Amidst preparations for the upcoming budget 2024-25, the business community in Pakistan, represented by the Karachi Chamber of Commerce and Industry (KCCI), is vehemently urging the government to abolish Section 7E of the Income Tax Ordinance, 2001.
This section pertains to the deemed income from immovable property, a contentious issue that has sparked widespread concern within business circles.
Section 7E, introduced through the Finance Act of 2022, mandates that residents are taxed on the “deemed” income derived from any immovable property they own but do not utilize. This deemed income is calculated as 5% of the property’s fair market value, subject to a 20% tax rate, effectively imposing a 1% capital value tax on the property’s total value.
However, the Karachi Chamber of Commerce and Industry has highlighted several critical issues with this provision. Firstly, it argues that the federal government’s imposition of taxation on immovable property contradicts the 18th Amendment, which devolved the taxation of immovable property to provincial governments. This constitutional conflict raises questions about the legality and jurisdiction of such taxation measures.
Moreover, the speculative nature of this tax appears to clash with Section 116 of the Wealth Tax under the same ordinance. Taxing unutilized immovable property diverges from international norms and practices, further complicating its justification.
Despite being in effect for two years and witnessing subsequent amendments aimed at withdrawing previous exclusions, Section 7E has encountered significant hurdles in mobilizing tax collection. The federal government’s struggles in enforcing this provision underscore its controversial nature and practical challenges.
Legal challenges to the validity of this tax are also underway in various courts across the country, adding to the complexity of the issue.
In light of these concerns, the business community is urging the government to repeal Section 7E from the Income Tax Ordinance, 2001. They argue that the imposition of such taxation is unjustified on multiple grounds, including constitutional conflicts, inconsistencies with international standards, and practical difficulties in enforcement.
As discussions surrounding the budget for the fiscal year 2024-25 intensify, the fate of Section 7E remains uncertain. However, the resounding call from the business community for its abolition underscores the significance of addressing these concerns in shaping tax policy and promoting economic stability and growth.