FCC strikes down Section 7E tax on property

May 07, 2026 (MLN): In one of the most consequential tax rulings in Pakistan's recent judicial history, the Federal Constitutional Court (FCC) unanimously struck down Section 7E of the Income Tax Ordinance, 2001, declaring the contested property levy unconstitutional, void from its very inception, and without any legal force whatsoever.

Chief Justice Amin-ud-Din Khan, sitting alongside Justice Ali Baqar Najafi, delivered the short order in open court in Islamabad, bringing to a decisive close a legal saga that had engulfed every major High Court in the country for nearly four years and mobilised over two hundred petitioners, from individual homeowners in Karachi to major textile conglomerates in Lahore, from bar associations to blue-chip corporations.

What Was Section 7E, and Why Did It Cause Such an Uproar?

When the government introduced the Finance Act 2022, it slipped in one of its most bitterly contested provisions. Section 7E introduced a "deemed income" tax on immovable property, essentially treating the value of real estate as if it were generating taxable rental income at a fixed rate, regardless of whether the owner had actually earned a single rupee from that property.

To put it plainly: if you owned a house or plot that you neither rented out nor sold, the tax authorities could still charge you income tax on what they deemed you should have earned.

For a country where real estate has historically been the default savings vehicle for the middle class, this hit a raw nerve almost immediately.

Salaried professionals, retired civil servants, heirs to family property, and major business houses alike found themselves staring at unexpected tax demands. Within months of the law coming into force, constitutional petitions began flooding every High Court in the country.

Four Different Courts, Four Different Answers

What made this litigation particularly extraordinary was the complete lack of consensus among Pakistan's High Courts, producing a fragmented legal landscape that, by itself, cried out for a definitive supreme ruling.

The Peshawar High Court and the High Court of Balochistan took the most decisive stance, striking down Section 7E entirely as ultra vires the Constitution.

The Islamabad High Court charted a middle course, declining to invalidate the entire provision but reading it down and declaring subsection (2) unconstitutional.

The Lahore High Court initially sided with the taxpayers through a Single Judge, only for a Division Bench to reverse that verdict on intra-court appeal and uphold the law.

The High Court of Sindh, for its part, dismissed constitutional petitions, leaving Karachi's taxpayers with no relief.

The result was a patchwork where the legal status of the same federal tax depended entirely on the province where you happened to file your petition, an obviously unsustainable state of affairs.

The Federal Constitutional Court Steps In

It was against this backdrop of judicial disagreement that the Federal Constitutional Court took up the matter, consolidating a staggering array of cases, civil petitions from Karachi, Lahore, Peshawar, and Quetta; cases transferred from the Islamabad High Court under Article 175E(5) of the Constitution; and freshly filed transfer cases, into one grand consolidated hearing.

The bench heard arguments over seven intensive days in April 2026, the 13th, 14th, 15th, 27th, 28th, 29th and 30th, with a formidable array of advocates on both sides.

Senior counsel including Rashid Anwer, Salman Akram Raja, Faisal Siddiqi, and a dozen other advocates-on-record appeared for the taxpayers. The Federation and the Federal Board of Revenue were represented by counsel including Asma Hamid, Hafiz Ahsan Ahmad Khokhar, Shah Nawaz, and Iftikhar Raza Khan, among others.

The arguments ranged across core constitutional questions: whether Parliament could lawfully impose income tax on income that had never actually been received; whether the provision violated the fundamental right to property; whether the fiction of "deemed income" was constitutionally sustainable without a genuine accrual of income; and whether the levy amounted to a disguised wealth tax that Parliament lacked the competence to impose under the legislative lists of the Constitution.

The court left no room for ambiguity. Section 7E, it held, is ultra vires the Constitution. It is struck down. It is void ab initio, meaning it is treated as if it never legally existed, from the very moment of its enactment in 2022.

The immediate practical effect is significant. Taxpayers who received assessments or demands under Section 7E — and there were many, ranging from salaried individuals to large listed companies like Gul Ahmed Textile Mills, K&N's Poultry Farms, Pakistan Telecommunication Company Limited, Bhanero Textile Mills, and Masood Textile Mills are now formally in the clear.

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