned business premises and agricultural land — are presumed to earn rental income equal to 20 percent of their FBR-determined value. A five percent tax is then applied to this notional income, effectively creating an annual tax liability close to one percent of the property’s declared value.
Representing taxpayers, counsel Raashid Anwer argued that the levy is essentially a tax on the capital value of property rather than an income tax, placing it beyond the constitutional authority of the federal government. He told the court that the key legal question was whether the tax could be justified under Entry 50 of the Fourth Schedule, which relates to taxes on the capital value of assets, or Entry 47, which permits taxation of income other than agricultural income.
According to the counsel, the tax fits neither category. He maintained that following the 18th Constitutional Amendment, changes to Entry 50 reflected Parliament’s intent to exclude immovable property from federal taxation relating to capital value. In support of his argument, he referred to FBR Circular No. 3 of 2012, which acknowledged limits on the federation’s authority to impose capital value taxes on immovable property.
Anwer submitted that Section 7E attempts to bypass these constitutional restrictions by treating property ownership itself as taxable income. He argued that the provision cannot be sustained under Entry 47 either, as it targets properties that generate no real earnings. Properties already producing rental income fall outside the scope of the law, which, he said, demonstrates that the levy focuses specifically on non-income-producing assets.
Referring to the Supreme Court’s judgment in the Elahi Cotton case, the counsel stated that while deeming provisions may be used in taxation, they must be linked to genuine economic activity. He argued that the Constitution does not allow authorities to declare income where none exists solely to create a tax liability.
The court adjourned proceedings after hearing initial arguments. The outcome of the case is expected to have significant implications for federal taxation powers and thousands of property owners across the country.
