The head of the FBR is being called to testify in a tax case.
identifies potential problems with the imposition of a deemed income tax of 20% on real estate.
ISLAMABAD: On Tuesday, the Lahore High Court (LHC) called the Federal Board of Revenue (FBR) chairman to court in a case about putting a 20% deemed income tax on the real estate sector. The court did this because it found legal and constitutional problems with putting this major tax measure into place.
A short order was made by a single judge on the provincial court the same day that FBR Chairman Asim Ahmad told a parliamentary committee that a drop in imports could hurt income in the coming months.
The chairman’s statement highlights the many problems that have made it impossible to reach the tax goal of Rs7.470 trillion for the current fiscal year.
The LHC’s short order said, “Let Chairman FBR and Federal Secretary Ministry of Law and Justice appear on 17.11.2022 to answer hardship, ibid., and help the court, about rationale behind omitting Section 7 from Finance Act 1989 after 18th Amendment in Constitution and taxation of immovable property as deemed income and Entry 47, instead of Entry 50, of the Constitution.”
People in the real estate industry have filed petitions against Section 7E, which says that people who get income equal to 5% of the fair market value of capital assets located in Pakistan will have to pay 20% tax.
But Section 7E faces serious constitutional challenges because many people say that it may be hard for the government to defend a law that falls under provincial taxation in the constitution in court.
In its interim order, the LHC said that Section 7E taxation was done based on the “speculative value of the property.” This seems to go against Section 116, which says that a taxpayer must submit a wealth statement along with their tax return.
“This court thinks that the declaration under Section 116 becomes part of the deemed assessment order under Section 120. If the learned additional attorney general’s argument is accepted as is, the court will have to look into whether Section 116 and 7E are in conflict after reading the “deemed provision.” This is what the interim order said.
“The court is not persuaded by the arguments that this can’t be looked into because it has to do with how things are done. “If this court tries to find a way to make both sections work together, the fact that the fair market value is a guess and goes against the accepted declaration in Section 116 will be a problem,” the court wrote.
The one-judge bench of the LHC said that if the court tried to read down the number of clauses in Section 7E, that would be the same as rewriting the provision in question.
Petitioners thought that Section 7E went against the constitution and was rushed into place without figuring out how to tax people.
The additional attorney general told the court that, based on the principle of interpretation, the court should work hard to save legislation and that the challenged provision could be read down to make it fit with the competence available under Entry 50.
He said again that the real tax rate was 5% of the fair market value of a capital asset, and that the term “asset” included property that could not be moved. The short note, however, suggested that the court did not accept his argument.
The FBR has a huge job ahead of it: it needs to collect Rs965 billion in taxes in December. It has set this goal based on the idea that new taxes in the budget will bring in around Rs200 billion in the month. Sources said that the Rs965 billion per month goal might not be reached because of serious legal problems. This is especially true because the International Monetary Fund (IMF) is pressuring Pakistan to raise taxes.
In private talks, the government has not ruled out a mini-budget, but the FBR has not yet backed it in public.
At the same time, the FBR chairman told the National Assembly Standing Committee on Finance that a sharp drop in imports was hurting the FBR’s efforts to bring in money.
Asim Ahmad said that the drop in imports had hurt revenue collection, which could put pressure on domestic taxes in the coming months.
He said that imports dropped by 17% in October and could drop by 20% this month. He also said that the FBR was not considering any new ideas.
Ahmad said that the FBR would try to make up for any shortfall in revenue in the next few months by taking administrative steps. So far, administrative measures have brought in Rs15 billion, which is more than the Rs5 billion that was brought in during the same time last fiscal year.
Sources said, though, that the IMF has always been against relying on administrative measures and has always asked for new taxes to make up the difference in revenue.
The FBR chairman said that nearly 2.6 million income tax returns had been filed in the current fiscal year, which is a sharp drop of 1.2 million, or nearly 32%, from the previous year.
He said that this year, taxes and returns totaled Rs56 billion, which is more than the Rs52 billion that was paid in taxes and returns last year. During the fiscal year, one million new taxpayers turned in their forms.
