FCC strikes down Section 7E of Income Tax Ordinance as unconstitutional

ISLAMABAD: The Federal Constitutional Court (FCC) on Thursday declared Section 7E of the Income Tax Ordinance, 2001 unconstitutional and void in its entirety, ruling that all actions, notices and proceedings initiated under the provision by the Federal Board of Revenue and Revenue Division were unlawful and ineffective.

A two-member bench comprising Chief Justice Aminuddin Khan and Justice Ali Baqar Najafi issued the written order after announcing a short verdict in the case.

Section 7E was introduced through the Finance Act 2022 as part of efforts to broaden the tax base. The provision treated a fixed percentage of the fair market value of certain immovable properties as taxable income, even if the owner had not earned any actual income from the property.

The law aimed to bring undeclared or idle real estate assets into the tax net, but it faced legal challenges in multiple high courts across the country.

Earlier, the Peshawar High Court and Balochistan High Court had declared Section 7E unconstitutional, while the Islamabad High Court struck down one of its subsections.

However, the Sindh High Court and Lahore High Court had upheld the provision in separate rulings.

During proceedings, taxpayers argued that Section 7E effectively imposed a tax on ownership of property rather than actual income, making it unconstitutional and discriminatory.

Representing the Revenue Division and the FBR, senior lawyer Hafiz Ehsan Ahmad Khokhar argued that Parliament had constitutional authority to introduce deemed income provisions in order to expand the tax net.

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He maintained that the law fell within the scope of Article 77 of the Constitution and relevant legislative powers.

After hearing arguments, the FCC ruled that Section 7E, in its “true nature and character”, amounted to taxation on ownership of property instead of income and therefore could not be sustained under the Constitution.

The court declared the provision unconstitutional, unauthorised and void, while ordering that all notices, proceedings and actions initiated under the section would also stand terminated.

The bench further observed that conflicting judgments from various high courts had created legal uncertainty, which now stood resolved through the FCC’s ruling.

The detailed judgment will be issued later.