The Finance Act, 2023 has brought about a major change through amendment in section 236C of the Income Tax Ordinance, 2001. All the registration authorities are now under obligation to ensure that the seller of an immovable property has paid the tax due under section 7E and evidence to this effect has been furnished before registration or transfer of the property. It may be recalled that section 7Ewas inserted in the Income Tax Ordinance, 2001 through the Finance Act, 2022. Under this section, 20% of the fair market value of immovable properties owned by a taxpayer was deemed to be the income of the taxpayer (irrespective of whether he was deriving from the properties any rental income or not), on which 5%income tax was imposed. Thus, in essence a tax rate of 1% of the fair market value of the immovable properties was levied in an oblique manner.
Tax experts were of the opinion that after the amendment in entry 50 of the Federal Legislative List through the 18th Constitutional Amendment, the Federal Government lacked the mandate to levy any tax on the immovable property or its value. This entry after the 18th Constitutional amendment authorized the Federal Legislature to levy “Taxes on capital value of assets, not including taxes on immovable property”. Section 7E that adopted a circuitous route to tax the capital value of immovable properties was thus declared to be a violation of the constitutional mandate being an indirect attempt to achieve what the legislature could not do directly i.e. levying a tax on immovable properties. The tax levied under section 7E was accordingly not paid by the taxpayers and the projections of revenue from this measure were not met. Aggrieved by the introduction of this section, many petitions challenging the vires of the section were filed before various High Courts. The Honorable High Court of Sindh in its judgment dated 28thOctober, 2022 upheld the tax levied by section 7E and the petitioners filed a Civil Petition for Leave to Appeal before the August Supreme Court of Pakistan. The apex court through its judgment dated 22nd March, 2023 passed an interim order directing the petitioners-taxpayers to deposit 50% of the tax due under section 7E pending judgment on the constitutional validity of this tax. Meanwhile, a judgment dated 6th April, 2023 by the Lahore High Court was also issued. This judgment essentially conflicts with the earlier judgment of the Sindh High Court and interprets the provisions of the disputed legal provision from a different perspective and also made recommendations for some changes in section 7E.
In view of the chequered history of section 7E, one would have expected some meaningful amendments in this section through the Finance Act, 2024 based on guidance from the judgments of the Honorable High Courts and the controversies surrounding the new tax. However, the only amendment that was made was to introduce the requirement that the exemptions from payment of tax under section 7E will be conditional upon the claimant of the exemption being in the active taxpayers’ list. It could have also been expected that in view of the disputed constitutional validity of this tax, FBR will not vigorously pursue recovery of this tax till the final adjudication of the dispute by the apex court, especially in view of the fact that the section did not itself provide any mechanism for recovering the tax if not paid by the taxpayer on his own. Unfortunately, none of the expectations were met and instead through the Finance Act, 2023, room for further controversies was provided by introducing a draconian measure of prohibiting registration of properties sold by a person who has not paid the tax due undersection 7E. This new step can be criticized on multiple grounds, some of which are briefly discussed below.
Firstly, it amounts to an admission by FBR that its machinery is not able to collect the due taxes despite elaborate and harsh recovery powers already available under the law. However, in defense of the tax machinery, it needs to be pointed out that one of the important reasons for the inability of the tax machinery to collect this tax was the deficiencies in drafting of section 7E itself. Unlike other taxes that were imposed in addition to income tax on income, such as super tax undersection 4B and 4C, section 7E did not include any provision empowering the Commissioner in cases where the the tax is not paid by a person liable to pay it, to pass an order determining the tax payable and to proceed to recover the tax by using the recovery measures available under the law. However, instead of taking cognizance of this lacuna and passing corrective legislation, again a harsh measure with dubious constitutional validity has been introduced.
The second issue with the new change that may ultimately prove to be its undoing in case of a legal challenge, is the alleged violation of fundamental rights guaranteed by the Constitution. The Constitution, grants the right of acquiring, holding and disposing of property under Article 23 which is included in Chapter 1 (with the heading Fundamental Rights) of Part II of the Constitution, this fundamental right is subject to the Constitution and any reasonable restrictions imposed by law in the public interest. FBR may like to argue that recovery of the tax not paid is in the public interest but in view of the fact that the vires of the tax under section 7E is still to be determined by the apex court and that interim relief has been granted by the Honorable Court, this argument carries very little weight.
At this juncture, it may be pertinent to point out that this is not the first instance in the history of taxation in Pakistan that an attempt has been made to coerce the taxpayers to “voluntarily” deposit disputed tax demands. On several occasions, the filing of appeals was made contingent upon deposit of a certain percentage of the assessed tax against which an appeal was being filed. Each time, the superior courts disapproved of placing such conditions on the would-be appellant taxpayers. The question as to whether the right of appeal can be made subject to condition of deposit came before the Supreme Court of Pakistan in M/s. Eastern Rice Syndicate v. Central Board of Revenue (PLD 1959 SC 364)wherein it was ruled that such a condition, amounted to negation of the right of appeal itself. Similar conditions were imposed at least twice under the Repealed Ordinance of 1979. Once through the Finance Act, 1995 and for the second time through the Finance Ordinance, 2000. Each time the fate was the same. Without going into details of judicial decisions on the subject, it would be instructive to refer to the judgment of the Honorable Lahore High Court titled as Messrs. Sadiq Brothers v. AAC Rawalpindi and another (2004 PTCL 173).The Honorable Court did not approve the argument on behalf of the then CBR that the condition of depositing 15% of the disputed tax before filing of appeal was meant to ensure smooth recovery of tax and held that Income Tax Ordinance of1979 provides powers and procedure for recovery of the amount of tax and held “This being so, the said enactment prescribing the said pre-condition which by all means constitutes an abridgment of right of appeal and its exercise by the person in whom it is vested, cannot at all be said to be reasonable. To say that right of appeal has been restricted in order to assure smooth recovery, in presence of said relevant recovery provision, cannot at all be termed, as a rationale for the same.” It needs to be realized that the right to appeal is in itself a creation of the relevant statute, and if the Honorable Courts did not approve of the abridgement of even this right by making it conditional on the deposit of a percentage of the disputed amount of tax, how can the Courts take a favorable view of curtailment of the fundamental right of acquiring, holding and disposing of property under Article 23 just to provide ease of collecting a tax the very validity of which is controversial? It needs to be highlighted that the new measure while violating the fundamental right of the seller at the same time impinges on the fundamental right of the purchaser to acquire property. Imagine the plight of a person who after negotiating the purchase of a property and having made the payment of consideration for that transaction, learns to his horror and dismay that the registering authority is refusing to register the title of the property in his name because the seller hadn’t deposited the tax payable by him under section 7E. Who will be responsible for the violation of the fundamental constitutional right of the purchaser due to no fault of his? Or should the purchaser first satisfy himself that the person who is selling the property is not in default of section 7E before negotiating purchase of the property?
It can also be argued with some force that the new measure is expropriatory and confiscatory in nature, as it amounts to forcing the taxpayer to pay a tax that has neither been quantified nor charged through a validly issued order by the Commissioner, after meeting all the procedural and legal requirements. The right of the taxpayer to challenge and contest this order before appropriate legal forums is also being usurped. In this regard it may be pertinent to quote the following extract from Corpus Juris Secundum, Volume LXXV, page 634, which the Honorable Supreme Court reproduced in its landmark judgment in Elahi Cotton Mills’ case,-
"Taxing power as extending to confiscation. It has been broadly stated that the power to tax has no limits and carries with it inherently the power to embarrass and destroy a business, such fact alone would not invalidate the tax. It has also been held, however, that the taxing power is virtually unlimited only as long as it does not amount to confiscation, and that the Legislature does not have the power to tax to the point of confiscation. It has further been held that the power to tax cannot be employed to embarrass and destroy useful and harmless occupations which are essential to the prosperity of the people, and thus defeat the very purpose for which the power is conferred. "
The next objection regarding the new measure is the legislation itself. The condition of making payment of the tax demanded under section 7E has been implemented by inserting a new sub-section (2A) in section 236C which was inserted in the Income Tax Ordinance through the Finance Act, 2012 with the purpose of imposing an adjustable withholding tax on sale of immovable properties. The selection of this provision for the purposes of prohibiting registration of properties on the ground of non-payment of tax under section 7E appears to be inappropriate. If the policy makers were bent upon introducing such a restriction, the more suitable course would have been to incorporate a new section to that effect. The language of the new sub-section (2A) suffers from a graver problem and is reproduced below to illustrate this issue-
“(2A)Notwithstanding anything contained in any other law, for the time being in force, any person responsible for registering, recording or attesting transfer of any immovable property shall not register, record or attest transfer unless the seller or transferor has discharged its tax liability under section 7E and evidence to this effect has been furnished to the said person in the prescribed mode, form and manner.”(Emphasis added)
What does the expression “its tax liability” mean? The pronoun “it” has not been used in the Income Tax Ordinance for the taxpayers or persons and the choice pronoun is “he” and its forms like “him” or “his”. So “its” cannot be said to referring to the tax liability of the taxpayer. The only possible explanation could be that “its” refers to the tax liability in respect of the property the ownership of which is sought to be transferred. Do the drafters of this provision intend to say that the tax under section 7E has been imposed on individual properties? It is universally known that income tax is a tax on a person in respect of his income. But here an innovative species of income tax that is neither on a person nor has a nexus with his income, is being introduced. This single expression will make the defense to the legal challenge against the vires of section 7E even more difficult. Moreover, section 7E purportedly imposes a charge on the income deemed to arise from all the immovable assets situated in Pakistan held on the last day of tax year. How will the liability on the asset being sold be computed? Similarly, tax under 7E will not be payable for the tax year in which its ownership is being transferred, so is the liability for the preceding years supposed to be paid under this provision? If so it would have been appropriate to spell it out clearly? The next issue is that evidence of payment of tax under 7E is to be furnished to the registration authority in the “prescribed mode, form and manner”. The provision has come into effect since 1stJuly, 2023 but despite lapse of more than two weeks since that date, even the draft rules prescribing the said mode, form and manner of furnishing the evidence are not in sight. No one can say how the provision is being implemented in the field and we also cannot possibly imagine the invisible costs that may have been added to registration of property transactions. The new provision also doesn’t envisage a situation where tax under section 7E may not be payable at all by the seller, nor has any provision been made for the taxpayers entitled to the benefit of the interim relief granted by the August Supreme Court as mentioned above.
It can be concluded from the above discussion that the new measure was not scrutinized on the touchstone of constitutional and legal limitations nor was it implemented in a sustainable manner. The only thing that it would yield is more disputes and litigation and the expected revenue may not come in. However, it will erect roadblocks to smooth registration and transfer of immovable properties and will have the unintended consequence of diminishing the revenues of the Federal and the Provincial Governments arising from registration of immovable properties prior to placing of this restriction. Needless to say that the market may also find a way to circumvent this requirement as the market does in most of the cases.
