PkRevenue.com – The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has vehemently criticized the deemed income tax imposed under Section 7E of the Income Tax Ordinance, 2001, and called for its removal in the upcoming 2024-25 budget.
Tax on Deemed Income Deemed Unconstitutional
In its budget proposals for 2024-25, the FPCCI contested the legality of the tax on “deemed income” associated with immovable property, introduced through the Finance Act, 2022 via the insertion of Section 7E.
This section defines a deemed income as 20% of 5% of the fair market value of an immovable capital asset, as specified under Section 68 of the Ordinance. The FPCCI argues that this levy violates Entry 47 of Part 1 of the Fourth Schedule of the Constitution of Pakistan, 1973, as it taxes a situation where no transaction or resulting income exists. In essence, it attempts to impose a tax on immovable property, which Entry 50 of the Federal List prohibits.
Exceeds Federal Government’s Authority
The FPCCI emphasizes that the “tax on deemed income” under Section 7E goes beyond the federal government’s constitutional authority. They argue that Entry 50 of the post-18th Amendment Federal Legislative List restricts the federal government from levying taxes on immovable property. This power falls under the purview of the provinces.
Discriminatory Practices Highlighted
The FPCCI further contends that Section 7E is discriminatory and violates Article 25 of the Constitution. This tax burden applies only to resident taxpayers who file Wealth Statements and Income Tax Returns, excluding others from the so-called “deemed income” tax. Additionally, the exclusions granted under sub-section (2) of Section 7E are deemed unjustified, creating an imbalance and infringing upon the taxpayer’s fundamental rights as guaranteed by Article 25.
Tax Not Recognized Under Income Definition
The FPCCI argues that the definition of “income” under the Ordinance excludes “any sum deemed to be income.” Consequently, the tax levied under Section 7E is deemed illegal. The Ordinance recognizes only actual rent as taxable income, with “rent” being defined as any amount received by a property owner for its use or occupancy.
Senate Recommendations and Retrospective Application Criticized
The FPCCI brings attention to the Senate of Pakistan’s recommendations during the 2022 budget proposals, urging the National Assembly to omit the proposed Section 7E due to its unconstitutionality.
Furthermore, Section 7E(1) of the Ordinance mandates the application of this tax “for the tax year 2022 and onwards,” implying a retroactive application starting from the tax period of 01.07.2021 to 30.06.2022. The FPCCI views this retrospective application as an undue financial burden on existing taxpayers and a violation of their vested rights. They argue that taxing the fair market value of immovable properties is akin to taxing past and closed transactions, which contradicts established tax law principles.
Legal Challenges and Call for Abolishment
The FPCCI acknowledges the filing of writ petitions in various High Courts challenging the legality of Section 7E. With conflicting judgments arising from these challenges, the matter now awaits final adjudication by the Supreme Court.
In conclusion, the FPCCI vehemently opposes the tax under Section 7E, considering it unconstitutional, unlawful, and exceeding the federal government’s authority. They propose the complete abolishment of Section 7E in the forthcoming budget.
