Lahore High Court (LHC) Stops Federal Government from Collecting “Income Tax”

In another recent landmark decision, the Lahore High Court has set aside section 7E of the Income Tax Ordinance 2001 due to it being unconstitutional and illegal. For a layperson, it means that the federal government will not be able to tax property related income though the local government can still do so.

Background & Important Facts

In July 2022, the Income Tax Ordinance 2001 was amended through the Finance Act 2022 to include Section 7E (2)(d). According to this new provision, if a property is not being used by its owner, the Federal Board of Revenue (FBR) will consider it to be earning a rental income equal to 5% of its total market value. This rental income will then be subject to a 20% tax imposed by the federal government.

Once enacted, it was challenged in the Lahore High Court on the grounds that it is not income tax which the federal government can collect but in reality a property tax which only local governments can collect. Petitioners further argued that in all the constitutions of Pakistan, property tax has always been a local matter rather than a federal matter. They argued that if the federal government is allowed to tax income driven from property, it will deprive local governments from a very important source of income and revenue.

Judgment

The Lahore High Court agreed with the petitioners and declared section 7E (2)(d) of the Income Tax Ordinance 2001 as unconstitutional and illegal.

Do you think its a good decision?