The Federal Constitutional Court (FCC) has declared Section 7E of the Income Tax Ordinance, 2001, unconstitutional and void in its entirety, adding all actions, notices and proceedings initiated by the Federal Board of Revenue (FBR) and the Revenue Division under it stand ineffective and unlawful.
The federal government introduced Section 7E through the Finance Act, 2022, as part of a broader effort to expand the tax base. The provision deems a fixed percentage of the fair market value of certain immovable properties as taxable income of a resident individual, even if no actual income is derived from such property.
The provision was subsequently challenged before various high courts on grounds of double taxation, discrimination, and violation of fundamental rights. The Peshawar High Court (PHC) and Balochistan High Court (BHC) eventually declared it unconstitutional and struck it down, while the Islamabad High Court (IHC) declared subsection 2 unconstitutional. The Sindh High Court (SHC) and Lahore High Court (LHC), however, upheld the provision.
Hearing appeals filed by taxpayers, a two-member bench comprising Chief Justice Aminuddin Khan and Justice Ali Baqar Najafi was informed of the conflicting judgments. Petitioners agued Section 7E effectively imposed a tax on deemed income from property ownership without any actual income, and therefore exceeded constitutional authority.
The FBR’s counsel argued that Section 7E had been introduced under Parliament’s constitutional authority to broaden the tax net and that the concept of deemed income was a recognized principle in tax law. He maintained the provision fell within the scope of Article 77 of the Constitution and relevant legislative competence.
Following the completion of arguments, the FCC ruled that Section 7E, in its true nature and character, amounted to a tax on ownership of property rather than on actual income, and therefore could not be sustained under the Constitution. It declared Section 7E unconstitutional, unauthorized, and void, adding that all notices, proceedings and actions initiated by the FBR and other authorities under the provision would also stand terminated.