Dr. Ikramul Haq
The National Assembly, through Finance Act 2012, amended section 37(5) of the Income Tax Ordinance, 2001 and for the first time levied income tax on capital gain of immovable property. Punjab levied a similar tax in Finance Act 2013 contesting the authority of the federal government to do so. Who has the right under the Constitution to levy this tax? Obviously, both the federal government and the provinces cannot use item No 50 of the Federal Legislative List of the Fourth Schedule to the 1973 Constitution to levy tax on gain of immovable property as it will be violative of Article 142 and various decisions of the Supreme Court and High Courts.
Item No 50, as amended by Eighteenth Constitutional Amendment [18th Amendment], reads as under:
“50. Taxes on the capital value of the assets, not including taxes on immovable property”
Prior to the 18th Amendment, the language of Item No. 50 was:
“50. Taxes on the capital value of the assets, not including taxes on capital gains on immovable property”
After omission of words “capital gain” from item No 50 through the 18th Amendment, Federal Board of Revenue (FBR) purportedly sought the opinion of Law and Justice Division pleading that now federal government can levy tax on immovable property. The Law and Justice Division, as per claim of FBR, endorsed its point of view that under the amended item No 50, the levy of income tax on capital gain on the disposal of immovable property is a federal subject.
After opinion of Law and Justice Division, National Assembly levied income tax on gain on immovable property. Sections, 236C and 236K were also inserted in the Income Tax Ordinance, 2001, in 2012 and 2014, respectively, for collection of advance tax from the seller and buyer at the time of sale/purchase/transfer of immovable property. In 2012, the FBR was of the view that capital gain tax on disposal of immovable property would help in broadening of tax base and substantially enhance revenue — both the assertions have proved wrong as both the number of filers as well as revenue from this source have substantially decreased.
The imposition of the Capital Gain Tax (CGT) on immovable property by the National Assembly in 2012 was unconstitutional, based on wrong interpretation of the amended language of item 50. The phrase “not including taxes on immovable property” cannot be read to “include taxes on capital gains on immovable property.”
Provinces have also failed to take cognizance of the fact that their right to levy CGT on immovable property is undisputable—it is being encroached upon by the centre since 2012. Only the Punjab Assembly levied this tax in Finance Act 2013, but never bothered to enforce it.
Since 2012, our leaned legislators have failed to recognize that item No 50 debars the federal government to levy any kind of tax (income tax any other tax) on immovable property. Therefore, even the Capital value Tax (CVT) on immovable property stands transferred to provinces since 2010 after 18th Amendment. It is simple that if the federal government cannot levy any tax on immovable property, how can it levy income tax under the garb of CGT on capital gain arising out of immovable property? This simple proposition could not be comprehended by our parliamentarians and they were as usual hoodwinked in 2012 by Revenuecracy [tax bureaucrats] who over the period have become de facto legislators! During the last 7 years nobody in Parliament has taken not of this unconstitutional tax, what to speak of removing it.
Before the amendment in item No 50 of Federal Legislative List by the 18th Amendment, the federal government was barred from taxing “capital gain on immovable asset.” Now this bar has been extended to “taxes on immovable property”. This bar is made wider and not otherwise as misunderstood by the National Assembly on wrong presentation of FBR and Law Ministry.
One wonders how the FBR and Law and Justice Division by mere omission of words “capital gains” in item No 50 of the Federal Legislative List concluded that right to taxation was shifted to the federal government. The National Assembly also failed to see that second part of item 50 is couched in a negative phrase. It is obvious that nobody has bothered to study item No 50 in its proper context. The phrase “not including taxes on immovable property” in item 50 is unambiguous—it precludes National Assembly to levy any tax on immovable property.
In terms of item No 50, as it stands after the 18th Amendment, the National Assembly can levy taxes on capital value of moveable assets but has no authority to levy taxes, including income tax, capital gain tax or any other tax, on immovable property. The way the Parliament, FBR and Law & Justice Division misread plain language of item No 50 speaks volumes about their level of competence—in fact hollowness—of our legislators and administrators in drafting tax laws. It confirms why we have so much confusion and chaos in revenue and legal matters!
The rich and mighty landowners in the wake of 18th Amendment cannot be taxed by National Assembly on their colossal immovable property—on their heavy agricultural incomes, they are already not paying due tax—as wealth tax was devolved to provinces. The Supreme Court in many judgements has passed strictures about poor understanding of law by the Law Ministry and FBR! But the real culprits are legislators who lack competence to enact tax laws.