FED on transfer of immoveable property

“Accordingly CVT was abolished through the Finance Act 2010 as charge and levy of CVT became a provincial subject. Different provinces have started levy and collection of CVT on immoveable property through their respective Legislation”—FBR’s Circular 3 of 2012 explaining provisions relation to Capital Value Tax (CVT)

The Ministry of Law and Justice has informed the Federal Board of Revenue that the tax authorities are not legally empowered to collect the Federal Excise Duty (FED) on all allotment and transfer of commercial and residential plots/buildings within the jurisdiction of federal Capital—‘Allotment/ transfer of plots with Capital: Tax Authorities are not competent to collect FED: Law Ministry’, The Business Recorder, November 27, 2010

“Entry 50 was the subject matter of discussion in a number of appeals before a Division Bench of which one of us (Shahid Karim, J.) was a member and it was held that tax on capital value of immovable property was beyond the legislative competence of the Parliament and was within the power of the Provincial Assemblies to legislate upon”—Commissioner of Inland Revenue v Muhammad Osman Gul [ICA No.35908 of 2023] [(2024) 129 TAX 364 (H.C. Lah.)]

“The Eighteenth Amendment brought a change to and amended Entry 50 in the Fourth Schedule (Federal Legislative List) of the Constitution of the Islamic Republic of Pakistan. As a consequence thereof, the Federation and all Cantonment Boards lack competence, power, and jurisdiction to levy, charge, impose and recover any or all tax(es) on any immovable property, including, but not limited to, tax on the annual rental value of immovable property”—M/S MILLENNIUM MALL MANAGEMENT CO v PAKISTAN & others [(2024) 129 TAX 505 (H.C. Kar.)]

In the Finance Bill 2024 the Federal Board of Revenue (FBR) proposed federal excise duty [FED] on transfer of immoveable property and National Assembly, acting as a rubber stamp, passed it in utter violation of the Constitution of Islamic Republic of Pakistan [“the Constitution”]. It proves beyond any doubt that while FBR is incompetent as far as tax legislation is concerned, our elected members are least concerned to abide by the supreme law of the land under which they have taken their oaths and vowed to uphold it supremacy. They have proved to be the worst violators of the Constitution.

The cases cited above and many others quoted and relied upon therein or reported elsewhere have explained in great detail and in unequivocal terms that after the Constitution (Eighteenth Amendment) Act, 2010 [“18th Amendment”], the federation has no power whatsoever to levy any tax on capital value of immovable property, except in Islamabad Capital Territory (ICT). FBR, in utter violation of Articles 77, 142, 189 and 201 of the Constitution, in the second consecutive budget has encroached upon the legislative powers of the provinces envisaged in Article 142(c) read with Entries 49 and 50, Part I, Federal legislative List (FLL), Fourth Schedule to the Constitution.

It is shocking that the elected (sic) members sitting in the National Assembly and Senate have once again failed to take cognizance of the perpetual violations of the Constitution on the part of FBR.

The amendment made in the Federal Excise Act, 2005 [FED Act 2005 as amended up to 30 June 2024] through the Finance Act, 2024 with effect from July 1, 2024 to the effect of imposing FED on transfer of immoveable property reads as under:

“after Table-II, the new Table shall be added, namely:– “Table-III”

In the budget 2022-23, through the Finance Act, 2022 with retrospective effect, that is from tax year 2022 onwards, section 7E of the Income Tax Ordinance, 2001 [“the Ordinance”], inserted. It was challenged in all the five High Courts of the country.

A detailed discussion on constitutionality of section 7E of the Ordinance vis-à-vis the conflicting judgements of High Courts is available in ‘Section 7E: Constitutional validity’, Business Recorder, April 19, 2024. Imposition of FED on transfer of immoveable property by the Finance Act, 2024, has raised some fundamental issues relating to its validity under the Constitution“ as well as real import of amendments made in Entry 49 & 50, Part I of FLL of the Fourth Schedule by the 18th Amendment.

The judgement of single judge of Lahore High Court, though disapproved erroneously by a Division Bench in intra-court appeal [Commissioner of Inland Revenue v Muhammad Osman Gul [ICA No.35908 of 2023] [(2024) 129 TAX 364 (H.C. Lah.)] brilliantly traces the history of taxes on immovable property and makes the following noteworthy observations:

“In Pakistan, estate tax was charged under Estate Duty Act 1950, which was repealed in 1979, without any debate or deliberation. It was within competence of Federation under Entry 46 “Estate Duty on property” along with Entry 45 “Duties in respect of succession to property”. Both the entries, imposing tax on immoveable property, are repealed by 18th Amendment along with the amendment in Entry 50, where after the phrase “taxes on immoveable property” is excluding “taxes” on immovable property and not the immovable property itself from capital assets, value of which is to be taxed under Entry 50. Omission of Entries 46 & 45 along with amendment in Entry 50, collectively shows that all taxes, burden of which is on the immoveable property are excluded from competence of the Federation”.

The issue of interpretation of Entry 50, Part I of FLL of the Fourth Schedule by the 18th Amendment in the wake of conflicting judgements of five High Courts [three in favour of taxpayers and two in favour of the federation], is presently sub judice in the Supreme Court of Pakistan to authentically settle the issue whether in pith and substance section 7E of the Ordinance is a tax on income or not.

A three-member bench of the Supreme Court seized the matter and heard it for three days on day-to-day basis which was not as per the Supreme Court (Practice & Procedure) Act, 2023. Later, on pointing out that since the matter involved interpretation of the Constitution, it could not be heard by less than a five-member bench under section 4 of the Supreme Court (Practice & Procedure) Act, 2023, constituted a larger bench to hear the matter, which was fixed but adjourned on April 25, 2024, and any fresh hearing date is yet not announced.

A holistic reading of Serial No 1 of the newly-inserted Table III to the Federal Excise Act, 2005 [FED Act 2005] shows that in pith and substance it is a duty to be paid on gross consideration at the time of “allotment or transfer of commercial property and first allotment or first transfer of open plots or residential property by any developer or builder in such mode and manner and subject to such conditions and restrictions as may be prescribed by the Board”.

The textual and plain reading of the law shows that any transferor of:- commercial property or first time allotment/transfer of open plot and any developer or the builder of:- residential property will charge and recover from the buyer or allottee, as the case may be, FED on the rate(s) applicable on the day of transfer or allotment.

There is absolutely no doubt that in respect of all the above events, FED is imposed on transfer of immoveable property, on buyer or allottee to be collected and paid in the government treasury by any transferor in respect of commercial property or first time allotment/transfer of open plot and by any developer or builder for residential property.

This imposition in pith and substance represents FED on transfer of immovable property and not any services rendered by the transferor or developer/builder. If it is capital value tax (CVT), then FBR has already conceded in Circular 3 of 2012 that power to levy it exclusively vests with provinces after the 18th Amendment, except in ICT. If for argument’s sake, it is conceded that FED is imposed on services then it is hit by Entry 49, Part I of FLL, Fourth Schedule to the Constitution that gives exclusive right for such taxation to the provinces after the 18th Amendment.

It is an established law that entries contained in the FFL, Fourth Schedule to the Constitution are mutually exclusive and for one taxable event two entries cannot be invoked—Pakistan International Freight Forwarding Association v Province of Sindh & Another (2016) 114 TAX 413 (H.C. Kar.) followed in Pakistan Mobile Communication Ltd & 2 Others v Federation of Pakistan & Others (2022) 125 TAX 401 (H.C. Kar.).

Entry 43, Part I of FFL, Fourth Schedule to the Constitution even in its widest possible scope/import cannot override Entry 49 as far as any imposition on services is concerned. Such a tax cannot even be imposed by the Parliament (Majlis-e-Shoora) under Entry 50 or 52, Part I of the FLL read with Article 77 and 142(a) of the Constitution after the 18th Amendment.

The legislative competence of provinces in view of ouster clause in Entry 49, Part I of FLL, Fourth Schedule to the Constitution is succinctly elaborated in Pakistan International Freight Forwarding Association v Province of Sindh & Another (2016) 114 TAX 413 (H.C. Kar.) followed in Pakistan Mobile Communication Ltd & 2 Others v Federation of Pakistan & Others (2022) 125 TAX 401 (H.C. Kar.).

Needless to say that the National Assembly by imposing FED in respect of transfer of immoveable property has once again violated the clear command of the supreme law of the land. All the institutions are bound to follow the Constitution and judgements of the Supreme Court and High Court in terms of its Articles 189 and 201. The National Assembly has violated both by imposing FED on transfer of immoveable property that falls outside its legislative competence.

Even if it is FED on services, exclusive legislative competence to tax it vests with the provinces in the wake of the 18th Amendment effective from April 19, 2010. This unconstitutional imposition of FED will certainly be challenged under Article 199 of the Constitution by the aggrieved persons.

Copyright Business Recorder, 2024