Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
A composite reading of the Constitution and the Income Tax Ordinance, 2001 leads to an inescapable conclusion. Where immovable property is held as stock-in-trade, gains fall within section 18 as business income under Entry 47. Where it is held as a capital asset, taxation of gains on disposal lies outside federal competence and within the exclusive domain of provinces. Any federal attempt to tax such gains under section 37(1A), or to treat their market value as income under section 7E, is constitutionally untenable—Unconstitutional CVT on foreign assets—I, Minute Mirror, February 3, 2026
Section 8 of the Finance Act, 2022 imposed a capital value tax [CVT 2022] at 1% on the aggregate value of “foreign assets” of “resident” individuals exceeding Rs. 100 million retrospectively, with effect from tax year 2022 onwards. CVT 2022 is payable with the income tax return, irrespective of any income, yield, transfer, or liquidity vis-à-vis “foreign assets”.
It is worth mentioning that federal CVT on transfers of immovable property, modaraba certificates, shares etc., was withdrawn from April 17, 2020 through Tax Laws (Amendment) Ordinance 2020. However, Finance Act 2022 re-enacted CVT 2022, and later Federal Board of Revenue (FBR) through SRO.1797(I)/2022 dated September 29, 2022 prescribed ‘Capital Value Tax Rules, 2022’.
The writs challenging vires of CVT 2022 are presently pending before the Federal Constitutional Court (FCC) of Pakistan in the wake of Constitution (Twenty-seventh Amendment) Act, 2025.
After dismissal of writs [Irfan Hussain Halai v Federation of Pakistan & Others, (2023) 127 TAX 49 (H.C. Kar)] by Sindh High Court, the taxpayers approached the Supreme Court. While granting leave to appeal, Supreme Court, directed taxpayers to deposit 50% of the demand and furnish bank guarantees for the balance. Lahore High Court also dismissed all petitions [Zaka Ud Din Malik & Others v Federation of Pakistan etc. (2023) 127 TAX 73 (H.C. Lah)]. Writs challenging the CVT before Islamabad High Court are still pending.
Notwithstanding the pendency of appeals before FCC, taxpayers have been compelled to pay this highly controversial levy for four years since its promulgation in 2022, and now liability as on June 30, 2026 would crystallize for the fifth consecutive year. This exposes the efficacy of our tax judicial system in settling even constitutional disputes at the highest level, especially when imposition of CVT on foreign assets, on the face of it, raises serious questions of legislative competence.
CVT 2022 defines “foreign assets” 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 10 years ago, a Pakistani resident individual deposited in a United Kingdom bank £100,000 (equivalent to Rs. 16,000,000), 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 2022 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. Taxpayer has realized nothing. Nothing has been gained. What has changed is only the measuring scale—the Pakistani rupee.
The above example exposes the constitutional fallacy at the heart of the levy. A collapsing currency does not create wealth. Yet CVT 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.
Ignoring the above, the High Courts only considers the point whether Parliament possesses constitutional competence to levy an annual tax on ownership of foreign assets of individuals, on the basis of their residential status (defined in section 82 of the Income Tax Ordinance, 2001). They primarily focused on territorial competence and the exclusion of immovable property under Entry 50, Part I of the Federal Legislative List (FLL), Fourth Schedule to the Constitution after Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] scenario.
The real constitutional question—curiously overlooked both by counsel and the courts—is far more fundamental: what, in pith and substance, is the true nature of this levy? Before answering that question, conceptual clarity is essential. Wealth tax is a tax on the capital value of assets minus liabilities. A classical capital value tax is a tax on the transfer of assets. Capital gains tax is a tax on the gain (real or constructive) upon disposal of an asset. These distinctions are not merely technical—they define legislative competence.
The 18th Amendment fundamentally altered Entry 50, Part I of FLL restricting Parliament’s power to impose taxes on the capital value of immovable property. This was not an incidental amendment but a structural reallocation of fiscal authority, placing immovable property squarely within provincial jurisdiction. CVT, Capital gains tax, wealth tax, property tax, estate duty and gift tax in relation to immovable property after 18th Amendment lie within the exclusive legislative domain of provinces, reinforcing fiscal federalism.
At this stage, it becomes necessary to clarify the constitutional position regarding immovable property, which has been further obscured by statutory drafting. A conjunct reading of the definition of “capital asset” in the Income Tax Ordinance, 2001 [“the Ordinance”] with Entry 47, Part I, FFL, provides the answer.
Where immovable property constitutes stock-in-trade, it ceases to be a capital asset and becomes part of a business undertaking. Any gain arising from its disposal is then business income, falling squarely within Entry 47, Part I of FLL as “taxes on income.” This position is fully aligned with section 18 read with section 2(10) of the Ordinance, which includes any adventure in the nature of trade, including dealing in plots or buildings.
Conversely, where immovable property is held as a capital asset, taxation of its value or gains lies outside federal competence. Such taxation falls within the exclusive domain of provinces after the 18th Amendment. This distinction exposes the constitutional infirmity of section 37(1A) of the Ordinance insofar as it provided capital gains taxation. Such inclusion effectively nullifies the exclusion contained in Entry 50, Part I of FLL. Likewise, section 7E of the Ordinance attempts to treat fair market value as income, which is constitutionally invalid.
The underlying error is the confusion between real and notional value. It runs contrary to global tax design. In most jurisdictions, a clear conceptual and legal distinction is maintained between income taxation and capital taxation. Income tax applies to flows—earnings, profits and realised gains—while capital taxation applies, if at all, to stock—wealth or property. Capital gains are typically taxed as a separate category because they arise upon realisation of capital, not as recurring income. This distinction ensures neutrality, fairness and alignment with ability to pay.
Under the British Raj, the Subcontinent presents an anomaly rooted in colonial history. Tax structures were often shaped to accommodate princely states and landed elites. Capital accretions in land were never taxed to avoid political resistance. The legacy of this compromise continues to distort tax policy, leading to hybrid constructs where capital and income are blurred, and constitutional boundaries are strained.
Pakistan’s constitutional framework, particularly after the 18th Amendment, sought to correct this distortion by clearly demarcating taxing powers. The Federation taxes income; provinces tax immovable property and its capital value. This clarity is now being eroded through legislative improvisations and judicial acquiescence.
The doctrine of pith and substance provides the corrective lens. A tax must be judged by its real nature and effect. CVT on foreign assets is, in substance, a tax on currency devaluation. Section 7E of the Ordinance is a tax on market value of immovable property and declared ultra vires of Constitution by FCC on May 7, 2022. Section 37(1A), insofar as it extends to immovable property, encroaches upon provincial domain. None of these levies align with the constitutional entries invoked to sustain them.
The issue before the FCC is, therefore, not merely technical. It goes to the heart of constitutional governance: whether Parliament can, by redefining concepts and expanding statutory language, extend its taxing power beyond constitutional limits.
A tax that arises solely because the national currency depreciates, or because value is imputed without realisation, is not a tax on income or capital value—it is a tax on fiction. The Constitution does not permit taxation of illusions. If such misadventures under Entry 50, Part I of FLL are allowed to stand, the carefully constructed architecture of fiscal federalism will be reduced to a matter of legislative convenience rather than constitutional command.
CVT 2022 penalizes resident individuals who have protected their savings against inflation. It penalizes Pakistanis who retain assets in stable currencies/markets. 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.
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Huzaima Bukhari & Dr. Ikramul Haq, lawyers, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’.