Peshawar High Court Declares Section 7E Unconstitutional

Peshawar High Court Declares Section 7E Unconstitutional

Islamabad, February 14, 2024 – The Peshawar High Court (PHC) has struck down Section 7E of the Income Tax Ordinance, 2001, terming it beyond the legislative competence of the Parliament.

The decision, delivered by a division bench, holds that the Parliament has no jurisdiction to impose income tax specifically on immovable property.

The crux of the matter revolves around Entry No. 50 of the Fourth Schedule to the Constitution, which, according to the PHC, limits the Parliament’s authority to tax the Capital Value of Assets. The court clarified that “capital value of assets” encompasses an inseparable complete whole of the property, both movable and immovable.

The PHC emphasized that the impugned legislation, Section 7E, introduced through the Finance Act, 2022, lacked compliance with the test of capital value of assets. The court concluded that the imposition of taxes on immovable property through a deeming clause, as per the impugned legislation, exceeded the legislative competence of the Parliament.

The division bench resolved the petition filed by Latif Hakeem and several others who challenged the insertion of Section 7E into the Income Tax Ordinance, 2001, through the Finance Act, 2022.

Section 7E, as contested by the petitioners, stipulates that, for the tax year 2022 and onward, a resident person shall be treated as having derived income chargeable to tax, equivalent to 5% of the fair market value of the capital assets situated in Pakistan, chargeable to tax at a rate of 20%.

The challenges to the legislation were based on three primary grounds: the alleged legislative incompetence of the Parliament, claims of discrimination, and accusations of being confiscatory.

The petitioners’ counsel argued that the right to hold property is a fundamental right of every citizen of Pakistan and that the impugned legislation directly affects this right by subjecting non-income-producing property to taxation. The counsel contended that Parliament lacks the power, under Entry No. 47 of the Fourth Schedule to the Constitution, to legislate on this subject.

Referring to a judgment by the Lahore High Court in Constitutional Petition No. 5255912022 dated 06.04.2023, the counsel asserted that, post the 18th amendment to the Constitution, Parliament is without jurisdiction to tax immovable property in any form. Additionally, it was argued that no tax can be levied through a deeming provision unless there is an event of taxation tied to income, as outlined in the Ordinance.

In summary, the Peshawar High Court’s decision has not only nullified Section 7E but has also underscored the importance of adherence to constitutional provisions when legislating on matters of taxation. This ruling sets a precedent for the protection of citizens’ property rights and reinforces the limits of parliamentary authority in imposing taxes.