Tax on ‘deemed income’ challenged in LHC


ISLAMABAD: The tax imposed on “deemed income”, through the Finance Act 2022, for taxation of capital assets situated in Pakistan, has been challenged in the Lahore High Court (LHC).

In this regard, the LHC has issued notice to the Attorney General of Pakistan. The date of hearing has been fixed for August 4, 2022.

According to an order of the LHC, the constitutional petition questioned the Constitutionality of the Section 7E (tax on deemed income) of the Income Tax Ordinance 2001, inserted through the Finance Act 2022, on the premise of legislative incompetence of the Parliament to enact law outside the scope of the entry number 50 of the Federal Legislative List, Fourth Schedule of the Constitution. The fundamental objection is that the tax added through section 7E is, in pith and substance, tax on immovable property, to which extent Parliament is not competent to make laws, after the 18th Constitutional Amendment 2010, where after the only provincial legislature is eligible and competent to tax immovable properties.

The petitioner said that the tax was imposed in lieu of the holding/owing of the immovable property, equal to five per cent of the fair market value of capital assets, by declaring it as deemed income, when no question of any gain thereupon arises, which is in fact and law an attempt to hoodwink the mandate of entry number 50, ibid when asked counsels submits that the tax in question is not classifiable or covered under the head of “capital gains.” The exclusion of certain categories of persons from the tax net is discriminatory and the classification prescribed infringes the constitutional guarantee of equality of citizens, not founded on rational intelligible differentia.

Questions pleaded prime facie calls for interpretation of entry number 50 of the Fourth Schedule in the context of section 7E, ibid, and to adjudicate the challenge thrown on the ground of the discriminatory enactment.

The LHC ordered that since substantial questions as to the interpretation of the constitutional provisions are involved, it is appropriate to issue notice to the Attorney General of Pakistan.

The case has been re-listed on August 4, 2022, the LHC order added.

The Finance Act 2022 has clarified that the tax on deemed income would be applicable for Tax Year 2022 (outgoing fiscal year) and onwards for taxation of capital assets situated in Pakistan.

According to the Finance Act 2022, for the Tax Year 2022 and onwards, a tax shall be imposed at the rates specified in Division VIIIC of Part-I of the First Schedule on the income specified in this section of the Income Tax Ordinance 2001.

A resident person shall be treated to have derived, as income chargeable to tax under this section, an amount equal to five per cent of the fair market value of capital assets situated in Pakistan held on the last day of tax year excluding the following, namely: (a) one capital asset owned by the resident person;

(b) self-owned business premises from where the business is carried out by the persons appearing on the active taxpayers’ list at any time during the year;

(c) self-owned agriculture land where agriculture activity is carried out by person excluding farmhouse and land annexed thereto;

(d) capital asset allotted to –

(i) a Shaheed or dependents of a Shaheed belonging to Pakistan Armed Forces;

(ii) a person or dependents of the person who dies while in the service of Pakistan Armed Forces or Federal or provincial government;

(iii) a war wounded person while in service of Pakistan Armed Forces or Federal or provincial government; and

(iv) an ex-serviceman and serving personal of armed forces or ex-employees or serving personnel of Federal and provincial governments, being original allottees of the capital asset duly certified by the allotment authority;

(e) any property from which income is chargeable to tax under the Ordinance and tax leviable is paid thereon;

(f) capital asset in the first tax year of acquisition where tax under section 236K has been paid;

(g) where the fair market value of the capital assets in aggregate excluding the capital assets mentioned in clauses (a), (b), (c), (d), (e) and (f) does not exceed rupees twenty-five million;

(h) capital assets owned by a provincial government or a local government; or (i) capital assets owned by a local authority, a development authority, builders and developers for land development and construction, subject to the condition that such persons are registered with Directorate General of Designated Non-Financial Businesses and Professions.

(3) The Federal Government may include or exclude any person or property for the purpose of this section.

The “capital asset” means property of any kind held by a person, whether or not connected with a business, but does not include any stock-in-trade, consumable stores or raw materials held for the purpose of business; any shares, stocks or securities; any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortization deduction under section 24; or any movable asset not mentioned; or “farmhouse” means a house constructed on a total minimum area of 2000 square yards with a minimum covered area of 5000 square feet used as a single dwelling unit with or without an annex: Provided that where there are more than one dwelling units in a compound and the average area of the compound is more than 2000square yards for a dwelling unit, each one of such dwelling units shall be treated as a separate farmhouse, the FBR added.