TAX on deemed income basis on immovable properties under section 7E of the ITO, 2001 as ULTRA VIRES of the constitution: LHC

PESHAWAR: A leading tax expert of KP, Muhammad Umair Zeb told to Khyber Mail on Monday that the Lahore High Court declared levying income tax on ‘deemed rental income’ of properties as illegal. The court allowed more than 1,000 petitions who claimed that the federal government is eating up revenues which rightfully belong to local governments.
In a 50-page judgment, Justice Shahid Jamil Khan declared that the market value of the immovable property as income is beyond the competence of federal legislators, and treating it as such is discriminatory under Article 25 of the Constitution.
Muhammad Umair Zeb, who is Member Tax Bar, Peshawar & Nowshera further briefed that the Petitioners took the plea that Section 7E of the ITO is ultra vires the Federal Legislature’s field of competence as listed under Entry 47 and 50 of the Fourth Schedule to the Constitution of Islamic Republic of Pakistan 1973 (“Constitution”). It was argued by the Petitioner’s Counsel, inter-alia, that after the 18th Amendment, taxation of immoveable property has been excluded from Entry 50, and therefore, taxation of income as envisaged in Entry 47 cannot be deemed for immoveable property. Moreover, it was further argued that a legal fiction of deeming income has been employed to overcome the impediment in the Constitution, which is not permissible. Furthermore, it was also argued that the exclusion of persons in Section 7E(2)(d) of the ITO is discriminatory. It was further contended that this fiction is against the settled principles of taxing income.
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. 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.
Umair Zeb, invited attention to the Judgement that the Judge observed the event or incidence of all kinds of taxation, direct or indirect, is to be decided by the legislature through enactment, influenced by political, economic and social factors, as well as international agreements and treaties.
He said taxes on a person or property are generally direct taxes, and tax on transactions is indirect, for it goes with the transaction and falls where the transaction terminates.
The judge observed that the state’s power to tax is the incident of sovereignty exercised through legislative discretion, which could not be curtailed on the grounds of being harsh or unreasonable.
Umair Zeb, the tax analyst briefed the Judgment “Since Federal Legislature is competent to fix a maximum limit of possessing or controlling property and can levy tax, driving competence from Entry 50 [of the Fourth Schedule], to achieve this goal,” he wrote.
“Accumulation of wealth through unfair means can be checked and criminalised through taxing provisions along with amendments to corresponding provisions of other relevant laws,” he added.
However, Justice Khan said that excluding people under clauses (i), (iii) and (iv) of Section 7E(2)(d) of the ordinance was discriminatory.
The judge ruled that this clause is highly discriminatory for those who purchase property from their savings but were never allotted any asset, including immovable property, during their service.
He said while excluding certain persons, the legislature ignored the persons, who inherited the immovable property but are not capable of paying capital value tax, particularly when the tax is on the person and not the property.
“This omission makes the levy expropriatory and confiscatory for those who might have to sell the asset to be taxed, for paying the tax,” he said.
The judge said the curative legislation is expected to bring the provisions of Section 7E within the spirit of taxing the capital value of assets and to harmonies it with other provisions of the income tax ordinance.