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ISLAMABAD: Three major revenue measures (direct taxes) of the Finance Bill, 2022, having accumulated revenue impact of Rs76 billion may be challenged in a court of law.

Former Chairman Federal Board of Revenue (FBR) Shabbar Zaidi told Business Recorder that the proposed tax on deemed income of non-productive immovable property to generate Rs30 billion and two percent Poverty Alleviation Tax on high earnings of all persons to raise revenue of Rs38 billion are expected to be challenged in courts.

Similarly, one percent Capital Value Tax on foreign immovable properties of Pakistani residents having revenue impact of Rs8 billion may also be challenged in courts.

He stated that a special tax for tax year 2022, other than income tax has been levied on all persons including companies and AOP’s where the income exceeds Rs300 million at the rate of two per cent of such income taxable under the Income Tax Ordinance, 2001.

The income for the purposes of this tax will be determined on taxable income other than brought forward depreciation, brought forward amortisation and brought forward losses. This provision will also be applicable for income determined under the Fourth, Fifth and Seventh Schedules for insurance, oil exploration and banking companies.

Tax in the similar nature was levied for the rehabilitation of displaced persons which was challenged before the Sindh and Lahore High Courts. Both the High Courts upheld the validity of this levy, and the matter is pending before the Supreme Court for decision.

According to him, the Capital Value Tax 2022 has been levied on the capital value of domestic and foreign assets under the Finance Bill, 2022. In case any immovable property falls within the purview of this CVT then is clearly invalid as the same has been devolved under the 18th Amendment to the Constitution. The Federal Government is not empowered to levy taxes on capital value of immovable property under Article 50 of the Federal Legislative List of the Fourth Schedule to the Constitution. Therefore, the Capital Value Tax 2022 on domestic and foreign assets can only be levied on moveable properties.

Zaidi raised questions about the right to tax immovable properties outside Pakistan. The question is whether or not the Federal Government has the right to tax capital value of any immovable property if that property does not fall within the areas of any provinces. The citizens of Pakistan cannot be taxed on the capital value of immovable properties outside Pakistan by the Federal Government.

Moreover, Capital Value Tax was levied by the federal government in 1989 on transactions relating to the acquisition of immovable properties. This tax which was effectively a tax on immovable property was devolved by the 18th Amendment and then adopted by the provincial governments.

Talking about the taxation of non-productive immovable property, the former chairman FBR added that for the tax year 2022 wealth tax in an indirect method on immovable property situated in Pakistan has been reintroduced. Under the proposed system all immovable property valuing above Rs25 million (other than a house for own residence) will be subject to a deemed tax. The income for such deemed tax will be five per cent of the fair value of such property. The tax rate will be 20 per cent of such income. This means that under the new section a wealth tax at the rate of one per cent has been levied under this provision. Under Entry 50 of the Federal Legislative List of the Constitution the Federal Government is not entitled to tax capital value of immovable property.

Therefore, this tax is not constitutionally valid and will be struck down in courts keeping in view Entry 50 of the Federal Legislative List, Zaidi added.

Copyright Business Recorder, 2022

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