‘The Federation, in light of Entry 50, cannot tax the capital value of immovable property at all’

ISLAMABAD: Advocate Raashid Anwer argued that the federation, in light of Entry 50, could not tax the capital value of immovable property at all – be it through a wealth tax or tax similar to Section 7E of the Income Tax Ordinance, 2001.

A three-judge bench, headed by Justice Syed Mansoor Ali Shah and comprising Justice Muhammad Ali Mazhar and Justice Athar Minallah, on Wednesday, heard the petitions challenging the vires of Section 7E (Tax on Deemed Income) introduced into the Income Tax Ordinance, 2001, through the Finance Act, 2022. Anwer has concluded his arguments.

Anwer further argued that Entry 47 was not applicable in the present circumstances as first, the department (the FBR) had only selectively relied on passages for Elahi Cotton relating to when a “deeming” provision may be applied, and that the tax in question was upheld as being vires on account of the same falling under Entry 52 [which reads, “Taxes and duties on the production capacity of any plant, machinery, undertaking, establishment or installation in lieu of the taxes and duties specified in entries 44, 47, 48 and 49 or in lieu of any one or more of them”] which requires that there be an underlying economic activity/transaction (in the instant case there is no underlying economic activity/transaction as the tax is even applicable on vacant plots of land).

Immoveable property: PHC strikes down Sec 7E of Income Tax Ordinance

Second, Anwer argued that as the tax does not fall under Entry 47 or 52, it needs to be seen whether the same falls under Entry 50 (which – after the 18th Amendment – reads “Taxes on the capital value of the assets, not including taxes on immovable property”)?

Anwer argued that Entry 50 places a bar on the federation from imposing any tax on the capital value of immovable property. He further stated that a Divisional Bench of the Peshawar High Court (which struck down Section 7E on the ground that a tax had to be imposed on the capital value of all assets – movable and immovable, and not on immovable alone) through its judgement dated 02.01.2024 had rightly held that Section 7E could not fall under Entry 47. He, however, contended that the federation (in light of Entry 50) could not tax the capital value of immovable property at all (be it through a wealth tax or tax similar to section 7E).

Section 7E effectively imposes a tax at the rate of one per cent of the Fair Market Value (by deeming that a person shall be deemed to have derived an income equal to five per cent of the FMV of the immovable property, and shall be taxed at the rate of 20 per cent on the aforesaid income). Certain properties have also been excluded from the ambit of the tax (namely self-owned business premises, self-owned agricultural land, property on which rent is earned), as well as certain groups of individuals (namely ex-servicemen and serving personal of armed forces or ex-employees or serving personnel of Federal and provincial governments who were the original allottees of the immovable property).

Anwer had previously challenged the vires of Section 7E before the Sindh High Court (SHC), which – through its Judgement dated 28.10.2022 had upheld the levy by concluding that the federation was empowered to impose the levy by virtue of Entry 47 to the Fourth Schedule (i.e. the Federal Legislative List) [Entry 47 reads “taxes on income other than agriculture income”].

The SHC had also relied on the judgement of the Supreme Court titled, Messrs Elahi Cotton Mills & others v Federation of Pakistan (PLD 1997 SC 582) [wherein, minimum tax under Sections 80C, 80CC, and 80D were upheld] to hold that the income could be “deemed” and therefore, the levy fell under the scope of Entry 47.

Copyright Business Recorder, 2024