The Federal Constitutional Court (FCC) released a comprehensive 92-page judgment on Tuesday, declaring Section 7E of the Income Tax Ordinance unconstitutional. The court ruled that the federal parliament lacks authority to impose taxes on immovable property or base taxes on presumed income rather than actual earnings.
Chief Justice Aminuddin Khan authored the landmark verdict, which elaborates on the legal rationale behind the FCC’s initial short order issued on May 7 that invalidated the contentious tax provision. The court emphasized that taxation must serve a public purpose and that the tax burden is collectively shared by the public, regardless of whether taxpayers receive direct benefits.
Notably, the court clarified its role is limited to assessing the constitutional validity of tax laws, not their policy objectives. A law is invalidated only if it infringes fundamental rights or exceeds the legislature’s jurisdiction.
The judgment found that Section 7E, which imposed a 5 percent tax on the value of immovable property without regard to actual income generation, effectively taxed property ownership rather than wealth creation. Under Pakistan’s Constitution, the federal parliament’s taxing powers are confined to movable assets, while taxation of immovable property falls exclusively within provincial legislative authority.
“Parliament and the federal government only possess the authority to tax the value of movable assets under the constitution,” the court stated. “The authority to impose taxes on immovable property lies solely with the provincial assemblies. Any direct or indirect tax on immovable property by parliament is beyond its jurisdiction.”
The court further underscored that the Constitution guarantees citizens the right to acquire and hold property lawfully. Imposing a 5 percent tax on property that yields no actual income violates fundamental rights. It ruled that taxation must be based on real income, not hypothetical earnings.
To illustrate the inequity, the court compared a taxpayer renting a house for 250,000 rupees—who pays tax on actual rent—to an owner of a vacant plot valued at 4.5 million rupees, who was taxed under Section 7E based solely on asset valuation. The court also noted that while parliament may enact retrospective laws, fiscal and monetary laws cannot be applied retroactively.
In a significant development, the court struck down sub-clause (2) of Section 7E, which exempted certain groups from the tax. These exemptions covered plots owned by military martyrs, wounded war veterans, individuals who died during active service, ex-servicemen, and serving government officials. The court found no valid justification for these exclusive privileges, deeming them a violation of the constitutional right to equal treatment.
The judgment also addressed corporate tax matters, stating that provisions like Section 7E, designed mainly to deter real estate hoarding rather than raise genuine revenue, cannot be introduced through a Finance Bill. It emphasized that courts must interpret laws as written and cannot amend them to correct legislative flaws.
Finally, the verdict clarified internal judicial procedures, affirming that the Chief Justice has sole discretion over bench formation. It confirmed that, barring any legal obstacles, a two-member bench of the constitutional court is fully competent to hear all cases presented to it.
