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ISLAMABAD: The Lahore High Court (LHC) held that Section 8(2) (b) of the Finance Act, 2022, is valid, constitutional and intra vires, saying no fault is found in the exercise of legislative powers by the Parliament under entry 50 of the Federal Legislative list.

The LHC on 22.12.2022 through short order had dismissed the petitions being devoid of any substance, the detailed judgment of it was announced on Tuesday.

The petitioners have challenged the constitutionality of Section 8(2) (b) of the Finance Act, 2022 on two counts; first, that the law legislated, whereby, it had allegedly taxed the foreign assets of the petitioners, is not within the territorial grasp of the Parliament; and second, the absence of legislative competence because matter of taxing immovable property exclusively falls within the legislative domain of the provincial legislature(s).

It was their further argument that the parliament lacks authority to tax assets located outside the territorial limits of Pakistan, which limits are defined under Articles 1(2) and 141 of the Constitution.

Finance Act: LHC urged to strike down ‘tax on foreign assets’ clause

The judgment authored by Justice Asim Hafeez noted that tax is levied on the value of the assets, which assets were identified as foreign assets of a resident person. Applying the rule of “pith and substance” manifestly tax levied is “in relation to the capital value of the assets”, which cannot be equated with the levy on corpus of immovable property.

It said that there is no ambiguity found in the words/ phrases employed in Entry 50. Entry 50, read disjunctively, comprised two separate parts, each of which part describes/ caters for a distinct and separate class/ category of taxes; first, half of the Entry 50 provisioned for the authority to tax on the capital value of the assets, and latter half provided for taxes on the immovable property, which category of taxes is excluded from the legislative domain of the parliament.

The court noted that the counsels for the petitioners have misconstrued the definition of taxation in Article 260 of the Constitution, which needs to be given effect in the context of the category of taxes, to be levied by the parliament of provincial legislature(s) in accordance with the scope of legislative competence conferred.

The judgment said that in pith and substance, tax on capital value tax of foreign assets is not a tax on immovable property, but for all intent and purposes subject(s) of tax in question are the resident individual(s), as defined under section 13(f) of Act, 2022.

“Undisputedly, provincial legislature(s) are competent to tax the immovable properties – situated within their respective territories, irrespective of the residence/ domicile of the owner, who might not be residing within the territorial limits of the Province where property is situated – for instance immovable property located in the city of Lahore is taxed under the provisions of Punjab Urban Immovable Property Tax Act 1958, which tax is imposed on the property and bears no nexus with the residence of the owner, who might be residing in Islamabad or Karachi,” it added.

The court said that the provinces cannot impose tax on capital value of assets, assessed on the aggregated capital value of the assets held by a resident individual, which might include assets outside the territorial limits of the province(s) – for instance, various properties simultaneously located in different cities of Lahore, Karachi, Peshawar, and Quetta.

It said that in the wake of the character of the tax, only the Parliament could make laws for the imposition of tax on the aggregated capital value of assets – foreign assets are subject matter of challenge through these petitions. Tax on the capital value of assets cannot be construed as a municipal tax, which is otherwise applicable on foreign immovable properties in terms of “law of Situs”.

Parliament has variously drafted laws having extra-territorial operations and enforcement thereof is hardly questioned by the domestic courts. The tax in question is not on non-citizens but defined resident individuals.

It noted that before the 18th amendment, taxes on capital gains on immovable properties were excluded from Entry 50, and after the amendment, the expression “on capital gains” was omitted; however, exclusion to the extent of immovable property was retained.

Copyright Business Recorder, 2023

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