Sequel to 18th Amendment: FBR has no authority to impose wealth tax on immovable property

The Federal Board of Revenue (FBR) has no legal authority to impose wealth tax on immovable property after 18th Amendment in the Constitution which bars the federal government from taxing immovable property. The federal government has surrendered its powers of taxing gains accruing from property under the 18th Amendment.
The amendment in the Federal Legislative List Part-I of the Fourth Schedule of the Constitution now stipulates that the federal government cannot impose tax on immovable property. The power to collect capital value tax (CVT) on immovable property has also been transferred to the provinces.
Any move to impose wealth tax on immovable property by the FBR would have serious legal implications which would be challenged in courts. The FBR is reportedly recommending imposing wealth tax on immovable property, which, if incorporated in the budget, would not be implementable.
Analysts argue that the only way the government can introduce wealth tax is through introduction of legislation by provinces as, in the case of sales tax on services through Provincial Sales Tax Ordinances, the provincial governments levied sales tax on services and collection rights were given to the FBR.
Analysts further argue that the proposal to re-introduce wealth tax would discourage formation of wealth in the country. Any kind of proposal that seeks to re-introduce wealth tax would discourage documentation of assets. There is unanimity of views that not only all income sources must be taxed but also that the creation of wealth is an economically positive activity: wealth generation and capital formation is needed for economic growth. Once income tax is charged then charging tax on savings from the same income does is logically inconsistent.
Experts added that wealth tax would negatively impact the growth potential of the economy. People would start hiding their assets and creation of ''Benami-Assets'' would again start. The investors and potential persons would start purchasing assets in the name of others. Another expert opined that except India, no other country in the region imposes wealth tax. In India, wealth tax is charged under the Wealth Tax Act, 1957 for every assessment year in respect of net wealth of corresponding valuation date, inter alia, on every individual Hindu Undivided Family and company at the rate of one percent of the amount by which net wealth exceeds Rs 1.5 million.
Instead of imposing wealth tax, the government should consider other options. The government has the option of imposing minimum tax on non-business assets. All assets generating income on which tax has been paid should be out of the purview of wealth tax. Secondly, those assets which are used in business, like plants, machinery, equipment etc, should also be excluded from the purview of wealth tax because such business assets are generating income.
If the intention of the government is to impose tax on people who generate wealth, but are not paying tax, then income tax should be levied on property by calling for returns and asking for the source of investment. The FBR is empowered to inquire about the source of funds for the purchase of property. The tax department can ask the owner of properties to explain source of money under the provisions of the Income Tax Ordinance 2001.
When contacted, an FBR official told this scribe that a committee headed by FBR Member Inland Revenue Khawar Khurshid Butt is considering the pros and cons of wealth tax restoration. Currently, the committee has convened a meeting at the Institute of Chartered Accountants of Pakistan (ICAP) in Karachi and other meetings at some Regional Tax Offices (RTOs) would be convened to analyse the legal aspects of wealth tax restoration. Another meeting on the possibility of restoring wealth tax was also convened at RTO Lahore where most of the tax experts/lawyers opposed the restoration of the wealth tax.
The official categorically said that it is not necessary that the committee would accept or reject the proposal of wealth tax restoration, but it would submit its viewpoint on the implications of levying wealth tax on the economy. One of the key members of the Revenue Advisory Council (RAC) has proposed restoration of wealth tax. The Wealth Tax Act was abolished in 2002-03 and its restoration could generate additional revenue. However, some members of the RAC strongly object to the proposal with the argument that wealth tax imposition would result in flight of capital. There are many negative implications of restoration of wealth tax including transferring of investment/cash abroad by industrialists, etc.