Federal Constitutional Court’s ruling restores an important constitutional distinction between ‘income’ and ‘property’. Income arises from flow; property represents stock. The two have historically been treated differently in constitutional taxation systems precisely because competence allocation depends on that distinction
Dr. Ikramul Haq
“….we are persuaded to hold that Section 7E of the Income Tax Ordinance, 2001, is ultra vires the Constitution, and is accordingly struck down, being void ab initio. For the reasons to be recorded separately, all the civil petitions filed by the taxpayers against the judgments of the High Court of Sindh and the Lahore High Court are converted into appeals and allowed while civil petitions filed by the FBR/C.I.R against the judgments of the Peshawar High Court and the High Court of Balochistan are dismissed. Consequently, all actions, proceedings, and notices initiated or taken by the FBR/C.I.R under Section 7E are declared to be without lawful authority and are hereby set aside”—Federal Constitution Court of Pakistan in Sher Muhammad Mughari v The Federation of Pakistan through Secretary Finance Islamabad & others
The short order of the Federal Constitutional Court of Pakistan declaring section 7E of the Income Tax Ordinance, 2001 [“the Ordinance”] ultra vires the Constitution is not merely another tax judgment. It is one of the most consequential constitutional tax rulings in Pakistan’s history because it exposes the deeper crisis of legislative overreach, fiscal opportunism and disregard for constitutional boundaries that has increasingly characterised federal taxation after the Eighteenth Amendment.
For those who consistently challenged section 7E of the Ordinance from the moment it was enacted through the Finance Act, 2022, the ruling is neither surprising nor sudden. The constitutional defect was visible from day one. The provision attempted to do indirectly what Parliament could not do directly: impose a tax on immovable property by disguising it as income tax through a legal fiction.
Immediately after enactment, it was argued that section 7E was not taxation of income at all but taxation of ownership of immovable property. The central point was simple. In the wake of Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] constitutional framework, taxes on capital value of immovable property fall outside federal legislative competence.
Entry 50, Part I of the Federal Legislative List (FLL), Fourth Schedule to the Constitution explicitly excludes “taxes on immovable property”. That exclusion was not accidental drafting. It was a deliberate constitutional restructuring after provincial autonomy was strengthened in 2010. The federal legislature nevertheless attempted to circumvent this limitation through legislative fiction.
Section 7E of the Ordinance declared that a person owning certain immovable property “shall be treated to have derived” income equal to five percent of the fair market value of the property. Tax was then imposed on this fictional income, effectively resulting in an annual levy approximating one percent of capital value.
The constitutional flaw was obvious. Parliament cannot convert property into income merely by legislative declaration. Constitutional competence is determined by the pith and substance of the levy, not by the labels used in legislation. If the essence of the levy is taxation of ownership of immovable property, it falls outside Entry 47, Part I of FLL relating to taxes on income and enters the exclusive provincial domain protected after the 18th Amendment.
That was precisely the position advanced repeatedly by this writer in contemporaneous writings immediately after section 7E was enacted. One article stated unambiguously that section 7E “is not income at all but tax on immovable property”. Another analysis explained that the federal government was attempting to impose a wealth-type levy on immovable property without constitutional authority. The Lahore High Court (single judge judgement), Peshawar High Court and Balochistan High Court later echoed similar concerns in varying forms, though judicial approaches initially differed.
The Federal Constitutional Court (FCC) of Pakistan has now settled the controversy decisively. The FCC in its short order of May 7, 2026 not only struck down section 7E as unconstitutional but also declared it void ab initio, meaning void from inception. It has categorically held that all actions taken under section 7E were unlawful. The implications are enormous.
Since 2022, the Federal Board of Revenue (FBR) under section 7E has been extracting billions of rupees per year. The provision became deeply embedded in property transactions because transfer of immovable property increasingly required proof of compliance. Purchasers, sellers and investors were effectively compelled into a taxation regime that the Court has now declared unconstitutional from the very beginning.
This means the question is no longer merely prospective invalidity. The real issue is refundability of illegally collected taxes. If the levy was void ab initio, then amounts extracted under it lack lawful constitutional foundation. The fiscal consequences for the state may therefore be substantial.
The ruling also has consequences extending far beyond section 7E itself. It reasserts a foundational constitutional principle that had increasingly been diluted in fiscal legislation: Parliament’s taxation powers are limited by constitutional entries and cannot be expanded through artificial drafting devices. This is particularly important in Pakistan’s post-Eighteenth Amendment constitutional order. The federation has repeatedly attempted to retain fiscal dominance despite constitutional devolution. Section 7E was one example. Petroleum levy arrangements, sales taxation distortions and other federal fiscal mechanisms reflect the same broader tendency: centralisation through legal engineering.
Seen through the lens of constitutional political economy, section 7E represented more than a tax measure. It was part of a broader extraction-oriented fiscal culture in which revenue desperation increasingly displaced constitutional discipline. Instead of reforming income taxation, broadening sales tax base or rationalising expenditure, the state sought easier avenues of extraction from already documented assets.
The irony is that section 7E was justified in the language of fairness and anti-speculation, yet it operated regressively in many cases. Non-income-generating inherited properties, unused plots and family assets were brought within the net regardless of actual cash flow. The levy thus resembled a recurring wealth tax on immovable property rather than a tax on realised or accrued income.
The Federal Constitutional Court’s ruling therefore restores an important constitutional distinction between income and property. Income arises from flow; property represents stock. The two have historically been treated differently in constitutional taxation systems precisely because competence allocation depends on that distinction.
This distinction is also visible comparatively. In most federations, immovable property taxation belongs primarily to subnational governments because property is territorially located and directly linked with local governance and provincial administration. Pakistan’s constitutional scheme after the Eighteenth Amendment moved further in that direction.
The federation nevertheless attempted to blur that boundary through deeming provisions. Had section 7E survived judicial scrutiny, it would have created a dangerous precedent enabling Parliament to tax virtually any asset merely by declaring fictional income upon ownership. The judgment is therefore significant not only for taxpayers but for constitutionalism itself.
It also vindicates an important principle often ignored in fiscal policymaking: constitutional limits are not technical obstacles but safeguards against arbitrary extraction. When governments bypass these limits in pursuit of short-term revenue, they ultimately weaken institutional legitimacy and investor confidence.
The deeper tragedy is that this constitutional confrontation was avoidable. Instead of engaging provinces meaningfully on property taxation reform after the Eighteenth Amendment, the federation attempted unilateral fiscal expansion through legal fiction. Predictably, prolonged litigation followed, creating uncertainty in the property market and burdening courts with hundreds of petitions and appeals.
The immediate challenge now concerns implementation. If the provision was unconstitutional from inception, the state must evolve a transparent mechanism regarding pending proceedings, refunds and adjustments. Attempts to resist or dilute the consequences of the ruling would only prolong uncertainty and damage fiscal credibility further. The larger lesson, however, is institutional. Pakistan cannot continue to operate through constitutionally questionable taxation measures designed primarily for short-term revenue mobilisation. Sustainable fiscal reform requires constitutional fidelity, rational tax design and political honesty.
Section 7E has now collapsed under the weight of its own constitutional contradiction. What was presented in 2022 as innovative tax policy has ended in 2026 as one of the clearest judicial repudiations of fiscal overreach in recent years.
The real issue now is whether policymakers will learn from this episode—or repeat the same pattern through another legal fiction under a different name.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.