Understanding Section 7e of the Income Tax Ordinance 2001. According to the FBR, a new section 7E was introduced through Finance Act, 2022. Here in this section, for tax year 2022 and onwards, every resident person (with some exemptions) has been assumed and treated to have earned as income, an amount equal to five per cent of the fair market value of the capital asset he owns in Pakistan.
What is Section 7e?
It means that every person will pay such tax if he holds more than one properties (Capital Assets with some exemptions) whose aggregate fair market value exceeds 25 Million Rupees. As prescribed above tax is chargeable at the rate of 20 per cent on 5% of the fair market value of that property. This 5% is treated as rental income derivable from such property.
Exemptions and Deductions
Section 7e also provides following certain exemptions for taxpayers:
(i) One capital asset owned by the resident person;
(ii) Self-owned business premises from where the business carried out by the persons appearing on the active taxpayer’s list at any time during the year;
(iii) Self-owned agriculture land where agriculture activity carried out by the person but excluding farmhouse and annexed land. Farmhouse defined in this section;
(iv) Capital asset allotted to —
(a) A Shaheed or dependents of a Shaheed belonging to Pakistan Armed Forces;
(b) A person or dependents of a person who dies while in the service of Pakistan armed forces or federal or provincial government;
(c) A war wounded person while in service of Pakistan armed forces or federal or provincial government;
(d) An ex-serviceman and serving personnel of armed forces or ex-employees or serving personnel of federal and provincial governments. Who are original allotees of the capital asset as duly certified by the allotment authority;
(v) Any property from which income is chargeable to tax under the Ordinance and tax leviable has been paid;
(vi) Capital asset in the first year of acquisition on which tax under section 236K paid;
(vii) Where fair market value of the capital assets in aggregate excluding capital assets mentioned in serial nos. (i) to (vi) above does not exceed rupees twenty-five million;
(viii) Capital assets which owned by a provincial government or local government;
(ix) Capital assets owned by local authority, a development authority, builders and developers for land development and construction. Subject to the condition that such persons 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.
Section 7e of Income Tax Ordinance Struck Down by FCC
Recently, in it’s very important judgment of the tax history of Pakistan, The Federal Constitutional Court has struck down section 7e of Income Tax Ordinance 2001 being Ultra Vires to the Constitution of Pakistan. The core issues involved were:
- Under Pakistan’s Constitution, the Federal Government can tax actual income only.
- But taxing immovable property itself is a Provincial subject.
- Experts argued the federal government overstepped it’s constitutional boundaries by disguising a property tax as an “income tax”.
The final verdict of the FCC is:
- The Federal Constitutional Court declared section 7e “ultra vires” (beyond the powers).
- The federal government did not have the legal authority to impose this specific tax.
Now what this means for you?
- Section 7e is now invalid
- No tax on deemed rental income.
- Huge relief for property owners across Pakistan.
- Constitutional Boundaries are respected.
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