LAHORE: The Lahore High Court declared levying income tax on ‘deemed rental income’ of properties as illegal. The court allowed several identical petitions filed by Ahmad Iqbal and others who claimed that the federal government is eating up revenues which rightfully belong to local governments.
The counsel pleaded that although the tax levied under newly-inserted section 7E of the Income Tax Ordinance, 2001, has been cleverly disguised by the Federal Board of Revenue (FBR) as an ‘income tax’, it is not a tax on income.
He argued that it is a property tax which represents the single most important source of revenue of local governments all over the world. This is the first time that the FBR has intruded into the domain of property taxes. The counsel said the fiscal future of local government would be jeopardized which would violate the object and purpose of Article 140A of the Constitution.
‘Deemed rental income’ of properties: LHC approached against legislation levying income tax
He said the new law mandates that every property which is not in the use of the owner will be “deemed” by the FBR as bearing a rent equivalent to 5 percent of the total market value of the property. This “deemed rental income” would be taxed at a rate of 20 per cent, the counsel added.
The counsel asserted that property tax has remained a provincial subject under all the various constitutions of Pakistan. Furthermore, the provinces have consistently allocated the revenues derived from property tax to the respective local governments where the said properties are situated, he added.
He further argued that the right of local governments to the revenue generated from property taxes has remained enshrined in law since the insertion of section 7-E in the Urban Immovable Property Act through Punjab Finance Ordinance, 1971.
The counsel urged the court to strike down a recent legislation levying income tax on “deemed rental income” of properties. He, therefore, asked the court to declare the impugned provision of the law as unconstitutional, illegal and set aside the same.
Copyright Business Recorder, 2023
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