09/07/2026
SECTION 7E STRUCK DOWN BY THE FEDERAL CONSTITUTIONAL COURT OF PAKISTAN
After years of litigation across multiple courts, the Federal Constitutional Court of Pakistan has finally settled one of the most contested tax disputes in recent memory. Vide a short judgment announced on 7th May 2026, the Court declared Section 7E of the Income Tax Ordinance, 2001 to be unconstitutional, void from the very day it was introduced through the Finance Act, 2022. The Court has now issued its detailed judgment.
What Was Section 7E About?
When the government introduced Section 7E through the Finance Act, 2022, it created what is known as a “deemed income” tax on immovable property. In simple terms, the law said that if you own property in Pakistan as a resident person, you will be treated as having earned income equal to 5% of the fair market value of that property, whether you actually earned anything from it or not. That notional income was then taxed at 20%, meaning the effective charge worked out to 1% of the FBR-notified value of your property each year.
The law applied to vacant plots, open land, additional houses, and commercial properties, essentially anything beyond your one self-occupied home and a few other exempted categories. Even properties that were generating no rent whatsoever, land that was barren or undeveloped, and plots where the owner did not even have physical possession were all brought within its sweep. Tax notices started flowing, and many people found themselves being asked to pay significant sums on assets that were simply sitting idle.
Why Did the Court Strike It Down?
The Court examined the law from several angles and found it wanting on every count.
The most fundamental problem, as the Court saw it, was that this was never really a tax on income at all. Income, by its very nature, requires something to actually come in a receipt, a gain, a transaction, some form of economic activity. Here, nothing of the sort was required. You could own a plot of land, earn absolutely nothing from it, receive not a single rupee, and still be told you had “earned” income equal to 5% of its value. The Court found this to be a legal fiction stretched well beyond its permissible limits. As an old legal principle goes, that which is not income cannot be made taxable simply by calling it income.
Beyond the conceptual problem, the Court found a clear constitutional barrier. After the 18th Constitutional Amendment, the power to tax immovable property was deliberately shifted to the Provinces. The Federal Legislature simply does not have the authority to impose a levy whose real impact falls on immovable property regardless of what label is put on it. By excluding all movable assets from the definition of “capital assets” under the provision, the law ended up applying exclusively to immovable property, which is precisely the field Parliament no longer controls. Interestingly, the Court also noted that the FBR itself had acknowledged this constitutional position back in 2010 and 2012 through its own circulars.
The Court was also troubled by the way the law treated different property owners. A person with a vacant plot was being taxed on a notional income that could far exceed what a neighboring property owner paid on actual rental income from a constructed house. Government employees and armed forces personnel who were original allottees of property were exempted, while other original allottees in identical situations were not. No rational explanation existed for these distinctions, and the Constitution requires that when you classify people for tax purposes, there must be a logical and defensible reason for doing so.
Perhaps most strikingly, the Court found that the tax could force people to sell their property simply to pay a tax bill on an asset earning them nothing. A tax that compels you to dispossess yourself of property in order to meet a liability on that very property crosses the line from taxation into something closer to confiscation and that, the Constitution does not permit.
Finally, the Court pointed to something quite telling in the Finance Minister’s own Budget Speech at the time Section 7E was introduced. The stated purpose was to discourage people from parking wealth in real estate. That is a regulatory objective, not a tax objective. If Parliament wanted to restrict how much property people could hold, there are specific constitutional provisions for doing exactly that but the government chose to dress up a regulatory measure as a tax and push it through as a Money Bill, bypassing the ordinary legislative route. The Court found this to be a colorable exercise of legislative power and constitutionally impermissible.
What Does the Judgment Mean Practically?
The Court declared Section 7E void from the very beginning not just going forward, but from the date it was introduced in 2022. All assessments, notices, demands, and proceedings initiated under this provision have been set aside and declared to be without legal authority. The FBR has been restrained from taking any further action under this section.
For those who received notices and did not pay, those notices are now nullified. For those who paid under protest or pending litigation, the question of refunds is a separate matter that will need to be carefully examined in each individual case. The judgment itself does not automatically direct refunds, and how that process unfolds remains to be seen.
Our team is available to assist you in understanding how this development applies to your specific circumstances.
This publication is for general information purposes only. It does not constitute legal or tax advice and should not be relied upon as such. Readers are advised to seek independent professional advice before taking any action based on the contents of this article. S&S Tax & Accounts Consultants accepts no liability for any action taken or omitted in reliance on this publication.
