Lahore High Court has declared the imposition of income tax on ‘deemed rental income’ of properties as illegal.
The court granted several identical petitions filed by Ahmad Iqbal and others, who argued that the federal government was unlawfully taking revenue that rightfully belonged to local governments.
The petitioners’ counsel stated that the tax, which was implemented under the newly-inserted section 7E of the Income Tax Ordinance 2001, was not an income tax but a property tax.
The counsel pleaded that although the tax levied under newly-inserted section 7E of the Income Tax Ordinance, 2001, has been cleverly disguised by the Federal Board of Revenue (FBR) as an ‘income tax’, it is not a tax on income.
They claimed that property tax is the most significant source of revenue for local governments worldwide and that this was the first time the Federal Board of Revenue (FBR) had intervened in property taxes.
The counsel further contended that the fiscal future of local government would be put at risk, which would violate the object and purpose of Article 140A of the Constitution.
The counsel also argued that property tax had always been a provincial subject in all Pakistani constitutions, and the revenue derived from it had always been allocated to local governments where the properties were situated.
The counsel urged the court to declare the provision unconstitutional, illegal and set it aside. In summary, the Lahore High Court has ruled that the tax on deemed rental income of properties is illegal and unconstitutional.