LAHORE: In a significant development, the Lahore High Court (LHC) has declared the tax on deemed income on immovable properties under Section 7E of the Income Tax Ordinance 2001 as ultra vires to the Constitution — meaning it exceeded its scope and went beyond its authority — and ruled that treating the market value of the immovable property as income is beyond the competence of federal legislator.
In a 50-page judgement, Justice Shahid Jamil Khan also ruled that excluding certain people — for instance, martyrs and their dependents and former servicemen — under 7E(2d) of the ordinance is discriminatory, offending Article 25 of the Constitution that says, “All citizens are equal before the law and are entitled to equal protection of the law.”
The judgement examined the federal legislature’s competence to levy income tax on immovable property, invoking fiction of law by using the phrase, “A person shall be treated to have derived, as income chargeable to tax”, on capital assets owned by a resident person.
This presumption is enforced by inserting Section 7E in Chapter 2 of the Income Tax Ordinance, 2001, through Finance Act, 2022.
LHC rules excluding some people under Section 7E of income tax ordinance is ‘discriminatory’
In the judgement, Justice Khan allowed more than 1,000 petitions by the taxpayers challenging the legislative competence of the federal government to levy the tax and the vires of Section 7E.
The judge observed that the event or incidence of all kinds of taxation, direct or indirect, is to be decided by the legislature through enactment, influenced by political, economic and social factors, as well as international agreements and treaties.
He said taxes on a person or property are generally direct taxes, and tax on transactions is indirect, for it goes with the transaction and falls where the transaction terminates.
The judge observed that the state’s power to tax is the incident of sovereignty exercised through legislative discretion, which could not be curtailed on the grounds of being harsh or unreasonable.
“Since Federal Legislature is competent to fix a maximum limit of possessing or controlling property and can levy tax, driving competence from Entry 50 [of the Fourth Schedule], to achieve this goal, therefore, it has implicit power to control and curb ill-gotten assets as well,” he wrote.
“Accumulation of wealth through unfair means can be checked and criminalised through taxing provisions along with amendments to corresponding provisions of other relevant laws,” he added.
However, Justice Khan said that excluding people under clauses (i), (iii) and (iv) of Section 7E(2)(d) of the ordinance was discriminatory.
The clause gave exemption to a shaheed (martyr) or dependents of a shaheed belonging to Pakistan Armed Forces; a person or dependents of the person who dies while in the service of Pakistan armed forces or federal or provincial government; a war-wounded person while in service of Pakistan armed forces or federal or provincial government; and an ex-serviceman and serving personnel of armed forces or ex-employees or serving personnel of federal and provincial governments, being original allottees of the capital asset duly certified by the allotment authority.
The judge ruled that this clause is highly discriminatory for those who purchase property from their savings but were never allotted any asset, including immovable property, during their service.
He said while excluding certain persons, the legislature ignored the persons, who inherited the immovable property but are not capable of paying capital value tax, particularly when the tax is on the person and not the property.
“This omission makes the levy expropriatory and confiscatory for those who might have to sell the asset to be taxed, for paying the tax,” he said.
The judge said the curative legislation is expected to bring the provisions of Section 7E within the spirit of taxing the capital value of assets and to harmonise it with other provisions of the income tax ordinance.
The petitioners were represented by Salman Akram Raja, Saqib Jillani, Ahmad Qayyum and other lawyers.
Published in Dawn, April 7th, 2023
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