Pakistan’s top court strikes down deemed income tax on property

Pakistan's Federal Constitutional Court unanimously declared Section 7E of the Income Tax Ordinance 2001 unconstitutional on Thursday, giving major relief to property owners across the country.

The court dismissed all appeals filed by the Federal Board of Revenue (FBR) and declared every action taken under Section 7E null and void.

What is Section 7E of the Income Tax Ordinance?

Section 7E was introduced through the Finance Act 2022 and imposed a tax on deemed income from immovable property.

Under the law, property owners were taxed as if their property was generating income equal to 5% of its fair market value, even if the property was not rented out or earning any actual income. Owners of more than one property were subject to the levy.

Why did the Federal Constitutional Court strike down Section 7E?

The FCC ruled that the federal government exceeded its constitutional powers by imposing the tax. Petitioners had argued that the federal government can only tax actual income under the Constitution, while taxes on immovable property fall under provincial authority.

The court agreed, declaring Section 7E ultra vires to the Constitution.

The case had a long legal history before reaching the apex court. High courts in Sindh, Lahore, Peshawar, and Islamabad had issued mixed rulings, with some finding the tax valid and others striking it down. The FCC's unanimous verdict settles the dispute.

Are Section 7E tax payments now refundable?

All Section 7E tax collected since 2022 is now considered illegal following the ruling.

Property owners who paid the tax are entitled to claim a refund or adjust the amount against existing tax liabilities. The verdict is expected to have a significant impact on the real estate sector and provide substantial financial relief to affected taxpayers.