FCC declares section 7E deemed income tax unconstitutional, strikes down FBR levy framework

The Federal Constitutional Court (FCC) on Thursday struck down Section 7E of the Income Tax Ordinance 2001, declaring the provision ultra vires the Constitution and invalidating the Federal Board of Revenue’s regime for taxing deemed income on immovable property.

In an open court short order, a two-judge bench comprising Chief Justice Aminuddin Khan and Justice Ali Baqar Najafi held that Section 7E was “void ab initio.” The detailed judgment will be issued separately.

The ruling immediately nullified all actions, proceedings and notices initiated by tax authorities under the disputed provision.

Section 7E had been introduced through the Finance Act 2022 for tax year 2023 and allowed taxation on notional income arising from ownership of immovable assets. It applied to properties valued above Rs25 million and imposed a levy based on five per cent of FBR-assessed fair market value, resulting in an effective annual tax of around one per cent on the capital value of covered properties.

The FCC decision also resolved a long-running constitutional conflict across multiple courts. Petitions filed by taxpayers from the Sindh High Court and Lahore High Court were converted into appeals and allowed, while petitions filed by the FBR and Commissioner Inland Revenue against judgments of the Peshawar and Balochistan High Courts were dismissed.

Previously, the Peshawar and Balochistan High Courts had already declared the provision unconstitutional and struck it down. The Islamabad High Court had not annulled it entirely but had read down parts of the law. The Lahore and Sindh High Courts had delivered differing outcomes at various stages, leading to consolidated hearings before the FCC after transfer under constitutional provisions following the 27th Amendment.

The petitions challenging Section 7E argued that the levy imposed tax on deemed income without actual receipt or accrual, effectively operating as a property tax rather than income tax. They further contended that it exceeded legislative competence under Article 77 read with Entry 47 of the Federal Legislative List and violated Article 25 by introducing arbitrary classifications among taxpayers.

The federal government and tax authorities defended the law as a legitimate measure to broaden the tax base and capture untaxed economic capacity, arguing that deemed income is a recognised legal fiction in taxation law and falls within Parliament’s constitutional authority to impose income-based taxation.

The FCC’s ruling now brings an end to the contested tax regime, removing the legal basis for enforcement under Section 7E across the country.