KARACHI: The Federal Constitutional Court has declared Section 7E of the Income Tax Ordinance, 2001, unconstitutional and void in its entirety, ruling that the provision effectively imposed a tax on property ownership rather than on actual income.
The unanimous ruling by a two-member bench comprising Chief Justice Amin-ud-Din Khan and Justice Ali Baqar Najafi on May 7, 2026, nullified all actions, proceedings, and notices initiated by the Federal Board of Revenue under the disputed provision, which was inserted through the Finance Act, 2022.
In detailed reasons issued June 16, the court held that the levy was confiscatory in nature because it imposed tax on immovable properties that do not generate income and, in certain cases, cannot generate income at all.
“The practical effect of such a levy is that a person owning a non-income-generating asset may be compelled to dispose of the asset to meet tax liability,” Chief Justice Amin-ud-Din Khan observed in the 92-page judgment.
The decision resolved a long-running constitutional conflict that had produced contradictory rulings across provincial high courts . The Peshawar High Court and Balochistan High Court had previously declared Section 7E unconstitutional. The Islamabad High Court had invalidated only subsection 2, while the Sindh High Court and Lahore High Court had upheld the provision.
The court identified several constitutional infirmities in the provision, including legislative competence, discrimination, and confiscatory effect.
Section 7E treated five percent of the fair market value of immovable properties as deemed income subject to a 20% tax rate, effectively imposing an annual levy of approximately one percent on the capital value of covered properties valued above Rs. 25 million.
The court determined that Parliament’s legislative authority is confined to matters falling within the federal domain under the Constitution, whereas taxation of immovable property falls within provincial jurisdiction following the 18th Constitutional Amendment.
“The item taxed should rationally be capable of being considered as income of a citizen,” the court stated, drawing on the principles established in the Elahi Cotton Mills case.
The judgment found that the provision operated in a discriminatory manner by granting exemptions to certain classes of persons while subjecting similarly placed taxpayers to unequal treatment. Exemptions granted without a clear principle or classifications that are arbitrary or discriminatory cannot survive constitutional scrutiny, the court ruled.
The court also held that Section 7E violated Article 23 of the Constitution, which guarantees every citizen the right to acquire, hold, and dispose of property.
The ruling declared Section 7E void ab initio, meaning invalid from its inception in 2022 . This raises significant questions about the refundability of taxes collected under the provision over the past four years.
The court observed that after the 18th Amendment, similar disputes have become more frequent because of overlapping claims of fiscal authority by the federation and provinces, often compelling taxpayers to engage in lengthy litigation and exposing them to the risk of double taxation.
The ruling came as Parliament was debating the Finance Bill 2026, which includes proposals related to implementation of the court’s decision.