The Islamabad High Court (IHC) has declared the Section 7E introduced through the Finance Act, 2022, to be ultra vires the Constitution and declared to be void ab initio.

Under Finance Act, 2022 section 7E was introduced whereby, for tax year 2022 and onwards, every resident person has been treated to have derived as income, an amount equal to five per cent of the fair market value of the capital asset situated in Pakistan subject to exclusions of the capital assets provided in the law.

The Islamabad High Court’s judgement sheet, available with Business Recorder, stated: “Summing up the reasoning as stated hereinabove, sub-section 2 of the impugned provision is confiscatory in nature and also discriminatory in its effect, and thus constitutes a violation of Article 25 of the Constitution.

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“It also violates Article 23 of the Constitution and goes beyond the ambit of reasonable restrictions as provided thereunder, hence, is liable to be struck down.

“Moreover, the classes or exemptions provided from payment of the tax does not seem to have any proper basis and has been created at whims of the Legislature which cannot be regarded as reasonable classification or classification based on intelligible differentia, hence violates Article 25 of the Constitution.

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“Neither the machinery for assuming the fair market value has been provided, nor the recovery mechanism, and on the touchstone of Messrs Elahi Cotton Mills (supra), such deficiencies may form the basis for striking down a statute.

“For the above reasons, the instant petition as well as petitions mentioned in the schedule are allowed and sub-section 2 of the impugned provision i.e. Section 7E of the Ordinance, is declared to be ultra vires the Constitution, hence it is struck down and is declared to be void ab initio.

“Consequently, the notices issued by the department under section 7E ibid are also set aside for being without lawful authority,” added the notice.

Last month, the Peshawar High Court (PHC) declared that Section 7E of the Income Tax Ordinance, 2001, does not qualify the test of Capital Value of Assets and, therefore, is beyond the legislative competence of the Parliament; hence, the same is hereby struck down.

A division bench of the PHC decided that on the petitions of Latif Hakeem and others who had challenged the impugned legislation on three grounds; first, legislative incompetence of Parliament; second, the said levy is discriminatory and third; being confiscatory.

The judgment, authored by Justice Syed Arshad Ali, held; “In view of the clear bar as provided under Entry No 50 of the Fourth Schedule to the Constitution, the Parliament has no jurisdiction to impose income tax on immoveable property;

The Federal Board of Revenue (FBR) on Wednesday directed field formations of Punjab that the section 7E (tax on deemed income basis) of the Income Tax Ordinance 2001 would now be applicable in cases falling under the jurisdiction of Lahore High Court from Feb 15, 2024.

In this regard, the FBR has decided to issue fresh instructions to its field formations.