The Islamabad High Court (IHC) has restrained the Federal Board of Revenue (FBR) from taking any coercive action against owners of residential houses in the Islamabad Capital Territory for the recovery of Capital Value Tax (CVT).
According to an IHC order, notices have been issued to the Federation (including the Attorney General of Pakistan) and the FBR. In the meantime, no coercive measures shall be adopted against the petitioners with respect to the tax levied.
Through this writ petition, the petitioners impugn Section 8(1), 8(2) (clauses (ab) and (ac)), and Section 8(4) of the Finance Act, 2022, as inserted through Section 12 of the Finance Act, 2024. They argue this is in violation of Articles 23, 24, and 25 of the Constitution, as well as Entry No. 50 of Part-I of the Federal Legislative List in the Fourth Schedule to the Constitution.
The IHC stated that this petition will be heard together with Petition No. 2641 of 2024. For consistency, notices shall also be issued to the respondents in this petition. A notice to the learned Attorney General for Pakistan shall likewise be issued, the IHC order added.
Through this petition, the petitioners challenge the legality and constitutionality of Section 12 of the Finance Act, 2024, which introduced certain amendments to Section 8 of the Finance Act, 2022, as well as amendments to the Table in the First Schedule to the Finance Act, 2022.
By way of the impugned amendment, a so-called Capital Value Tax (CVT) has been imposed on farmhouses measuring at least 2,000 square yards and on residential houses measuring at least 1,000 square yards (the “Impugned Levy”). The Impugned Levy is charged based on the size of the farmhouse or residential house, with different rates prescribed according to property size.
According to the petitioners, this Impugned Levy goes against the nature of a Capital Value Tax, which is normally levied on the consideration arising from an economic activity, such as the sale or purchase of an asset (as was the case in Pakistan between 1989 and 2022). Under the usual CVT framework, the liability rests with the purchaser (i.e., the person paying the sale price). However, the Impugned Levy has no link to any economic activity.
Although it is labeled a Capital Value Tax, the Impugned Levy does not depend on the actual value of the identified assets or on any income (actual or deemed) from these assets. Instead, the CVT rate is tied solely to the size of the asset.
As a result, the petitioners argue, the Impugned Levy is effectively a tax on immovable property disguised as a CVT, which the Federation is not empowered to impose. This is due to the amendment to Entry No. 50 of the Federal Legislative List (in the Fourth Schedule to the Constitution) made by the 18th Amendment, which specifically removed the power to impose taxes on immovable property from the federal domain.
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