Court Declares Section 7E Unconstitutional

The Federal Constitutional Court has declared Section 7E of the Income Tax Ordinance, 2001 unconstitutional, ruling that the provision exceeded the constitutional authority of the federal government.

Section 7E, introduced through the Finance Act, 2022, imposed tax on “deemed income” arising from immovable property. Under the provision, owners of certain properties were deemed to earn income equivalent to 5% of the fair market value of the property, regardless of whether any actual rental income was generated.

The provision had faced significant legal scrutiny since its introduction, with concerns raised over the constitutional jurisdiction of the federal government in relation to taxation of immovable property.

Petitioners argued that while the Constitution permits the federal government to levy tax on income, taxation relating directly to immovable property falls within the legislative domain of provincial governments. It was contended that Section 7E effectively imposed a property tax under the guise of income taxation.

In its judgment, the Federal Constitutional Court held that the provision was ultra vires the Constitution, concluding that the federal government lacked the authority to impose such a levy through the Income Tax Ordinance.

The ruling effectively nullifies the application of Section 7E and reinforces the constitutional distinction between federal taxation powers and provincial authority over immovable property taxation.

The decision is expected to have significant implications for the real estate sector and property owners nationwide, while also shaping the constitutional framework governing future taxation measures related to immovable property.