The National Assembly through the Finance Act 2012 amended section 37(5) of the Income Tax Ordinance, 2001 [“the Ordinance”] and for the first time levied capital gains tax (CGT) on disposal of immovable property. Punjab Assembly reintroduced CGT in the Finance Act 2013 [abolished in 1979] contesting the Parliament’s legislative competence.
Who has the right under the Constitution of Islamic Republic of Pakistan 1973 [“the Constitution”] to levy this tax? Entry 50, Part I of the Federal Legislative List (FLL), Fourth Schedule to the Constitution [hereinafter “Entry 50”] gives exclusive power to provincial assemblies to levy “taxes on immovable property”. Under Entry 50, the Parliament can only levy taxes on capital value of assets excluding taxes on immovable property.
It is an established law that entries contained in the Fourth Schedule to the Constitution are mutually exclusive and for one taxable event two entries cannot be invoked—Pakistan International Freight Forwarding Association v Province of Sindh & Another 2017 PTD 1 followed in Pakistan Mobile Communication Ltd & 2 Others v Federation of Pakistan & Others (2022) 125 TAX 401 (H.C. Kar.).
Entry 50, as amended by Constitution (Eighteenth Amendment) Act, 2010 [commonly called the 18th Amendment], reads as under:
“50. Taxes on the capital value of the assets, not including taxes on immovable property”
Prior to the 18th Amendment, the language of Item No. 50 was:
“50. Taxes on the capital value of the assets, not including taxes on capital gains on immovable property”
After omission of words “capital gain” from Entry 50 through the 18th Amendment, the Federal Board of Revenue (FBR) sought the opinion of Ministry of Law and Justice [MoF] pleading that Federal Government obtained right to levy capital gains tax on immovable property in the wake of the said amendment. The MoF, according to FBR, endorsed its point of view. Having purportedly obtained a favourable opinion, FBR through the Ministry of Finance, presented to the National Assembly a Bill proposing CGT on immovable property.
Sections 236C and 236K were also inserted in the Ordinance in 2012 and 2014, respectively, for collection of advance tax from sellers and buyers at the time of sale/purchase/transfer of immovable property. Later, the Finance Act, 2019 enhanced rates of advance tax on sale and purchase of immovable property as well as on capital gains arising out of its disposal.
There is no serious debate until today on whether imposition of CGT on immovable property by the National Assembly in 2012 was as per the Constitution or not. Did it base on correct interpretation of the amended language of Entry 50, Part I of FLL, Fourth Schedule to the Constitution especially when the Punjab Assembly also used the same in 2013?
The phrase “not including taxes on immovable property” cannot be read to “include taxes on capital gains on immovable property”. On the contrary, it also restricts the scope of Entry 47 of FLL that says: Taxes on income, other than agricultural income. Since Entry 50 categorically says: “not including taxes on immovable property”, it means taxes that include even CGT—so only rent (being income) or annual letting value (being deemed income) can alone be taxed under Entry 47 of FLL. Use of the word “taxes’ in plural form by the Legislature in Entry 50 is significant and needs consideration as it is no more related to just CGT or capital value tax (CVT). The word “taxes” includes all kinds of taxes and not merely CGT or CVT on immovable property. The language of constitutional provision is clear and unambiguous.
After the 18th Amendment, the Federal Government cannot levy wealth tax, CVT, CGT or any tax under any nomenclature on immovable property as this is within the exclusive domain of the provinces. Recent judgements of the Sindh High Court upholding levy of tax through the Finance Act 2022 under section 7E of the Ordinance and CVT on immovable property of a resident individual situated outside Pakistan, with due deference, need appraisal by the Supreme Court of Pakistan. Both the orders are assailed by way of leave to appeal but not yet fixed.
It is desirable that constitutional experts, members in Senate, National and Provincial Assemblies, debate the scope of Entry 50 after the 18th Amendment. In 2012, the Parliament encroached upon the provinces’ right by including immovable property in section 37(5) of the Ordinance and now again, by adding section 7E as explained in ‘Legal fiction, Section 7E & Constitution’, Business Recorder, December 2, 2022.
Section 8(3)(c)(i)) of the Finance Act, 2022 shows that it is not CVT, levied on foreign assets of a resident individual. Lahore High Court in Zaka Ud Din Malik v Federation of Pakistan etc [W.P. No.50314/2022] ignored this point. In reality, it is a tax imposed on notional value of foreign assets determined by applying exchange rate, notified by State Bank of Pakistan, on the last day of the relevant tax year for which CVT return is filed (hence measure is notional gain due to fluctuation of exchange rate). Undoubtedly, it falls outside the ambit of Entry 50 that authorises Parliament to impose tax on capital value of moveable assets after the 18th Amendment.
From the reading of judgement (supra) of Lahore High Court, it appears that this aspect was neither taken in the writs, nor pressed in the arguments. Even the Sindh High Court did not discuss this aspect in Irfan Hussain Halai & others v Federation of Pakistan & another. The manner in which tax is levied renders it unconstitutional even if the right of Parliament under Entry 50, for argument sake, to levy CVT on foreign immovable property is accepted.
Strangely, no province, except the Punjab, till today has taken cognizance of the fact that the right to impose CGT, CVT or wealth tax, etc., on immovable property indisputably vests with provinces after the 18th Amendment.
The Punjab Assembly correctly read Entry 50 and levied CVT on immovable property vide Finance Act 2012 and CGT through the Finance Act 2013. It is pertinent to mention that Federal Government has not contested these acts of the Punjab until today by referring the matter to the Supreme Court under Article 184(1) & (2) of the Constitution that reads as under:
184- Original jurisdiction of Supreme Court.-(1) The Supreme Court shall, to the exclusion of every other Court, have original jurisdiction in any dispute between any two or more Governments.
Explanation.-In this clause, “Governments” means the Federal Government and the Provincial Governments.
(2) In the exercise of the jurisdiction conferred on it by clause (1), the Supreme Court shall pronounce declaratory judgments only.
Since 2012, legislators sitting in provincial assemblies have not realised that the Constitution debars the Parliament to levy taxes on immovable property. It is simple that if the Parliament cannot levy taxes on immovable property, how can it levy CGT or CVT on immovable property? Before the amendment in Entry 50 by the 18th Amendment, the Parliament was barred from taxing “capital gain on immovable asset”.
After the passage of the 18th Amendment and receiving the assent of President of Pakistan on April 20, 2010, this bar was extended to all kinds of “taxes on immovable property”.
Wizards sitting in National Assembly, while passing the Finance Acts of 2012 and 2022 failed to see the second part of Entry 50 that is couched in negative phrase. The phrase “not including taxes on immovable property” precludes National Assembly to levy taxes on immovable property.
Under Entry 50, as amended by the 18th Amendment, the National Assembly can levy taxes on capital value of moveable assets but has no authority to levy any tax, including CGT, CVT, wealth tax etc on immovable property.
The way the National Assembly and FBR have misread plain language of second part of Entry 50 speaks volumes about their level of competence. This also testifies to the fact as to why we have so much confusion and chaos in tax and other legislations ignoring fundamental provisions of the Constitution.
It is important to note that the rich and mighty owners of immovable property in the wake of the 18th Amendment are outside the purview of Parliament for levy of progressive taxes like wealth tax, inheritance tax etc that were once in vogue in Pakistan but repealed later on to serve them.
Majority of rich absentee landlords are not paying due tax on their colossal agricultural incomes. The poor and small farmers are burdened with heavy sales tax on many goods (inputs) directly used for crop production but the wealthy absentee landlords are paying negligible tax on their humungous agricultural incomes and no wealth tax on their agricultural lands.
(Huzaima Bukhari & Dr Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)
Copyright Business Recorder, 2023