Striking down a grossly unfair tax law

EDITORIAL: Federal Constitutional Court struck down Section 7E of the income Tax Ordinance 2001 that had allowed Federal Board of Revenue (FBR) to collect a tax on deemed income from property owners even if they were not actually renting it out, declaring it ultra vires of the constitution. The insertion of the section had allowed FBR to impose a 5 percent tax on those owning immoveable property worth over 25 million rupees that were to be assessed as per fair market value. The brazen iniquity of the Section must be emphasised as it allowed FBR to tax an income that it “deemed” was possible through ownership of a second home/place of residence that could be rented out but was not. In other words, notional income was to be taxed and the decision of the highest court in the land to strike it down vindicates a long-standing demand by the Business Recorder. What should be a source of serious concern is the fact that FBR and the Commissioner Inland Revenue deemed it appropriate to file civil petitions against the judgements of Peshawar High Court and Balochistan High Court, thereby wasting valuable public resources. This tendency of the FBR to fight all legitimate appeals filed by the taxpayers, irrespective of their merit, thereby misusing scarce public resources must be dealt with a stern hand. And, official(s) who approve going into such frivolous litigation be dealt with through the imposition of penalties and disciplinary action. Successive administrations, including the incumbent one, have faced three major constraints with respect to revenue collections. First, their acceptance of an unrealistic revenue target set by donor agencies (including the International Monetary Fund), which is seldom realised. Pakistan in its seventy nine-year history has been on a Fund programme for 72 years – Pakistan is currently on its twenty-fourth IMF programme, usual duration of each being three years. Second, the rise in current expenditure has continued unabated and administrations typically over-state the Public Sector Development Programme (PSDP) in their budgets to boast of a higher engagement in development than in the previous year, while slashing it during the year to meet the deficit targets set by the donors. It is relevant to note that the government has already slashed PSDP this year by around 50 percent, ostensibly due to the ongoing Middle East conflict that has required petrol subsidies for the lower middle income. And finally, Pakistan’s tax structure is inequitable (due to a heavy reliance on indirect taxes like sales tax, which are regressive as their incidence on the poor is greater than on the rich), unfair (even after the percentage of direct tax collections rose significantly this rise is attributable to the FBR practice of crediting withholding taxes imposed in the sales tax mode as direct taxes – a charge that was levelled by the Auditor General with the recommendation to the FBR to desist from this dishonest practice but to no avail), and anomalous (with some influentials paying less tax than others engaged in producing the same product). Several studies have been undertaken (domestically and with the assistance of international consultants) to improve the current tax system and make it more equitable, fair and non-anomalous, but they all are gathering dust in the FBR offices. The present stress is on enforcement with serious concerns by the taxpayers against the officials’ heavy-handed tactics and their reliance on appeals to delay the process so as to show higher revenue collections. Today the July-April shortfall has been estimated at 683 billion rupees, likely to cross the 700 billion rupees by the end of the fiscal year in June and the officials are seeking advance tax to meet their unrealistic targets. To conclude, it is critical for the FBR to take informed decisions with respect to reforms and phase them out to ensure that all concerns can be ironed out in a timely fashion and in the meantime there is a need to reduce current expenditure to obviate the need to generate an unrealistic revenue target. Copyright Business Recorder, 2026

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