The Peshawar High Court (PHC) on Wednesday struck down an “impugned” legislation that imposed taxes on immovable properties, saying it didn’t qualify the test of Capital Value of Assets and was beyond legislative competence of the Parliament.
“In view of the clear bar as provided under Entry No. 50 of the Fourth Schedule to the Constitution, the Parliament has no jurisdiction to impose income tax on immovable property,” the court’s judgement read.
The Parliament has the jurisdiction to tax Capital Value of Assets in terms of Entry No. 50 of the Fourth Schedule, it added.
Capital Value of Assets means an inseparable complete whole of the property (both moveable and immovable), PHC explained.
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The development comes after a petition was filed against the insertion of section 7E through Finance Act, 2022 to the Income Tax Ordinance, 2001 (Ordinance), which provided that for the tax year, 2022 and onward, a resident person shall be treated to have derived as income chargeable to tax, an amount equal to 5% of the fair market value of the capital assets situated in Pakistan, chargeable to tax @ 20% under Division-VIII C of Part-I of the First Schedule to the Ordinance.
The vires of the impugned legislation were challenged mainly on three grounds; firstly, legislative incompetence of Parliament; secondly, the said levy was discriminatory and thirdly; being confiscatory.
According to the judgement, the learned counsel for the petitioners argued that right to hold property is “the fundamental right of every citizen of Pakistan and the impugned legislation has directly affected the said right of the petitioners by making the non-income producing property owned by the petitioners subject to incidence of taxation”.
Meanwhile, the Deputy Attorney General assisted by the learned counsel for the Revenue argued that an immovable property cannot be taxed by the Parliament after 18th amendment in the Constitution, but “the capital value of Asset, though it may have not realised any income, can still be taxed by the Parliament through a deeming clause in terms of Entry No. 47 in the Fourth Schedule of Constitution.”
The learned counsel also maintained that since the tax can be imposed on income and when the immovable property does not generate any income, it cannot be subject to impost of income tax through a deeming clause, as the same would not only be a violation of the basic purpose of direct taxation but would also be confiscatory.
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The judgement read that the Entry No 50 as it stood before the 18ft amendment in the Constitution did include the power of Federation to tax immovable property in any form but the exclusion was capital gains on immovable property. The said area was available to the Federation in the same fashion in the Constitution of Islamic Republic of Pakistan, 1962 in form of entry No. 42(e) which reads “taxes on capital value of asset, not including taxes on capital gains on immovable property”.
“We are in full agreement with the observation made by the learned Judges of the High Court. Item 50 of the Fourth Schedule provides for tax on capital value of the assets not including taxes on capital gain on immovable property,” it stated.
In its opinion mentioned in its judgement, the court said, “if a tax is to be levied on property, it will not be irrational to correlate it to the value of the property and to make some kind of annual value the basis of the tax, without intending to tax income”.
The judgement said that the power of taxation on income as provided under Entry No. 47 of the Parliament was altogether different from the power of Parliament to tax capital value of assets as provided under Entry No. 50; “both are different area of legislation”.
“If a tax is to be levied on property, it will not be irrational to co-relate it to the value of the property and to make some kind of annual value the basis of the tax, without intending to tax income.
“Having discussed the constitutional scheme, we would now revert to the impugned legislation,” it concluded.
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