Another blow to local governance

On the 15th of November this year, a writ-petition was filed in the Lahore High Court challenging a newly inserted section to the Income Tax Ordinance of 2001. The new section, title 7E, was a seemingly harmless inclusion to the tax ordinance that allowed the Federal Board of Revenue (FBR) to collect income taxes on immovable property.

But according to the writ petition, and other similar cases that are currently being contested in the high court, the inclusion of section 7E is a more sinister move that may in part go against the 18th amendment to the constitution. 

The new law mandates that every property which is not in the use of the owner, will be “deemed” by the FBR as bearing a rent equivalent to 5% of the total market value to the property. This “deemed rental income” would be taxed at a rate of 20%. In simple words, every property owner would have to pay a tax equivalent to 1% of the market value of his property to the federal government.

The idea to tax unused immovable property in itself is not a bad one. Property is generally a great means of storing wealth in Pakistan and largely remains undocumented and untaxed. The issue here is that with the FBR imposing and collecting this tax, the federal government is in essence collecting property tax. While the FBR has claimed and is arguing in court that this is an income tax and not a tax on property, the lines are blurry.