Huzaima Bukhari and Dr Ikramul Haq
The federal government, through the Finance Act 2012, amended section 37(5) of the Income Tax Ordinance, 2001 and for the first time levied income tax on gain of immovable property in the history of Pakistan. Punjab levied a similar tax in the Finance Act 2013 but never bothered to implement it or contest the authority of the federal government to levy such taxation by invoking Article 184(1) of the Constitution. Obviously, this taxation cannot be levied simultaneously by the centre and provinces.
The question is whether or not the federal government has the right under the Constitution to levy this tax? In fact, the federal government has ‘abused’ Entry 50 of the Federal Legislative list of the Fourth Schedule to the 1973 Constitution by levying income tax on gain of immovable property. The right under this Entry vests exclusively with the provinces to tax capital gain arising out of disposal of immovable property.
Entry 50 says: “Taxes on the capital value of the assets, not including taxes on immovable property”. Prior to the Eighteenth Constitutional Amendment Act, 2010, the language of this Entry was: Taxes on the capital value of the assets, not including taxes on capital gains on immovable property”. After omission of words “capital gains” from Entry 50, Federal Board of Revenue (FBR) sought the opinion of Law and Justice Division about its scope and import. According to the FBR, the Law and Justice Division endorsed its point of view that under the amended language of Entry 50, the levy of income tax on capital gain on the disposal of immovable property had become a federal subject and therefore national parliament could legislate on it.
In the Finance Act 2012, section 37(5) of the Income Tax Ordinance, 2001 was amended to bring capital gains on immovable property in the ambit of income taxation. Two new sections, 236C and 236K were also inserted in the Income Tax Ordinance, 2001, in 2012 and 2014, respectively, for collection of advance tax from the seller and buyer at the time of sale/purchase/transfer of immovable property. In 2012, the FBR was of the view that capital gain tax (CGT) on disposal of immovable property would help in broadening of tax base and substantially enhance revenue—both the assertions later proved wrong as both the number of filers as well as revenue from this source substantially decreased.
The FBR’s claim that the levy of advance tax on sale/purchase/transfer of immovable property would play a major role in plugging one of the many loopholes for whitening untaxed money in the name of capital gains proved a fantasy as evident from daily transactions in some well-known societies. The FBR in fact has facilitated the tax evaders, criminals, even terrorists, through its notified rates to whiten even illegitimate and dirty money in real estate! Later can be used anywhere. This is anti-thesis of National Action Plan and countering terrorism financing.
The point everybody has missed since 2012 is that the very imposition of the CGT on immovable property is unconstitutional. It is based on self-assumed interpretation that amended language of Entry 50. The phrase “not including taxes on immovable property” cannot be read to “include taxes on capital gains on immovable property”, as being done. Provinces have failed to assert their right to tax gains on immovable property situated within their territories. The legal position is undisputable and is being infringed upon by the federal government since 2012. Only the Punjab Assembly rightly levied this tax in the Finance Act 2013. However, till today it did not challenge the unlawful assumption of jurisdiction by the federal government in this regard.
Entry 50 debars the federal government to levy any kind of tax on immovable property—not even the Capital value Tax (CVT). This simple proposition could not be comprehended by our parliamentarians. This testifies how tax bureaucrats prevail upon them!
The National Assembly by levying CGT on immovable property has committed utter violation of the Constitution. It has failed to see that second part of Entry 50 is couched in a negative phrase. It is also strange that nobody has bothered to study Entry 50 as per dictum laid down by Supreme Court in the Haji Mohammad Shafi and Others v Wealth tax Officers and Others 1992 PTD 726. The Supreme Court in this case held that Parliament under Entry 50 was competent to levy wealth tax on the value of assets. It was elaborated that the manner in which valuation of any immovable asset was made could not be termed “tax on capital gain”. Before the 18th Constitutional Amendment in Entry 50, the federal government was barred from taxing “capital gain on immovable asset.” Now this bar has been extended to “taxes on immovable property”. This bar is made wider and not otherwise as misunderstood by the FBR and National Assembly. It now includes all kinds of taxes on immovable property”.
From the plain reading of Entry 50, as modified through the Eighteenth Constitutional Amendment, it is unambiguous that the Parliament can levy taxes on capital value of moveable assets but has no authority to levy taxes, including capital gain tax, on immovable property. The way FBR and Law and Justice Division read plain language of Entry 50 speaks volumes about their level of competence as well as hollowness of our parliamentarians in passing laws as drafted by tax bureaucrats and vetted by babus sitting in Law and Justice Division.
Unfortunately, after the 18th Amendment, the provinces have also not levied wealth tax on the rich and mighty. They are not even collecting agricultural income tax from mighty absentee landowners. CGT on immovable property is also snatched by the FBR. It shows that provinces are not interested in raising their own resources and want to remain heavily dependent on divisible pool.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Professors at Lahore University of Management Sciences)