The Federal Constitutional Court (FCC) has delivered a landmark judgment, striking down Section 7E of the Income Tax Ordinance 2001. The provision, which imposed tax on deemed rental income from properties, was declared unconstitutional and void ab initio. The decision came in response to a petition challenging the legality of the section, arguing it violated fundamental rights guaranteed under the Constitution.
Background of Section 7E
Section 7E was introduced through the Finance Act 2021, taxing individuals on the basis of deemed rental income from their properties, regardless of actual rental receipts. The provision applied to owners of more than one property, with certain exemptions. Critics argued that it imposed an unfair burden on property owners and lacked legal justification.
Constitutional Challenge
The petitioners contended that Section 7E was discriminatory and violated the right to property under Article 23 of the Constitution. They also argued that the tax was arbitrary and not based on actual income, making it a form of wealth tax rather than income tax. The FCC, after hearing arguments from both sides, agreed that the provision was unconstitutional.
Key Observations of the Court
- The court noted that Section 7E was not a valid exercise of taxing power under the Income Tax Ordinance, as it taxed deemed income rather than actual income.
- The provision was found to be discriminatory, as it targeted only owners of multiple properties without reasonable classification.
- The court emphasized that taxation must be based on clear and rational principles, and Section 7E failed to meet this standard.
Impact of the Judgment
The FCC's decision is expected to benefit thousands of property owners who were subject to tax under Section 7E. The court ordered that all assessments and proceedings initiated under the section be quashed. Taxpayers who had paid taxes under the provision may seek refunds, subject to applicable laws.
Reactions and Implications
Legal experts have hailed the judgment as a victory for taxpayers' rights and constitutional supremacy. The government, however, may explore alternative measures to tax property income, potentially through a revised legislative framework. The ruling also sets a precedent for challenging other tax provisions that may be deemed arbitrary or unconstitutional.
In conclusion, the FCC's striking down of Section 7E marks a significant development in Pakistan's tax jurisprudence, reinforcing the principle that taxation must be just, fair, and grounded in constitutional values.
