Uncertainty remains over refund claims after the Federal Constitutional Court struck down the deemed rental income tax and the Finance Act, 2026 repealed the provision.
ISLAMABAD: Taxpayers are seeking refunds of taxes paid under Pakistan’s deemed rental income regime after the Federal Constitutional Court (FCC) declared the levy unconstitutional and the government subsequently abolished the provision through the Finance Act, 2026.
The deemed rental income tax was introduced under the Finance Act, 2022, imposing a 20 per cent tax on deemed income calculated at 5 per cent of the fair market value of specified capital assets located in Pakistan, subject to certain exclusions.
The measure drew widespread criticism from taxpayers and industry stakeholders, who challenged its constitutional validity on the grounds that it imposed tax on notional income rather than actual earnings.
In a landmark judgement delivered on May 6, 2026, the Federal Constitutional Court of Pakistan, established under the 27th Constitutional Amendment, declared the provision ultra vires the Constitution, effectively invalidating the tax.
Following the court’s ruling, the Finance Act, 2026 formally omitted the deemed rental income provisions from the Income Tax Ordinance, 2001. The repeal was widely regarded as a consequential amendment intended to bring the tax law into conformity with the court’s decision.
Despite the repeal, uncertainty remains over the treatment of taxes already collected under the invalidated regime.
Tax experts have noted that the Finance Act, 2026 does not provide any mechanism for the automatic refund of taxes paid before the provision was struck down, leaving affected taxpayers without a clear path to recover their payments.
The absence of a dedicated refund framework has created uncertainty for individuals and businesses that paid the levy while it remained in force.
According to tax practitioners, taxpayers may be required to pursue refunds under the existing provisions of the Income Tax Ordinance, 2001 or submit claims to the Federal Board of Revenue (FBR) until a specific refund procedure is introduced.
They have urged the FBR to issue comprehensive guidelines outlining a transparent and streamlined refund process, arguing that such a mechanism would ensure consistency, reduce administrative delays and provide timely relief to taxpayers who paid the deemed rental income tax before it was declared unconstitutional.