Dr. Ikramul Haq
Section 8 of the Finance Act, 2022 imposed an annual Capital Value Tax (CVT) at 1% on the aggregate value of foreign assets of resident individuals exceeding Rs. 100 million retrospectively, with effect from tax year 2022 onwards. The levy applies irrespective of income, yield, transfer, or liquidity and is payable annually with the income tax return.
It is worthwhile to mention that the provisions relating to collection of federal CVT, which applied on transfers of immovable property, modaraba certificates and shares etc., ceased to take effect from April 17, 2020 through Tax Laws (Amendment) Ordinance 2020. However, Finance Act 2022 re-enacted ‘Capital value tax 2022’ and also prescribed ‘Capital Value Tax Rules, 2022’ through SRO. 1797(I)/2022 on September 29, 2022.
Foreign assets are defined to mean any movable or immovable assets held outside Pakistan, whether directly or indirectly, and include but are not limited, to real estate, mortgaged assets, stocks and shares, bank accounts, bullion, cash, jewels, jewellery, paintings, accounts and loan receivables, assets held in a dependent’s name, beneficial ownership or beneficial interests or contributions in offshore entities or trusts.
The value of foreign assets is the total cost of the assets on the last day of the tax year in relevant foreign currency, converted into rupees as per the exchange rates notified by the State Bank of Pakistan for the same day. Where the cost cannot be determined with reasonable accuracy, the fair market value on the last day of the tax year will be taken for this purpose, and foreign currency conversion is applied in the same manner.
Consider a simple illustration. Suppose ten years ago, a Pakistani resident individual deposited in a United Kingdom bank £100,000, when parity with Pak rupee was 160 to one. Over that decade, inflation in the UK eroded the real value of that £100,000. In economic terms, the asset may be worth less, not more. Yet, because the Pakistani rupee has collapsed against the pound over the same period, that same £100,000—unchanged in nominal terms—now converts into approximately Rs. 38,000,000 for CVT purposes. It is sheer absurdity amounting to confiscatory taxation.
Under the CVT regime, the taxpayer is now treated as having acquired a higher “capital value” in Pak rupees, and is taxed accordingly—though the asset being cash has a diminishing purchasing power due to inflation. Taxpayers has realized nothing. Nothing has been gained. What has changed is only the measuring scale—the Pakistani rupee.
This example exposes the constitutional fallacy at the heart of the levy. A depreciating ruler does not make objects longer. Likewise, a collapsing currency does not create wealth. Yet CVT Act 2022 proceeds on precisely this fiction. It taxes the effect of rupee devaluation, not the value of the asset. That is why, even conceptually, this levy cannot be defended as a tax on wealth.
Entry 50 of Part I of the Federal Legislative List (FLL) authorizes taxes on the “capital value of assets, not including taxes on immoveable property”.
The term ‘capital value’ has a settled meaning: it refers to the intrinsic or market value of an asset, assessed by reference to its own characteristics and economic worth. It does not refer to accounting artefacts produced by translating foreign currency figures into a weakened domestic currency. By equating currency translation with capital appreciation, Parliament has confused the unit of measurement with the thing being measured. This is why the levy is not merely flawed; it is penal in character.
CVT Act 2022 penalizes resident individuals who have protected their savings against inflation. It penalizes Pakistanis who retain assets in stable currencies. It penalizes disclosure and rewards opacity. In doing so, it violates one of the core insights of constitutional political economy: taxes that punish prudence destroy credibility, and taxes that destroy credibility do not raise sustainable revenue.
CVT is payable by the resident individuals holding foreign assets at the time the income tax return for the tax year is due. Imposition of CVT, especially retrospectively for tax year 2022 and on immovable property was challenged in various high courts. The main grounds of challenge are: Parliament cannot levy such a tax on immoveable property, as it falls within the ambit of provinces under the Constitution of Islamic Republic of Pakistan [“the Constitution”] and that for tax year 2022 retrospective application was against the well-established doctrine of past and closed transactions.
The Sindh High Court (SHC), in its judgment [Irfan Hussain Halai v Federation of Pakistan & Others, (2023) 127 TAX 49 (H.C. Kar)], upheld the constitutionality of the tax. It held that, although CVT on immovable assets after the Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] is within the legislative jurisdiction of provinces, they cannot make any extra-territorial laws. Therefore, the Parliament validly levied CVT even on foreign immovable assets of resident individuals. The petitioners did not challenge CVT on foreign moveable assets.
Supreme Court allowed leaves to appeal against SHC order, subject to a deposit of 50% of the disputed tax and a bank guarantee for the balance until final decision on the matter. The cases later transferred to Federal Constitutional Court (FCC) of Pakistan, established by Constitution (Twenty-seven Amendment) Act, 2025 [27th Amendment] on November 13, 2025 with exclusive jurisdiction in cases involving interpretation of the Constitution. The Lahore High Court also dismissed all petitions in its judgment [Zaka Ud Din Malik & Others v Federation of Pakistan etc. (2023) 127 TAX 73 (H.C.Lah)]. Leaves to appeal against this judgment are fixed for February 6, 2026 by the FCC. The writs filed against CVT Act 2022 in the Islamabad High Court are still pending.
The core controversy in these cases is whether Parliament possesses constitutional competence to levy an annual tax on ownership of foreign assets of individuals, merely because of residence (as defined in section 82 of the Income Tax Ordinance, 2001). Powers under the Constitution are enumerated as far as Parliament is concerned, not residual that belong to provinces. They must be found affirmatively in the Federal Legislative List.
Absence of provincial competence does not, and cannot, create federal competence. If this logic is accepted, Parliament can tax foreign property, foreign inheritances, foreign wealth, or foreign successions merely because provinces cannot do so under Article 141 of the Constitution—an outcome that would render enumerations in FFL meaningless. Constitutional silence is a restraint, not a licence.
Equally flawed is the conflation of income taxation with capital taxation. Much reliance has been placed on the notion that Pakistan taxes global income of residents and, therefore, may tax their foreign assets as well. This is a category error. Income is a flow. Capital is a stock.
Income tax is personal, yield-linked, and internationally harmonized through tax treaties and/or unilateral relief on doubly taxed income. Capital value tax, as imposed under the Finance Act, 2022, is none of these. It attaches to the mere existence and valuation of assets, not to economic activity or gain. To import income-tax logic into an asset-holding levy is not doctrinal development; it is doctrinal collapse.
Residence, by itself, is an insufficient constitutional nexus for an asset-based tax. Residence may justify taxing income because income accrues to the person. But capital—especially immovable capital situated abroad—derives its legal and economic character from situs, governance, and protection, none of which Pakistan provides in respect of foreign assets. Taxation without governance is not fiscal prudence; it is fiscal opportunism.
The economic irrationality of the levy is equally stark. An annual one percent tax on capital stock, payable, irrespective of income or liquidity, is inherently erosive. Many foreign assets held by Pakistani residents—inheritances, retirement homes, dormant accounts, or long-term investments—yield little or no annual income. Yet the tax applies relentlessly.
It is noteworthy that such assets are already subject to property taxes, wealth taxes, inheritance duties, or capital gains taxes in the jurisdictions where they are located, and CVT becomes confiscatory in effect. There is no treaty relief, no tax credit mechanism, and no valuation harmonization. The result is double—or even triple—taxation without constitutional warrant.
Taxes, which punish transparency, do not broaden the tax base; they destroy it. A rational taxpayer, faced with an annual erosion of declared foreign capital, will either under-report, re-structure through opaque vehicles, or change residence altogether. This is not conjecture. It is predictable behaviour in capital-scarce economies where credible commitment is already fragile. Pakistan needs overseas capital to return, not to be judicially cornered.
The deeper harm, however, lies in the erosion of fiscal federalism. The 18th Amendment deliberately tied capital value taxation of immovable property to territorial governance of provinces. Article 160 and the National Finance Commission (NFC) framework are not mere revenue-sharing arrangements; they are structural safeguards.
By allowing the Federation to create a new tax base outside the divisible pool—simply by characterizing it as “foreign”—the Sindh and Lahore High Courts have sanctioned a bypass of the federal compact. Today it is foreign assets; tomorrow it could be any capital that does not sit comfortably within provincial reach. That is not federalism; it is centralization by judicial reasoning (sic), rather judicial distortion.
The capital value tax on foreign assets fails every serious test: of competence, of nexus, of proportionality, and of legitimacy. To sustain it is not to strengthen the state. It is to weaken the Constitution and federalism.
Even if one were to assume, for the sake of argument, that Parliament could invoke Entry 50, Part I of FLL, the levy still collapses in pith and substance. It does not tax capital value. It taxes currency conversion driven by rupee devaluation. Neither entry 50 nor any other constitutional entry authorise a devaluation tax.
The economic consequences are predictable. An annual levy on notional rupee gains—unrelated to income or liquidity—erodes foreign-currency capital over time. It encourages non-declaration, restructuring, and eventual exit. It undermines the very transparency that Pakistan desperately needs to rebuild its tax base.
From a federalism perspective, it also bypasses the National Finance Commission framework, creating a new federal tax base drift outside the divisible pool and weakening the post-18th Amendment fiscal settlement.
Our post-18th Amendment tax jurisprudence has been drifting—quietly but dangerously—towards a proposition that should alarm anyone who takes constitutional limits seriously: that wherever provincial taxing power ends, federal taxing power must necessarily begin.
The decision by the Federal Constitutional Court strictly as per the Constitution, which many suspect, may offer a crucial opportunity to arrest this drift. The question before the FCC is not whether the state needs revenue. It is whether constitutional limits on fiscal power mean anything when revenue anxiety sets in.
A tax that arises solely because the national currency collapses is not a wealth tax. It is a penalty on economic prudence—and the Constitution authorises no such penalty. If this levy is upheld, Pakistan will have crossed a dangerous line: from taxing wealth to taxing weakness, from taxing value to taxing devaluation.
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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 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.