A new section 7E has been introduced through Finance Act, 2022 whereby for tax year 2022 and onwards, a resident person is treated to have derived income equal to five percent of fair market value of the capital assets situated in Pakistan which will be chargeable to tax at the rate of 20% under Division VIIIC of Part I of First Schedule of the Ordinance. Following exclusions have been provided to which this section will not apply:
- One capital asset owned by the resident person;
- Self-owned business premises from where the business is carried out by the persons appearing on the active taxpayer’s list at any time during the year;
- Self-owned agriculture land where agriculture activity is carried out by the person but excluding farmhouse and annexed land. Farmhouse has been defined in this section;
- Capital asset allotted to —
- A Shaheed or dependents of a Shaheed belonging to Pakistan Armed Forces;
- A person or dependents of a person who dies while in the service of Pakistan armed forces or federal or provincial government;
- A war wounded person while in service of Pakistan armed forces or federal or provincial government;
- An ex-serviceman and serving personnel of armed forces or ex[1]employees or serving personnel of federal and provincial governments who are original allotees of the capital asset as duly certified by the allotment authority;
- Any property from which income is chargeable to tax under the Ordinance and tax leviable has been paid;
- Capital asset in the first year of acquisition on which tax under section 236K has been paid;
- 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;
- Capital assets which are owned by a provincial government or local government; Capital assets owned by 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.
The honorable Lahore High Court Lahore Mr. Justice Raheel Kamran Sheikh Fixed cases u/s 7E for 30.09.2022 for hearing Attorney General of Pakistan
High Court of Sindh Judgment (C.P. 4614/2022)
Summary:
Levy of tax on deemed income from capital assets in terms of Section 7E of the Income Tax Ordinance, 2001, is valid; within the competence of the Federal Legislature and is not ultra vires to the Constitution.
“From perusal of the above case law as well as the dicta laid down by the Hon’ble Supreme Court in the case of Elahi Cotton (Supra), and in view of hereinabove facts and circumstances of these cases, after hearing all the learned Counsel as well as learned Assistant Attorney General, we had come to the conclusion that no exception can be drawn to the competence of the Federal Legislature while introducing Section 7E through Finance Act, 2022, in the Ordinance, whereas, the impugned levy is neither ultra vires to the Constitution; nor it is confiscatory or discriminatory; hence, the Federal Legislature is fully competent to impose tax on deemed income pursuant to Section 7E of the Ordinance, and
therefore, by means of a short order dated 28.10.2022 all listed Petitions were dismissed and these are the reasons thereof.”
Taxpayers in Punjab will have to pay tax under section 7E.
Lahore High Court has set aside its earlier judgment No.35908 of 2023 dated 15 Feb 2024. Section 7E of Income Tax law is now applicable.
FBR has issued circular No. 03 of 2023-24 with more information.